Mid-year review

Brandon Snow's picture

Markets: The first half of 2013 offered a much easier environment for equity investors than did the last few years. There was stable but not prolific growth in the U.S., the European credit situation calmed down and we had the added bonus of massive monetary stimulus out of Japan. The result was a less volatile, more widespread advance in the markets for most of the quarter, with all the excitement happening underneath the surface (defensive vs. offence and sector rotations).

Funds: Of course, as we always say, we buy stocks and not markets. Entering the year, we were very excited about the opportunities we saw, and I think we did a decent job translating that into performance. Here are examples of our year-to-date performance:

When looking at our performance, people often ask what it was we owned that worked so well. The fact of the matter is the performance is just as much about what we didn’t own as what we did.

For example, Cambridge Canadian Equity held 103 stocks over the past six months and just five were down more than 10% and none were down more than 25%. These stocks totalled 2.25% of the fund. Compare that to the S&P/TSX Composite Index, where the materials sector alone (19% of the index) finished down 32% over the same time period. About 25% of our stocks were negative in the first half vs. 50% for the TSX, and our average loss on those names was 6% vs. 22% for the TSX. We preach downside protection; it is important to know we practise it as well.

Outlook: We still feel that the outlook is favourable. It seems the market agrees, as many stocks are trading at reasonably attractive risk-reward levels, but without the "fat pitch" opportunities we have seen in the last few years. Our view of China being the biggest risk globally has not changed and recent stress in Chinese funding markets suggests that something could happen sooner rather than later.

Our fund positioning has reverted to core names with cyclical exposure skewed to liquid names. Cash levels are reasonable at 10-20% across the Canadian portfolios, giving us flexibility to react if volatility picks up over the summer months. We continue working to find new names to add to the funds and continue to monitor our existing coverage list for opportunities.

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