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August 2006 Newsletter
Tuesday, August 01, 2006
CANADIAN ADVANTAGE FUND
The Van Arbor Canadian Advantage Fund was up 0.1% for the month of July, while the benchmark S&P TSX Equity Index ended the month up 1.86%. The July advance was led by the utilities, energy and financials, which were long overdue for a rally. The three groups ended the month up 5.5%, 0.70% and 3.5% respectively. The Bank of Canada's decision to hold interest rates steady earlier this month sparked some life in the stocks of major Canadian banks and other financials. The June inflation report which showed that the CPI dropped 0.2% from year ago levels, made the Bank's decision to hold a correct one, as many economists were surprised by the tame inflation figures.
With oil still hovering at $75 per barrel, supported by the recent turmoil in Middle East, we may be shortly away from surpassing the $80 mark. Strong corporate earnings from companies like Talisman (TLM:TSX), Home Capital Group (HCG:TSX) and Astral Media (ACM/A:TSX), helped the Fund end the month in positive territory, while industrials like Stantec (STN:TSX) and SNC Lavalin (SNC:TSX) ended the month as a group down 5%. Since bottoming out at 10,900 in mid-June, the S&P TSX Index has advanced almost 9%, however is still just 5% shy of its April high of 12,500. Going forward, the three key factors to watch for will be interest rates, supply shortages of oil and demand for precious metals. Earlier in the month the Fund sold holdings of Canadian Tire and National Bank and established positions in Astral Media (ACM/A:TSX) and Kingsway Financial (KFS:TSX).
Fund Performance Summary (Benchmark is S&P TSX Index)
US ADVANTAGE FUND
The Van Arbor US Advantage Fund advanced at a solid pace for the month of July to close at $11.62, or up 2.44%. Meanwhile, the broad US benchmark, S&P 500 Index, ended the month slightly up 0.51%, just 50 points shy of its 52 week high of 1325. Similar to last month's performance, the Index lagged for the first half, only to sharply rebound in the latter half on the month, on news of slower economic growth for the second quarter of 2006. The decline can be attributed to lower consumer spending, which makes up more than 70% of the US's GDP. More surprising is that stocks are rallying on the release of weak economic news. The reasoning is that slower economic growth will cause the Federal Reserve to stop raising interest rates and since lower interest rates are generally good for stocks, any news that could mean that interest rates will stop rising must therefore be good for equities in general.
Most notable advancements came from stocks we would consider as value-oriented. After a disappointing start to the year, shares of Unitedhealth advanced 6% on news of a 26% rise in second quarter earnings and a 57% spike in revenue, reflecting new clients under the US Medicare drug plan and the recent acquisition of PacifiCare Health Systems. Similarly shares of the recently purchased Altria Group (MO:NYSE) advanced 9% for the month on a favorable court ruling in Florida earlier this month. The following trades took place earlier this month. Holdings of Golden West Financial and Hershey Co were sold and replaced with Constellation Brands (STZ:NYSE) and Fortune Brands (FO:NYSE).
Fund Performance Summary (Benchmark is S&P 500 Index)
EURO ADVANTAGE FUND
The Van Arbor Euro Advantage Fund advanced 1.39% for the month of July, during which the S&P Euro Index closed up 2.63%. Shares of consumer staples, materials, energy and utilities helped push the index in positive territory, as the four industry groups finished the month up 5.3%, 3.4%, 3% and 4.5% respectively. The Fund benefited from holdings of Grupo Catalina (GCO SM), which ended the month up 12%, after reporting an increase in earnings of over 30%. Similarly, shares of Pernod Ricard (RI FP), maker of Beefeater gin, advanced in excess of 5% for the month, after the French company reported stellar growth in sales and raised earnings guidance for the year. In economic news, while consumer price inflation remained fairly tame in the Eurozone, anticipated are further rate hikes by the Central Bank before the year is done.
The S&P Euro Index along with the S&P 500 and the S&P TSX, have traded in similar fashion throughout the year and have more or less responded to macroeconomic events in a similar way. However, of the three, the S&P Euro appears to be trading at relatively cheap levels, offering to investors, for every dollar invested, almost $0.08 in earning compared to only $0.059 and $0.055, for the S&P 500 and the S&P TSX Index. Over the month, the Euro advanced just over a percent against the Canadian dollar and consequently helped the portfolio. The following trades took place earlier in the month. Shares of Cementos Portland and Metrovacesa were sold and proceeds were used to establish positions in Arcadis (ARCAD NA) and UniCredito Italiano (UC IM).
Fund Performance Summary (Benchmark is S&P Euro Index)
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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