VANews

September 2010 Newsletter

2010-09-02T19:20:11Z

CANADIAN ADVANTAGE FUND
The Canadian Fund ended the summer where it started, holding its value even as markets were a bit volatile. The TSX Index edged up 1.7% in August with most of the gains coming from gold producers as well as Potash Corp, which is being targeted as an acquisition by BHP Billiton. Markets continue to remain lumpy, as economic concerns are putting pressure on more cyclically inclined stocks, while less cyclical companies are beginning to see a bit of a renaissance. To date, this year has been spent mostly balancing last years gains with the search for new opportunities. Our focus remains on companies in the telecommunications, utilities, and consumer staple sectors, which offer slower stable returns and are less risky. Our two best performers in August were BCE (+6.1%) and Rogers (+3.5%), both of which are seeing stable earnings growth.

WORLD ADVANTAGE FUND
The World Fund had a solid month in August, rising 4.1%, bringing our year to date gain to 5.4% even though the MSCI World Index remains down for the year. The Fund is becoming less dependent on the performance of the broader market as we are focused on more selective areas of the market. Last month’s gains came mainly from our positions in global utility companies whose stable earnings and nice dividend yields are becoming very attractive in the current low inflation environment. Foreign currencies are also helping boost returns, but more importantly act like a great hedge against any market downturn which usually leads to foreign currency priced assets rising. Our best performers in August were telecom company AT&T (+4.2%), electric utilities Ameren (+10.6%) in the US and Hokuriku Electric (+5.1%) in Japan.

Van Arbor Asset Management is dedicated to creating wealth using a disciplined, value based investment strategy with an emphasis on preserving capital while generating superior long-term returns.
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August 2010 Newsletter

2010-08-04T16:45:34Z

CANADIAN ADVANTAGE FUND
The Canadian Fund saw a slight uptick in July, rising 0.1%, while the TSX Index rose 3.7%, recovering almost half of its losses from last quarter. The Fund continues to favor more conservative areas of the market as the economic horizon is showing some signs of slowing. This does not necessarily point to negative growth, but rather to slower growth than we are used to. From our perspective, a slower pace of growth bodes well for the companies we are interested in due to their focus on steady growth and dividend payouts. Second quarter earnings season kicked off last month and our big winners were grocer Loblaw (+13.1%), electric utility TransAlta (+5.7%), and food producer Maple Leaf Foods (+2.7%).

WORLD ADVANTAGE FUND
After last quarter’s stellar double digit return, the World Fund saw some its equity and currency positions retreat in July. The Fund fell 5.9% for the month, but still remains up for the year. The strength of the Loonie took a 3.2% bite out of the Fund for the month; however, we continue to have a positive view on owing foreign denominated assets which are undervalued based on many metrics. On the equity side, some of our big winners last quarter saw a bit of a pull back, mostly from our electric utility holdings in Asia. Overall, second quarter earnings have been positive with profits meeting positive expectations. Attention now turns to second half earnings and more importantly to which sectors and companies will maintain profit momentum.

Van Arbor Fund’s Received Fundata’s A FundGrade

2010-07-30T23:54:44Z

The funds stated below have received the Fundata A FundGrade rating as of June 30, 2010:

Van Arbor Canadian Advantage Fund Series A
Van Arbor World Advantage Fund Series A
Van Arbor World Advantage Fund Series F

“Fundata’s FundGrade is an independent and objective investment fund rating system that has been developed to recognize funds who achieve superior risk adjusted returns. ”

July 2010 Newsletter

2010-07-30T21:30:29Z

Second Quarter Report
Some people say “beauty is in the eye of the beholder”. Well, nowadays one could also make the case that “inflation is in the eye of the beholder”. For investors, inflation plays a very large role in the investment allocation strategy. Too much inflation requires a strategy to protect the real value of investor’s capital against rising prices. Conversely, a very low inflation or deflationary environment favors certain investments over others. Today, there is no unanimous consensus on where we are and where we are going on the inflation front. On one side, there are the hyper-inflationist’s who correctly point out that money supply has flooded the market which increases the risk of high inflation. On the other side, you have the deflationist’s correctly pointing out that we are coming out of a debt super bubble which is leading to consumer, business, and now sovereign deleveraging. So, today we have a large reflationary force (low interest rates and fiscal and monetary stimulus) battling a large deflationary force (deleveraging). Unfortunately, there is no easy answer to which force will eventually dominate as we are currently seeing some cyclical short term inflation at the same time as excess capacity and savings providing a constraint on medium term inflation.

