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2nd Quarter 2012 Market Commentary – Equity

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The global economic activity slowed and risks remained throughout the 2nd quarter, which resulted in negative equity returns. The TSX dropped by 6%, the S&P 500 lost 3%, NASDAQ was down 5% and abroad the MSCI EAFE dropped 7% and the MSCI Emerging almost 9%.

The TriDelta portfolio’s, ‘Pension’ and ‘Core performance’ continued to significantly outperform their benchmarks despite the weak quarter and reaffirmed our dividend growth focus and attraction to select US companies.

Our ‘Pension’ and ‘Core’ equity portfolios have significantly outperformed the TSX, which can be attributed to 3 decisions that came out of our investment process:

  1. We believe that while the Toronto market has many benefits and strengths, it is a narrow market with some sizable investment volatility. As a result, we have 30% to 40% invested outside Canada in mostly Global names.
  2. Our approach to using quantitative analysis with a focus on strong cash flow, profitability, solid dividends and size, has worked well for this period of the market. We believe for most investors who want lower volatility, this approach will be a benefit over the long run, but will underperform on major commodity rallies.
  3. Our approach kept us out of precious metals and energy for much of the year, but given the  compelling valuations in these sectors we have now added investments at very attractive valuations.

The recent market weakness provided us with opportunities to add quality holdings such as Husky Energy and Suncor – both of which saw valuations approaching levels last seen in the weak oil prices of 2009. Husky is a conservative growth company that also pays a 5% yield, has low debt levels and high cash flow, which we favor. Because of some greater volatility, we added Husky to our Core Growth portfolios, and added the larger Suncor to our Pension portfolios. Furthermore the energy sector has retreated by over 20% in the past months, so we felt it was a good entry point.

Economies around the world continue to display a bit of indigestion after years of excess.

The US economy remains sluggish although there is continued evidence of stability and pockets of optimism despite slow job creation and the looming “fiscal cliff” of expiring tax cuts at year end. However assuming that some US political sanity will prevail, we remain optimistic given the improving news flow, which suggests improvement in the real economy.

The European Central Bank and the Peoples Bank of China both cut key lending rates, while the bank of England increased its bond-buying stimulus program. This combined central-bank firepower significantly underpin downside risk and boost confidence in an eventual recovery.

Other encouraging signs include good growth in the US housing market, recent improvement in bank lending and large corporations remain awash in cash. Lower oil prices are also a tail wind for the global economy and this will significantly boost general consumer spending. Emerging market growth is also evident, led by Malaysia and Taiwan. The emerging markets have limited debt and should deliver roughly 5% growth this year.

Conservative growth and income investments remain in favor although at some point we will see further signs suggesting that risk assets will be favored. We continue to monitor these as we consider adding to our cyclical exposure at appropriate times.

Last but not least however, we remain vigilant in monitoring the global economies, quarterly earnings reports and economic news in these uncertain times.

Cameron Winser
VP Equities, TriDelta

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