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September 2005 Newsletter
Thursday, September 01, 2005
CANADIAN ADVANTAGE FUND
Buoyed by the recent highs in energy prices, the Canadian equity market, as represented by the S&P TSX, continued its growth patter appreciating 2.4% for the month of August. Decomposition of total returns revealed significant appreciation in the energy sector (+ 6.5%), info tech sector (+3.8%) and the telecom services sector (+2.1%). Decliners for the month were financials (-3.1%), industrials (- 2.8%) and heath-care (-2.9%). As a result of the heavy summer driving season and the recent hurricane inflicted damage in the Gulf of Mexico, oil prices have been flirting with mid 60s and have even tested the $70 range by month end. Led by energy related holdings the Van Arbor Canadian Advantage Fund exceeded the returns of the S&P TSX by 2.4% for the month. Earlier in the month the fund was rewarded from holdings of Terasen Inc (TER:TSX), on news of a $3.1billion takeover from Kinder Morgan. Terasen appreciated 14.1% for the month. However, some of the Fund's gains were diluted by news concerning Transcontinental Inc (TCL/SV: TSX) after Canada's No.2 commercial printer cut its fiscal 2005 profit forecast due to production disruptions and higher price competition for books. Shares of Transcontinental had their biggest drop in seven years and ended the month down 14.6%. There were no portfolio trades during the month.
US ADVANTAGE FUND
The US equity markets struggled to limit losses this month as energy prices including oil and natural gas spiked to unprecedented levels. The energy concern among the experts is not whether or not the world will run out of oil, but whether we will experience capacity constraints - the amount of oil that can be pumped to the surface on a daily basis. Capacity shortages, as seen this month resulting from hurricanes in the Gulf, create supply disruptions which in turn combined with the heavy demand for gasoline over the summer, create unexpected jumps in the price of energy as opposed to slow and predictable increases. As oil is the fundamental input into the cost structure of many businesses, their inability to immediately pass on higher input prices to consumers hinders their profit margins and as a result depresses their stock price. The negative relationship between energy prices and stock market returns has been present over time, and as a result the concept of diversification calls for including in one's portfolio some exposure to commodities such as natural gas, crude oil and metals. In financial news, the US Federal Reserve increased the overnight lending rate for the tenth straight time to 3.5% earlier in the month in order to cool the frothy US housing market and keep a lid on inflationary pressures. The Van Arbor US Advantage Fund was negatively affected by holdings of retailer and consumer discretionary oriented firms which plunged on weaker outlooks and higher costs. The portfolio experienced four trades this month. Holdings of home builders Pulte Homes and KB Homes along with Praxair and Legg Mason were sold and proceeds were used to establish positions in Walgreen Co (WAG:NYSE), EW Scripps (SSP:NYSE), Aflac Inc (AFL:NYSE) and Equitable Resources Inc (EQT:NYSE).
Van Arbor Asset Management is an independent Asset Management company dedicated to creating wealth using a disciplined, proprietary investment strategy with an emphasis on preserving capital while generating superior long-term returns.
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