It seems clear that the long term direction of inflation is still up for debate. As investors, we are approaching this market with a versatile approach. In the sense that it is likely that we will see reflation and deflation alternately dominate the market over the next few years. Last year our focus was primarily on reflation which was expressed via our more cyclical commodity investment exposure. More recently, our focus has been on non-cyclical dividend companies from the electric utility, consumer staples, and telecommunication sectors. These investments will likely do very well in a more deflationary environment, which from our perspective will likely be the dominating force in the market over the medium term. As for longer term, when and how much inflation we will have will ultimately depend on how monetary and fiscal stimulus interacts with collective deleveraging. Reflation is only one “printing press” away; thus, if longer term inflation develops we will likely have a stronger bias towards protecting the real value of capital via companies with pricing power as well as commodity producers. However, in the medium term, quality dividend companies from less cyclical areas of the market should continue to outperform the broader market.

As for second quarter performance, we are pleased to have avoided the 5-10% correction in the market, as our more defensive stance has paid off from a relative standpoint. The Canadian Fund continued to hold its value for the year even as the TSX Index fell over 6%. The World Fund on the other hand had an exceptional quarter, rising 13.2% while the MSCI World Index fell 9.4%. Patience is really starting to payoff in the World Fund as our focus on undervalued electric utility and telecom companies in Asia and the US, as well as undervalued currencies like the US Dollar versus the Loonie, is all starting to gain some momentum in the current macro environment.

CANADIAN ADVANTAGE FUND
The Canadian Fund ended the month of June where it started, holding its value while the TSX Index fell 3.98%. From a relative perspective, our focus on capital preservation has been effective. From an absolute perspective, we haven’t seen many returns this year with the market hitting a rough patch; however, patience is our mantra and as such we continue to look for new opportunities. Our focus is mainly on the “other” side of the index, namely the 20% of the TSX Index which is not in the energy, materials, or financial space. That “other” area is where we are finding value in forgotten companies that lacked the cyclical appeal that drove last year’s market. Thus, many companies from the non-cyclical side of the market are starting to see some gains as we move into the second half of the year. June was a good month for Telus (+2.7%), BCE (+1.2%), as well as drug company Biovail which popped on its merger announcement with Valeant Pharmaceuticals in the US.

WORLD ADVANTAGE FUND
The World Fund had another exceptional month, rising 5.31% while the MSCI World Index fell 2.24%. Our positions in defensive companies in the US and Asia are starting to heat up as low valuations, nice dividend yields, and “safer” earnings all become more attractive relative to the rest of the market. Some of the big winners last month were electric utility companies Public Service Enterprise (+2.3%), Tokyo Electric Power (+6.8%), Osaka Gas (+3.2%) and Chugoku Electric Power (6.3%). Many of these holdings still sit at undervalued levels, and thus should provide some more lift in the second half. Our bias towards US Dollars is proving to be profitable not only as a hedge against market volatility but on an absolute basis as well. Overall, we view the current macro environment as favorable to the World Fund with its more deflationary structured investment portfolio capitalizing on a mispriced market.

June 2010 Newsletter

2010-06-02T20:25:32Z

CANADIAN ADVANTAGE FUND
The Canadian Fund held steady in May, holding its value while the TSX Index fell 3.7%. Our more defensive stance going into the spring helped us weather the storm that has been blowing in from across the Atlantic. Concerns about sovereign debt in much of Europe and other developed economies took some of the wind out of more risky areas of the market. The current aversion to risk should prove to be quite positive for the Canadian Fund as we continue to build positions in undervalued non-cyclical companies in the consumer staples, telecom, and utility sectors. Thus, our exposure to riskier assets is limited as we anticipate that more stable low volatile companies will likely lead the market going into the second half of the year. Our best performers in May were TELUS (+4.1%) and electric utility Emera (+2.8%), both of which are gaining some attention with their near 5% dividend yields.

WORLD ADVANTAGE FUND
The World Fund had an outstanding month in May, rising 4.8% even as the MSCI World Index dropped 6.8%. Patience is beginning to pay off as our positions in undervalued defensive companies and undervalued currencies are gaining some momentum. Even after a big outperformance last month, many of our positions are only just starting to heat up as the combination of quality, value, and very under owned companies and sectors will likely continue to outperform the broader market. From a macro perspective, a continuation of risk aversion, deflationary forces, and return to fiscal and monetary normality should be big catalysts for our overall portfolio. The best performers in the World Fund last month were electric utility companies PPL Corp in the US (+4.2%) and Chubu Electric in Japan (+3.8%).

