2010 Q3 Newsletter September 30, 2010
We are very pleased to report strong performance in the third quarter (Q3). Equities gained significant ground during the quarter reversing the losses in the second quarter. On a year to date basis there have been modest gains in equities indices based largely on positive performance in September.
Interest increases moderated due to continued debt concerns in Europe and slowing growth in the United States. It is expected that further stimulus will be provided through quantitative easing by the Federal Reserve. We also expect interest rates to remain low for much longer than previously forecast. This will trigger a rise in the value of equities.
LDIC’s performance was +11.5% in the third quarter. Our third quarter performance exceeded the S&P TSX which gained +9.5% during Q3.
Our year-to-date performance was +10.1%, nearly double compared to the S&P TSX’s performance of +5.3%. As well, we outperformed the indices (Dow Jones and S& P 500) for both Q3 and the year-to-date.
All of our top ten holdings gained during Q3. The average gain was +8.9% with the best gain on Keyera Facilities at +17.41%. Gains in H & R REIT +16.18%, Just Energy +15.64% and Inter Pipeline Fund at +14.73% were also strong. Investors favoured income producing equities and trust.
Major Portfolio Exits
We exited one equity position in the third quarter.
We exited Norbord during the third quarter after adding it earlier this year. Our original thesis about a housing recovery proved premature. Although the earnings in the second quarter were in line without expectations, the stock sold off as OSB (oriented strand board) prices spiked and then sold off during the second and third quarters. We continue to monitor the sector for firm signs of recovery.
Major Portfolio Switch
We switched one equity position during the quarter.
Enbridge to TransCanada Corp
Enbridge was a long-time holding of LDIC. As the stock approached our target, we decided to evaluate our positions in the utility sector. We decided that TransCanada Corp represented better value than Enbridge’s rich valuation; as well TransCanada offered a 30% higher yield. TransCanada’s growth projects, such as their Keystone Pipeline, a $12 Billion oil pipeline to the United States, will greatly increase earnings in the next few years. As the market begins to give the company credit for those future earnings, we believe the shares will continue to appreciate.
Major Portfolio Additions
We added three equity positions during the quarter.
We decided to increase our allocation to Canadian REITs (Real Estate Investment Trusts) during the third quarter for several reasons. With interest rates at or near all-time lows, borrowing costs for REITs are also at historic lows. On top of that, REITs are not subject to the SIFT rules which have forced other income trusts to pay taxes starting in 2011. Because of that, we believe the need for yield will support REIT values. We like Artis because of its yield and its exposure to western Canada commercial real estate. Recent acquisitions have increased Artis’ size and scale and the REITs units were added to the TSX Composite Index in September.
iShares DEX Universe Bond Index Fund
We decided we wanted some exposure to bonds during the third quarter. Bonds are expensive to transact in for individuals in small amounts, with liquidity being poor and the bank dealers taking large commissions in the form of price spreads. The iShares DEX Universe Bond Index Fund (“XBB”) was a way for us to get liquidity and lower commissions. The XBB is an exchange traded fund, which replicates as best as possible the holdings of the DEX Universe Bond Index, a broad index of investment grade corporate and government bonds of varying maturities.
Canacol is a small-cap oil & gas exploration company operating in Latin America, with its primary producing assets located in Colombia. Canacol is also drilling a highly prospective well in Guyana. In 2009 Canacol made a very large heavy oil discovery in Colombia called Capella, in which it has a 10% ownership, with the Chinese major oil company Sinochem as their main partner. The Capella discovery could prove to be extremely large and will be proven up over time. Another light oil discovery, called Rancho Hermoso, provides significant production and more exploration potential.
Our outlook for the forth quarter is positive. The maintenance of low interest rates to support economic recovery in Europe and the United States will add stimulus to the global economy. Increased forecast for +8.2% growth in the forty four Asian nations will add momentum to sectors such as base metals and energy. We expect Canada’s economy to continue to outperform other industrialized nations over the next two years as forecast by the IMF.
President and CEO