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January 2007 Newsletter
Monday, January 01, 2007
MARKETS AT A GLANCE: FOURTH QUARTER 2006
Led by materials, information technology, financials and consumer discretionary, the Canadian stocks captured a fourth straight yearly gain, advancing 18% for the year. Index members in the materials category of the S&P TSX led the yearly gain appreciating in excess of 39%, while shares of energy holdings, which account for 28% of the broad Index, were little changed for the year, along with the price of oil which concluded the year below $61 a barrel.
Stronger than expected data on consumer confidence and home sales drove the S&P 500 higher for the fourth quarter of 2006. The Index ended the year and the quarter up 14% and 7% respectively. While downturns in housing and manufacturing have spurred speculation that the Federal Reserve would cut rates to accelerate growth, the economy has been exhibiting strength above everyone's expectations and as a result economists have been reluctant to forecast first quarter rate hikes.
The Eurozone ended the fourth quarter of 2006 on a strong note, as the S&P Euro advanced 7%, while interest rates continued to climb higher driven by strong economic growth and some inflationary pressures. The European Commission said that the economy of the dozen euro nations will start 2007 stronger than it anticipated, bolstering the case for higher interest rates. The positive outlook comes at the heels of the falling unemployment rate in Germany and rising consumer confidence. 
CANADIAN ADVANTAGE FUND
The Van Arbor Canadian Advantage Fund advanced 7.55% for the year and made a distribution of $0.17 to its unit holders. As of December 31st, the annualized gain for the Fund since inception was 24.11%, versus the Index which recorded a 20.27% gain over the same time period. Since inception, the Fund has incurred only seven negative months, while over the same time period the Index recorded ten. Over the past year the Fund's modest growth resulted from us taking a more defensive stand as a result of higher volatility in certain market sectors. The Fund's energy holdings, that as a group tracked the price of oil, were little changed from the beginning of year. This group, however, did contribute more to volatility than the other industry groups in the Fund.
The Fund benefited from holdings of financials, which as a group advanced over 15% for the year. Most of the growth in financials occurred after the income trust ruling this year, as investors dumped income trusts and increased demand for other income generating investments like banks, which provide attractive yield and relatively more stability. Consumer discretionary was another category that experienced stunning growth this year as many retailers expanded their store counts and increased year over year sales. The group was up over 30% in the Fund, while the S&P TSX Consumer Discretionary group was up 15% for the year. Strong economic growth spilled over into the industrials sector which helped the group advance 13% for the year. The group was led by holdings of Stantec (STN:TSX) and SNC Lavalin (SNC:TSX).
Fund Performance Summary (Benchmark is S&P TSX Index)
US ADVANTAGE FUND
The Van Arbor US Advantage Fund ended the month up 1.50% while the S&P 500 Index finished the month up 1.26%. The Fund concluded 2006 at $13.08 advancing 7.34% for the trailing twelve months and 30.78% since its inception. While the Fund underperformed the Index for the first half of the year, during the third and fourth quarters, the fund went on a rally and advanced 15.14% versus the Index which climbed 10.53% in the second half of the year.
On an annualized basis, the Fund has returned 10.72%, while the S&P 500 Index was up 10.30%. Strong growth from consumer stocks led the six month rally as shares of Target (TGT:NYSE), Fortune Brands (FO:NYSE) and McGraw Hill (MHP:NYSE) recorded double digit returns over the two quarters. Revival in the healthcare space seems to have contributed to United Health's 13% appreciation this past month, while positive reviews for the 2007 outlook for the insurance industry helped shares of Old Republic International (ORI:NYSE) and Aflac Group (AFL:NYSE) advance for the month of December. Amid a rally in global equities, the US market has recorded the biggest annual gain in three years.
Fund Performance Summary (Benchmark is S&P 500 Index)
EURO ADVANTAGE FUND
The Van Arbor Euro Advantage Fund ended the month up 7.60% while the S&P Euro Index advanced 5.56%. The Fund also had a distribution of $1.97 to its unit holders. The Fund advanced 38.01% this past year and has captured an annualized 23.23% return since its inception in August 2005.
During the last twelve months, the Fund had only three negative months and has recorded returns in excess of 6% for five of the twelve months. Above average growth of steel related companies, found in the materials group of the S&P Euro Index, helped push the Fund to new highs throughout the year. Banks and other financials, whose appreciation was more subdued relative to other industries, contributed double digit returns this past year, while engineering and heavy equipment companies rode the wave of the Eurozone expansion and delivered above average returns as well. Interest rate tightening will most likely resume in the Eurozone in 2007, as the Central Bank will be closely watching inflation data and responding to any kind of price increases. Over the year the Euro appreciated against the Canadian dollar.
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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