As the first quarter reporting season for U.S. companies enters its later stages, it is clear that: a) it was a tough quarter, especially for any business affected by the weather, and b) things are not falling off a cliff. Expectations for economic activity have been reset, giving us the opportunity to act on some ideas we have developed.
The last two months have been very interesting. While the overall market has been basically flat, there has been a rotation out of economically sensitive names (driven by the slowdown in economic momentum and the carnage in the commodity markets) into more defensive names, with consumer staples, utilities and health care leading the market. I believe we are seeing the beginning of a rotation into equities by bond managers and retail investors in the U.S., and they are targeting the “core” type of names we champion. This has led to strong performance in Cambridge Canadian Asset Allocation Corporate Class, with its large allocation to health care, REITs and infrastructure. The fund is up 9.3% for the year-to-date as of April 29 (Class A). More information is here.
Since our last update, we added to transportation names in North America, as well as some commercial construction-related companies. We also found attractive entry points for a number of U.S. retailers through earnings season and were able to build positions in these names. In addition, while defensive U.S. names rallied, we were able to buy a few defensive names in Canada as they sold off on negative news (such as Intact Financial). Finally, we added to our energy exposure with refineries and service companies. In the equity portfolios, cash has declined from 20-25% at the end of March to the mid-teens today. We will remain patient and will put this money back to work only if justified by the risk-reward offered by the investment.
The bottom line is that we have come through a tough first quarter reporting season with some confidence about the outlook. More importantly, expectations have come down. While I don't know where the market will end the year, we don't buy the market – we buy companies, and we feel very good about what we own and what we are working on today.