Equity Fund Commentary

March 31, 2012

Market Overview

  • The Canadian stock market (S&P/TSX Composite Index) was up 4% to start the year, led by financial and consumer stocks. Resource stocks weighed on the market, however, as commodity prices were weak – especially natural gas, which tumbled to a 10-year low.
  • Global markets had a much stronger start, as the clouds over Europe began to lift and investor sentiment improved.

Portfolio Specifics

  • The companies in the fund continue to report strong earnings and balance sheets are in good shape. Investors are starting to feel a little better about the global economy and this was reflected in share price gains in the first quarter.
  • The fund’s foreign investments have driven performance, a theme that started in late 2010. Asia Pacific Breweries, BorgWarner, Insperity and Lincoln Electric all saw strong price gains.
  • The portfolio’s Canadian investments fared well. This was due in part to a focus on growing dividends and limited exposure to gold and base metals (the mining sector was weak).
  • The dividend yield of the fund is 2.3% (slightly higher than 10-year government bonds).
  • Birchcliff Energy was the lone sore spot. The company, which put itself up for sale in October after receiving unsolicited buyout offers, took itself off the block late in the quarter and did an equity financing at a reduced price. The manager, CGOV Asset Management, modestly increased the position following the announcement.
  • The cash position is higher than normal, at 8%. CGOV has been cautious in redeploying cash.

Notable Transactions

  • BorgWarner was sold. The auto parts company gained a quick 35% from the manager’s purchase price last year and CGOV felt the stock’s risk/reward profile was no longer favourable.
  • Positions were increased in CAE, Franco-Nevada and Birchcliff.

Positioning

  • The fund’s structure hasn’t changed. CGOV favours industry-leading companies with predictable, recurring revenues across a wide range of industries.
  • A higher cash position provides the manager with some options if volatility picks up. The manager has a few stocks on their watch list but valuations are not yet attractive enough to pull the trigger.