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November 2006 Newsletter
Wednesday, November 01, 2006
MANAGER'S NOTE
Change to Income Trust Taxation
The Canadian Government, after the close of markets on October 31, announced two changes to tax policy; a change regarding income splitting for pensioners starting in 2007 and a change involving the taxation of income trust distributions starting in 2011.
The Government's intention to eliminate the tax benefit enjoyed by income trusts starting in the tax year 2011 can be expected to generate turmoil in the trust sector as current income trusts must decide if it is in their best interest to remain as income trusts or if a re-structure to a corporation is a better long term strategy.
The Van Arbor Funds do not invest in income trusts.
CANADIAN ADVANTAGE FUND
The Van Arbor Canadian Advantage Fund advanced 3.55% for the month of October. Albeit the month of October has had a tainted history in capital markets, this time round nine out of the ten industry groups in the S&P TSX Equity Index ended the month in positive territory helping the Index advance 5.26%. Consumer stocks, industrials and energy added value to the Index, as early earnings reports showed signs of healthy balance sheets and corporate profits. At month end, 30% of our holdings reported third quarter results, which showed significant improvement over this quarter last year. The current reported earnings were also, on average, 10% higher than what was estimated by analysts covering these companies.
Suncor Energy (SU TSX), the world's biggest oil-sands producer, reported that third quarter profit more than doubled on increased output from deposits in Alberta and on subdued operating costs. Suncor along with other oil producers lowered its production forecast for the full year, while its shares ended the month up 7.56%. Similarly shares of Canadian National Railway (CNR TSX), the country's largest railroad, advanced 14.44% for the month after the company reported an increase in third quarter profit of 21%, or 11% more than analysts expected. Lagging performer for the month in the earnings department was Home Capital Group which reported earnings growth below historical levels. Earnings of Home Capital also fell short of meeting the average of analysts' expectations. There were no portfolio trades to report this month.
Fund Performance Summary (Benchmark is S&P TSX Index)
US ADVANTAGE FUND
The Van Arbor US Advantage Fund's 4.55% return this past month fuels the four month rally that has the Fund pegged at $12.75. The Fund has advanced 12.25% over the past four months and has captured a 4.65% return 2006 year to date. During the month, the S&P 500 Index came 10 points shy of crossing the 1400 mark and finished the month up 3.15%. As the reporting seasons comes to a close, US companies are continuing to post strong earnings. The S&P Index was expected to post a 13% operating gain in the third quarter which will result in the 18th consecutive double-digit, gain for the Index. With 85% of the Fund's companies having reported third quarter results, the average growth in earnings over this quarter last year was 11.50%. Similarly, of the firms that have reported, 75% beat analyst expectations of earnings by an average of 4.0%.
The earnings surprises that led to greatest share appreciations in the days following their announcements went to CR Bard (BCR:NYSE), MDU Resources (MDU:NYSE) and McGraw Hill (MHP:NYSE). After reporting strong revenue growth and beating sales estimates posted by analysts, shares of Bard appreciated over 9%. Similarly shares of MDU appreciated almost 15% following 25% growth in third quarter profit. Lastly, McGraw, owner of the Standard & Poor's and BusinessWeek, reported a 9% growth in earnings on strong demand for S&P debt ratings services. Since then shares of McGraw have risen 10.5%. In economics news, the US Federal Reserve, for a third consecutive meeting, elected to keep interest rates unchanged at 5.25%. Earlier in the month, the Fund sold its holdings of Apache Corp and EW Scripps and used proceeds to establish positions in Constellation Energy Group (CEG:NYSE) and Kellogg Co (K:NYSE), manufacturer and marketer of ready to eat cereal and other grain based food products.
Fund Performance Summary (Benchmark is S&P 500 Index)
EURO ADVANTAGE FUND
The Van Arbor Euro Advantage Fund advanced 6.08% for the month of October to close at $11.71, capturing a 1.91% gain over the S&P Euro Index which ended the month up 4.17%. This is the third month this year that the Fund has exceeded a monthly return of 6%. The 2006 year to date return of 20.28% for the Fund differs greatly from the returns posted by the Canadian or US counterparts and seems to suggest the benefits of geographic portfolio diversification. The top performing sub-indexes for the S&P were telecom, materials and consumer discretionary, which were up 7.8%, 5.4% and 4.5% for the month respectively.
Top performers for the Fund included commercial banks, chemicals and construction companies which ended the month up, on average, 8%, 12% and 7%. Shares of K+S AG (SDF GR), the world's third largest producer of potash used in fertilizers, rose to their highest level in more than five months as rising demand for fertilizers sparked optimism that earnings will be higher. Shares of K+S finished the month up 17%. Similarly, Omega Pharma (OME BB), Belgium's largest supplier of pharmacy products, rose nearly 13% for the month, after the company said third quarter sales of over the counter products were on the rise. The Euro appreciated 107 basis points during the month against the Canadian dollar. Late in the month the Fund sold Pernod Ricard and with proceeds bought shares of Bijou Brigitte AG (BIJ GR), a German based manufacturer of jewelry and accessories for women, men and children.
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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