May 2010 Newsletter

2010-05-04T18:26:45Z

CANADIAN ADVANTAGE FUND
April was a mixed month for markets as strong earnings reports were offset by sovereign credit concerns in Europe. The Canadian Fund ended the month flat, while the TSX crept up 1.4%. Most of the year so far has been spent consolidating last year’s gains as economic and earnings data confirms the year old rally. From our standpoint, many of the cyclical companies that we feasted on last year have become at least fairly valued and as such we have moved on to greener pastures. Looking towards the second half of the year, the best opportunities are developing in the non-cyclical sectors like utilities, staples, and telecoms. Many of these companies have lost favor as attention has been focused elsewhere; however, valuations, dividend yields, and a good risk/reward opportunity for capital appreciation have our utmost attention. April’s best performers for the Fund were Rogers and grocer Metro, both of which reported strong first quarter earnings.

WORLD ADVANTAGE FUND
The World Fund bounced back strongly in April, rising 2.6% while the MSCI World Index fell 0.6%. Our positions in undervalued equities and currencies are starting to heat up as we move into the summer. From a macro perspective, we are starting to see some changes in leadership as we move into the second half where valuations and fundamentals will be more in focus. Some of the best opportunities, from our perspective, are in the World Fund as diversity and selectivity will be very valuable moving forward. Last month’s best performers were electric utility companies FPL Group (+7.7%) and Public Service Enterprise Group (+8.8%). This area of the market has excellent valuations relative to the market and extra large dividend yields that should allow for a nice price multiple expansion and potentially leadership going into the fall.

April 2010 Newsletter

2010-04-28T17:20:44Z

First Quarter Report
O Canada! Those are the words that most markets are chanting these days. Canada’s economy is in the sweet spot in today’s global economy, and foreign investors cannot get enough of our currency, commodities, and even our government bonds. The cyclical economic recovery has been confirmed in other developed nations as well, with global economic stimulus and monetary reflation being successful in boosting the economy. It comes to no surprise to us, as we were early proponents of a cyclical bull market last year and have invested accordingly. Even though the economic headlines are quite rosy, one has to take into account that the thirteen month market rally has priced in a fairly robust recovery as evidenced by a relatively flat few months for most equity markets. The market’s attention is shifting to the more mature phase of the economic recovery that will be more of a stock picker’s market with individual company fundamentals and valuations becoming more important.

Our focus for the next one to two years is shifting to companies that offer stable earnings growth, visible sales, and cheap valuations. More importantly we are looking for investments in companies that will be able to sustain growth without the aid of monetary reflation (zero percent interest rates) or fiscal government stimulus spending. Both stimulus factors will wean as we move into the second half of the year and the baton gets passed to private sector led growth. That means we are transitioning out of cyclical oriented companies in the energy, materials, and industrial areas that did very well for us last year, but have become fairly valued. Our focus now is more centered on non-cyclical stable companies that have not yet participated in the rally and will likely catch up in the coming quarters. The added bonus of these companies is an excellent risk/reward for investors as stability, low volatility, and steady growth become more attractive opportunities as the year progresses.

In terms of the market, the first quarter of 2010 was a bit choppy with January’s 5% correction giving way to a nice rebound that helped the TSX Index squeak out a 2.5% gain. The Canadian Fund was mostly flat over the whole quarter avoiding most of the market volatility as we transition the portfolio to new opportunities. The market seems inclined to chase the more cyclical/riskier areas of the market in the short term; however, we believe our focus on better valued less volatile areas of the market will be the best position over the next three quarters of the year in terms of capital preservation and capital appreciation.

The soaring Loonie was a big factor in the World Fund’s negative 4.9% performance in the first three months of this year. While we love our Canadian Dollar, it has become a bit stretched versus most foreign currencies which have fallen 25% relative to the Loonie over the last year. We do not currency hedge, as we believe holding foreign assets is a great diversification hedge versus the commodity heavy TSX Index. In fact, foreign currency denominated holdings have largely been a net benefit to the World Fund, with the exception of the last quarter, helping the Fund avoid losses in the 2008 crisis while still rising almost 40% over the last 13 months. Not bad considering the Loonie has gone from 76 cents to par with the US Dollar in the same time frame. We are fairly close to a level on the Loonie that will produce less drag on the portfolio and potentially even become a net benefit as international stocks are good bargains relative to domestic stocks.

