While the U.S. debt conundrum will continue to dominate the headlines over the next week at least, this is creating the type of fear and uncertainty that creates stock market bottoms. Once investors start to focus on the strength of corporate earnings, the easy interest rate environment and the historically low valuation of stocks, money will start to flow back into equities.  The Canadian dollar will also probably rally further against the US dollar.  Within our balanced funds and hedge fund we have taken short positions in US Treasury Bonds (where allowed) in order to benefit from a rising Canadian dollar (effectively hedging the currency risk in owning US stocks) as well as protect against a rise in interest rates.

Account Review and Strategy

Equity markets ended the month by giving up all their gains and then some, while bond prices rose, so our Asset Allocation decision to remain overweight in stocks did not add value in July.  However, we were able to keep performance in line with the benchmark index due to the overweight sector position in Basic Materials stocks.  Positive contributors to performance last month included Uranium One (up 26.7%), oil service firms Trinidad Drilling (up 19.1%) and Calfrac Well (up 14.3%), Galleon Energy (up 13.6%) and Enablence Technology (up 12.5%).  On the downside were some of the Financials (Sun Life down 9.1%, Manulife down 11.1%), RIM (down another 14.4%) as well as Talisman Energy (down 11.4%) and Magna International (down 10.4%).  From the international stocks, technology was the big winner as earnings beat expectations with Apple up 14.7% and Google up 17.5%.  Laggards included US auto firms GM (down 9.3%) and Ford (down 11.6%).

The structure of the stock portfolio is still geared towards a recovery in the global economy and better relative strength from cyclical stocks.  The largest overweight sector is Basic Materials (including an overweight on Golds) while we also have smaller overweight sector positions in Energy, Consumer Discretionary and Information Technology.  Biggest underweight continues to be in the Financial Sector.  The fund is currently zero weighted in the smaller Telecom, Utilities, Health Care and Consumer Staples sectors.

Global Hedged Growth Fund Account Review and Strategy

Returns for the Fund in July were strong despite the overall weakness in the stock market.  The Fund benefitted from a rise in Canadian Basic Materials stocks (55% of the Fund’s asset allocation) as well as a substantial gain in Silver prices (12% of the Fund).  Some weakness in Uranium prices negatively impacted results though as that position represents 18% of the Fund.  The 26% short position in US mid-term bonds (through the Ishares ETF for 20-year bonds) provided mixed results as bond prices rose but so did the Canadian dollar versus the US dollar, which helped mitigate the losses from the short position.  The strategy for the Fund remains in place as we move into August although we will probably look to lighten our precious metals exposure somewhat and replace it with base metal and energy exposure which would benefit from stronger economic growth.

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