2010 Q2 Newsletter June 30, 2010
Our expectations for further gains in the equity markets in the second quarter (Q2) were not realized. Although Canadian economic recovery continued to out-pace recovery in other nations, markets were negatively affected by three factors. The first factor was debt concerns in Europe, particularly Greece, Spain and Portugal. The second major concern was very slow US job growth. Finally the efforts of the Chinese government to rein in growth were also a negative for equity market performance. China’s growth remains strong despite the credit tightening.
The result was a negative second quarter with markets turning modestly negative for the year to date. We remain cautiously optimistic about the balance of 2010.
LDIC Inc. performance was -5.7% in the second quarter. This was a 0.5% gain on the S&P TSX which dropped 6.2% in Q2. American markets performed far worse with the DJIA dropping 10% and the broader S&P 500 dropping 11.9%.
For the year to date, LDIC Inc. lost 1.3% verses a loss of 3.8% on the S&P TSX and losses of 7.6% and 6.3% on the American indices. Our thesis that Canada remains a better place to invest is still intact.
Our top 10 holdings reflected the negative market performance, six were down and four were up. Overall, the top 10 were down 2.56% during the second quarter. Our best performers were Enbridge and H & R REIT. Our worst performers were Just Energy, Armtec and Daylight Resources.
We have included the yield for each of the top ten positions which averaged 7.76%. This is to reinforce our strategy of seeking yields as a means of preserving capital in volatile markets.
Major Portfolio Exits
We exited three equity and trusts positions in the first quarter.
AltaGas Income Fund (ALA.UN)
We exited our position in AltaGas Income Fund during the quarter because the trust is converting to a corporation on July 1st at which point the yield will be cut from $0.18 per month, approximately an 11% yield to $0.11 per month, approximately 7% yield. We believe there are higher yielding trusts/corps with the same or better risk-reward profile.
IAMGOLD (IMG-T) and Redback Mining (RBI-T)
During the second quarter, gold hit an all-time high in both US dollar and Euro terms. Given gold’s tendency to increase in a parabolic fashion and pull-back we felt the risk-reward was weighted to the downside and sold our gold equities profitably. On average we made a return of about 25% on RBI-T and 20% on IMG-T for our clients during the quarter. We continue to watch gold equities for a more attractive entry-point.
Major Portfolio Additions
We added two new major holdings in the second quarter.
Canfor Pulp Income Fund (CFX.UN-T)
Canfor Pulp operates three low-cost pulp mills in western Canada with a combined annual capacity. Over the last twelve months, pulp prices have undergone a V-shaped recovery rising from their low in May 2009 of US$400 per metric tonne to an all-time high in US dollar terms of US $1,020 per metric tonne at the end of April 2010. We like CFX.UN because there are severe supply constraints in the industry at the moment fuelled by the Chilean earthquake that occurred, just as demand is picking up. Canfor currently earns and pays a high yield of over 16% and continues to raise the distribution as earnings improve and management continues to guide to a very positive outlook going forward.
Northland Power Income Fund
Northland Power Income Fund is a power producer with assets in Ontario and Germany. Northland produces 1100 megawatts of electricity from natural gas plants, wind and biomass. In addition to its 1100 megawatts of existing capacity, Northland has plans to grow by 563 megawatts or about 50% by 2016. This robust pipeline of projects will support the distribution and the potential exists to grow the distribution in the long run. Northland has recently announced their $1.08 annual distribution, paid monthly, will be maintained as a dividend following their conversion to a corporation on January 1, 2011. The company also has significant tax pools that will prevent them from paying taxes for the foreseeable future, further protecting the dividend.
As we enter the third quarter the outlook is for more volatility and potential negative performance. We have taken steps to reduce risk and shift to more conservative; yield oriented holdings to preserve capital in what may prove to be a difficult quarter.
As noted in May, our strategies for protecting client assets through this downturn parallels past efforts.
First, we remain invested in Canada where economic recovery and job creation are strong. Second, we have increased our holdings of income producing positions including: bonds, income trusts and dividend paying equities. Third, we have reduced our holdings of non-dividend paying equities.
We are optimistic about the medium term but it may be a volatile journey to visible, sustainable US recovery in both the job and housing markets.
President and CEO