CANADIAN ADVANTAGE FUND
March was a steady month for the Canadian Fund, ending the quarter and year to date flat. While the TSX Index rose 2.5% for the quarter, the last three months were choppy as the market determines how strong the recovery will be beyond what has been priced in last year. Our view is that the best opportunities in today’s market are in the other side of the Canadian market, namely non-commodity and non-cyclical companies that have yet to participate. This may be contrary to today’s economic snapshot which points to a strong cyclical recovery; however, markets tend to move three to six months ahead of the economy, thus we are investing for a more stable normal growth rate as opposed to the strong growth rates that are typical out of a recession. This means focusing on the forgotten quality companies that don’t have volatile high growth rates and valuations, but rather stable growth rates with lower risk. From our perspective it is a fantastic time to accumulate quality low risk bargains that should offer solid returns as well as leadership as we move into the rest of the year.

WORLD ADVANTAGE FUND
The World Fund hit a rough patch in the first quarter, giving up some of its January gains to finish down 4.9% for the year. It was a fairly disappointing month as the Fund took a hit from the Loonies’ 4% rise. In addition, our equity positions fell modestly as investors flocked to cyclical growth companies and away from stable value companies. Unfortunate as it was, we believe that the short term pain will give way to long term gain as the year progresses. The fact that most foreign currencies have fallen 25% relative to the Loonie over the last year is largely priced into the Fund already. It may be difficult to invest internationally as the Loonie soars, but what we have learned from the past is that these are exactly the times to invest in international companies that are on sale relative to Canadian investments. One cannot “time” the best time to invest globally, but with the Loonie soaring and a bit stretched, it becomes a more favorable time from a risk/reward standpoint.

March 2010 Newsletter

2010-04-28T17:20:44Z

CANADIAN ADVANTAGE FUND
The Canadian Fund ended February with a flat return for the month as well as year to date. The TSX index recouped some of its big losses in January but remains down 1.34% for the year. Cyclical companies were the biggest gainers last month as January’s declines proved premature with mostly positive economic data fueling hopes of a continued cyclical recovery. After last year’s large gains, markets seem content to trade in a range until the private sector takes the baton from government spending led growth. In the meantime, we have a preference towards non-cyclical companies that were largely ignored over last year’s rally. On a relative basis, valuations in the utilities and telecommunications sector are a fraction of the large index sectors and should do well in the current market environment. On the earnings front, fourth quarter reports came in better than expected, but the picture remains mixed with good bottom line profit growth mixed with slowly recovering top line sales growth. Our focus remains on companies with good sales prospects that are trading at reasonable prices. Coincidentally these companies are underrepresented in the broad index; therefore, the current portfolio has less exposure to broad market movements and more exposure to individual company related fundamentals.

WORLD ADVANTAGE FUND
The World Fund was down slightly in February but remains up for the year by 1.27%. The MSCI Index ended the month flat and remains down 2.45% for the year. Much of the attention last month was focused on government debt concerns in Europe, as Greece aims to reduce its budget deficit and come up with a better fiscal plan. The World Fund currently has no exposure to European markets as we are focused more on companies in the US and Asia. Fundamentally, the global economic recovery continues to be led by low debt countries in Asia and emerging markets, which are showing signs of a V-shaped recovery. The best way to get exposure to these economies, in our view, is not by investing directly in the emerging nations companies but rather in multinational companies that sell goods to these areas. Companies that have goods that these nations demand should see better growth relative to domestically focused companies. This is one of the main reasons we highly recommend Canadian investors to diversify towards international exposure in order to benefit from the emerging prosperity of these new consumer nations.

The Wall Street Journal

2010-07-30T21:31:06Z

CANADA TIP SHEET: Zohny Looks Beyond TSX Leaders

“TORONTO (Dow Jones)–The broad gains that helped Canadian equities soar nearly 31% in 2009 are unlikely to be repeated this year, making for a stock-picker’s market, says Youssef Zohny.”

Reuters Canada

2010-04-28T17:27:06Z

Van Arbor sees flat market; safer stocks to star

“Canadian fund managers Andrew Parkinson and Youssef Zohny are buying cheaper safe-haven stocks like utilities instead of banks and resource firms, betting shares that profit most from a growing economy will lag as governments drain stimulus spending.”