Tactical Yield Fund Commentary
Portfolio Sub-Advisor: Catapult Financial Management Inc.
Fund Commentary - June 30, 2011
The IA Clarington Aston Hill Tactical Yield Fund began the year
with a net leverage position that was well below the maximum net
leverage that the Fund can employ, but ended the second quarter
with roughly 2% in cash and cash equivalents. One Fund strategy is
to utilize leverage and earn a high level of cash income from its
investments. In addition, the borrowing rates for leverage remain
inexpensive in the opinion of the Portfolio Advisor.
During the first two quarters of 2011 the asset mix of the Fund
changed substantially. The Fund employed leverage at times and had
more than 50% invested in equities. This reflected the Portfolio
Advisor's belief that the global economy was recovering and that
government bond interest rates had bottomed out. In that scenario,
it was expected that equity markets would outperform their bond
counterparts and thus, the Fund should have a high percentage of
the asset mix invested in equities. However, sovereign debt issues
in Europe, the earthquake and tsunami disaster in Japan, plus
geopolitical uncertainty in North Africa all worked together to
slow growth expectations for the global economy. While the Fund did
have an equity weighting of more than 50% for some time, the Fund
ended the period at 48% equities and 52% in bonds, preferred shares
and cash. The weighting in equities detracted from performance as
equities underperformed high yield bonds in the first half of the
year. The S&P/TSX Composite Index returned just 0.2% for the
first six months of 2011, while the Merrill Lynch U.S. High Yield
Cash Pay Index returned 4.9%.
The Fund seeks to generate a high level of income while
protecting investor capital. Protecting investors' capital,
as interest rates rise, can require greater exposure to equities as
fixed income securities, including high yield bonds, will generally
fall in value in a rising interest rate environment. Ten year U.S.
government bond yields rose, for the most part, until mid April of
this year and subsequently dropped 75 basis points over the
following two months. While it did make sense for the Fund to have
high exposure to equities at the beginning of the year, the
Portfolio Advisor made a few adjustments after mid-April to reflect
the new environment.
The Portfolio Advisor believes that the following three events
had the greatest bearing on Fund performance. First, political
uprisings in Egypt, Libya and Syria triggered reactions from equity
markets and affected crude oil prices. The geopolitical events in
North Africa and the Middle East caused crude oil prices in North
America to reach a peak of almost $115 by the end of April. The
rise in crude oil prices rallied major oil stocks initially;
however, the slowing global economy caused crude oil prices
to fall below $100 by the end of June, and oil stocks decreased
1.6% at the end of this period. Second, Japan was struck by a major
earthquake in March and the tsunami that followed created more
devastation and triggered a nuclear disaster at the Fukushima
plant. These disastrous events have grounded the Japanese economy
to a halt, and this has compounded the global economic slowdown.
Third, Europe has been dealing with another potential meltdown in
Greece as Greek citizens have rallied against the government in
protest of the dramatic cuts to government services and employees.
The uncertainty regarding Greek debt caused equity markets to move
lower in the second quarter of this year. The uncertainty was
most felt by European financials as they are considered to have the
most exposure to sovereign Greek debt. The Fund does not currently
have any exposure to European banks or other financial companies in
Europe.
In light of the troubles in the Middle East and Japan, the
Portfolio Advisor continues to focus the Fund's investments on
companies that offer a reasonable yield, and will experience
minimal effects from geopolitical events and commodity prices.
Bonds like the RSC Equipment Rental Inc., 10.0% of 2017, and Rite
Aid Corp., 8.0% of 2020 offer investors yields of 8% to 9%, and the
Portfolio Advisor has great confidence in their ability to pay
principals and interest. In the Fund, Davis and Henderson Income
Corp., Cineplex Inc., and REITs such as Riocan Real Estate
Investment Trust, H&R REIT, and Canadian REIT offer investors a
dependable dividend, or distribution and the possibility of growth
in that income stream. It may sound boring, but The Portfolio
Advisor believes that this investment strategy will offer investors
the best possible returns with a minimal amount of risk.