Second Quarter Review North American Capital Appreciation Strategy June 2015

It seems there is never a dull moment in the capital markets. As we headed into the Canada Day and the Fourth of July Independence Day holidays, it looked like an extra-long weekend for some after a relatively uneventful quarter in the North American equity markets. However, the markets ended up facing another bout of volatility as Greece opted to miss a debt payment and called a referendum, asking its people to decide whether they are willing to accept more austerity in return for remaining in the Eurozone and receiving more aid. Overall, the reaction in peripheral country bond yields and global equity markets was relatively subdued compared to the reaction when Greece was in the headlines back in 2012, although the timing from a quarter end return perspective was not ideal. Meanwhile, the Chinese central bank cut rates for a fourth time since November in an effort to stem the correction the Shanghai Composite has endured in the past two weeks as it officially enters a bear market (down -20%) at the time of this writing. While we are concerned about these developments, that are continuing to unfold, we don’t believe these problems pose systemic risks unless they lead to severe deflation or recessionary economic conditions that are beyond the central bank’s ability to reverse them.

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First Quarter Review North American Capital Appreciation Strategy March 2015

Macro events continued to dominate markets during the first quarter. The European Central Bank (ECB)’s decision to implement Quantitative Easing (QE) in January, put downward pressure on the Euro and the collapse in oil continued to hurt the Canadian dollar. While this was positive for the US dollar, it was not positive for US companies that generate earnings abroad, which currently make up about one third of the S&P500 revenues. Adding up the effects of a stronger US dollar and the impact it had on earnings revisions as well as the negative impact from lower energy prices, this managed to keep returns in North America at least in local currencies relatively flat. During the first quarter, the TSX returned 2.58% while the S&P500 returned 0.95% in US dollars.

Year End Review North American Capital Appreciation Strategy December 2014

The fourth quarter did not start off well for the markets. By mid October, both the S&P500 and TSX were down over 7% and 11% from their respective all time highs reached in mid-September 2014. The trigger seemed to be many factors including weaker retail sales in the U.S., weak economic data from Europe and the end of quantitative easing (QE), the U.S. Federal Reserve (Fed) large-scale bond buying program that helped fuel equity markets over the past 5 years. An accelerated sell-off in oil triggering a sudden and significant widening in bond high yield spreads, which has often been an indicator of tougher markets ahead, probably created an additional layer of panic in the market. Once the market adjusted to the fact that the pain in the high yield market was mostly centered on energy companies, which make up about 17% of it, things began to normalize. Then on October 15th, comments by James Bullard, president of the St. Louis Federal Reserve Board, suggested delaying the end of the Fed’s bond buying program and in fact possibly extending it with a new program, sparked a rally in the S&P500. This seemed to be a powerful enough signal to the markets that the Fed would remain accommodative in the face of further volatility notwithstanding its original goal to end QE in October. The TSX initially recovered as well but further pressure from declining crude oil prices reversed these gains. During the fourth quarter the TSX returned -1.5% in C$ while the S&P500 returned +4.9% in US$. Adjusting for currency moves, the S&P500 returned 8.6% as the C$ depreciated slightly more than 3 cents relative to the US$, closing at US $0.86 at December 31st.

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Third Quarter Review North American Capital Appreciation Strategy October 2014

The TSX and the S&P500 started off with gains during the first two months of the third quarter but lost ground in September. The loss in September was enough to pull the TSX into negative territory for the quarter as it returned -0.6% for the third quarter while the S&P500 returned 1.1% in US$. Adjusting for currency moves, the S&P500 returned 6.2% in the third quarter as the C$ lost just over 4 cents, essentially reversing the gains it saw in the second quarter. The biggest drop in Canada occurred in the resource sectors driven by the decline in commodity pricing as West Texas Intermediate (WTI) oil fell 11.5% to US$91.16 per barrel and gold dropped 9.0% to US$1,208.15 per ounce. In the U.S., market trepidation early in the quarter centered around the second quarter earnings releases which in totality actually ended up coming in better than analysts’ expectations as the blended earnings growth rate in Q2 rose to 7.7%. This drove a decent recovery in the S&P500 in August.

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Second Quarter Review North American Capital Appreciation Strategy July 2014

The second quarter of 2014 saw a continuation of the positive performance trend exhibited in the first quarter in North America. Both indices, the TSX and the S&P500, hit new highs during the second quarter with the TSX slightly outperforming the S&P500 as it returned 6.4% while the S&P500 returned 5.2% in US$. Adjusting for currency, the S&P 500 returned 1.6% in C$ as the C$ strengthened by over 3 cents during the quarter reversing the downward trend it exhibited during the first quarter.

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First Quarter Review North American Capital Appreciation Strategy April 2014

The first quarter of 2014 saw returns shift back to Canada as the TSX outperformed the S&P 500 for the first time since the fourth quarter of 2012. The TSX returned 6.1% while the S&P500 returned 1.8% in US$. Adjusting for currency, the S&P500 returned 5.8% in C$ as the C$ declined almost 4 cents against the US closing at $0.9042. The recent decline in our dollar follows an approximate 7 cent US decline in 2013.

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North American Strategy 2013 Year End Review and Outlook January 2014

The fourth quarter ended with a strong finish for the U.S. markets, which resulted in the best annual performance for the S&P500 index since 1997. In the quarter, the S&P500 returned 10.5% in US$ or 14.3% in C$, which helped drive the total return for 2013 to 32.4 % in US$ or 41.5% in C$.Clearly,the weaker Canadian dollarrelative to the US dollar was a significant driver of the returns when viewed in Canadian dollars as the Canadian dollar declined approximately 7% during the year. As we discussed during our last client quarterly meeting and conference call in November, we began moving more assets into the U.S. in 2012 with the U.S. exposure in our North American Equity strategy increasing from approximately 25% to 43% by the end of the first quarter of 2013. We also removed our US dollar currency hedge in the fall of 2012, which had helped protect the portfolios from the prior decline in the US dollar relative to the Canadian dollar. Being unhedged during 2013 allowed our Canadian clients’ portfolios to benefit from the relative strength of the US dollar.

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The S&P 500 continued its advance in the third quarter reaching record highs in early August. Strong manufacturing data and better than expected second quarter earnings reports helped propel the S&P 500 through the 1,700 level for the first time ever. The earnings growth rate for the index in the second quarter of +2.1% year over year was considerably better than forecasts and marked the third consecutive quarter of positive earnings growth. The market’s focus then shifted to rising bond yields as better economic data spurred concerns that the U.S. Federal Reserve (“the Fed”) would reduce (“taper”) its $85-billion-per-month bond buying program in September, which would be sooner than market expectations, The bond buying program is aimed at keeping borrowing costs down and fueling the economy. News about chemical weapons attacks against civilians in Syria onAugust 21st added to the geopolitical nervousness in the markets as the likelihood of a retaliatory strike against Syrian President Bashar al-Assad’s forces grew. Gold spiked up through $1,400 per ounce and oil rose over $110 per barrel, while the S&P 500 pulled back almost 5% from its early August highs.

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The S&P 500 continued its advance through April and May hitting an all time high on May 22nd of 1,687, before pulling back almost 8% to the June low of 1,560 and eventually closing at 1,606 on June 30th. The second quarter started out on a positive note driven by better than expected first quarter earnings. In fact, 70% of companies reporting first quarter earnings inApril and May beat expectations with the blended earnings growth rate for the quarter coming in at +3.3% as compared to -0.7% estimated at March 31st . All ten sectors of the S&P 500 showed earnings growth during the first quarter.The positive market momentum inApril and most of May was also supported by strong economic data including better than expected auto sales, improving jobless claims and overall much stronger consumer confidence. On May 22nd, Fed Chairman Ben Bernanke indicated in his first testimony before Congress since February, that while the economy has shifted to a more sustainable growth trajectory, the employment picture still remains weak overall.This seemed to suggest status quo in terms of quantitative easing. However, the minutes from the Federal Reserve’s policy meeting released that afternoon, indicated some Fed members were in favour of tapering the central bank’s $85-billion-per-month bond-buying stimulus program as early as June. This mixed message resulted in the sell-off in equities and an increase in bond yields. Weaker manufacturing data out of China and concern about a possible credit crunch also weighed on markets globally. The June 19 Fed meeting caused a further downdraft for the S&P 500 as the Fed confirmed it may moderate its pace of bond purchases towards the end of the year and completely stop by mid-2014. The total return for the S&P 500 in the second quarter was +2.9% in US$ or +6.5% in C$ as a result of a weaker Canadian dollar.

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The S&P 500 started 2013 with the biggest one day gain in more than a year as investors welcomed a budget agreement that averted the “fiscal cliff”.The strong performance continued right through the first quarter. Not even concerns over the Italian election results, in which Italy has not yet formed a coalition government or costs associated with quantitative easing which have raised worries that the Fed stimulus could end sooner than expected, were enough to curb market enthusiasm through the end of February. In March, the focus shifted back to the Eurozone as the European Central Bank (ECB), European Commission, International Monetary Fund (IMF) and the Cypriot Parliament worked to finalize a €10 billion Cyprus bank bailout that would see shareholders, creditors and uninsured deposit holders cover much of the cost. The main concern in the market was the possibility that this may be considered a template for future bailouts, which could derail the fragile and nascent Eurozone recovery. None of this in itself was enough to slow the market momentum as the total return forthe S&P 500 in the first quarter was 10.6% in US $ or 13.0% in C$ as a result of a weaker Canadian dollar in the quarter. The first quarter was all about fund flows as liquidity poured into U.S. equities at about the fastest rate we have seen since 2007. Positive housing and jobs data in recent months have only added fuel and not even the sequestration cuts that began in March have had much impact on market momentum. The S&P 500 closed the quarter at its all time high surpassing its October 2007 peak. In contrast to the S&P500, the total return for the S&P/TSX was 3.3% or about one quarter the performance of the S&P 500. Performance in Canada continues to remain hindered by the underperformance of the heavily weighted materials index. A combination of poor operating performance in mining and disappointing commodity pricing has held back the Canadian market year to date. During the quarter, pricing pressure continued to mount on the price of gold and copper with gold closing at US$1598.75 per ounce, down 4.6% in the quarter and copper, down 4.9% at US$3.42 per pound. Below-normal temperatures across most of the United States helped oil and natural gas prices as oil closed up 4.4% at US$97.23 per barrel while natural gas increased 20.0% to close at a 52-week high US$4.02 per mcf.

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