Balanced Fund Report July 2013

Monthly Update July 2013

Portfolio Additions


About the Company: ANN is a women’s retailer that operates over 900 stores in the U.S. under the Ann Taylor and LOFT brands. ANN has recently expanded into Canada with plans for additional store launches over the next few years.

Investment Thesis: Similar to Kohl’s, ANN has struggled to meet same store sales expectations. However, the issues seem to be temporary in nature (weather, merchandising misses) versus permanent or structural problems. Given a strong balance sheet and cash flow, management has time to right the ship.

Valuation: ANN is trading at 6x on an ev/ebitda basis. We see 7x as a very achievable multiple, giving the stock 15%+ upside.

Expectations: As ANN executes on initiatives and shows stronger growth, we see the shares trading higher.

Key Points:
  1. Recent performance seems temporary in nature.
  2. Stock supported by strong cash flow and a strong balance sheet.

Portfolio Deletions

We did not eliminate any positions from the portfolio this month.

Management Commentary

Fed Comments Move Markets

Ben Bernanke, Chairman of the U.S. Federal Reserve Bank, made comments that suggested the FED may slow its program of buying $85 billion of securities a month as early as this year. This caused both bond and stock prices to fall. Bond investors fear that lower demand from the FED will cause rates to rise, while some stock investors fear that much of the money the FED has injected into the economy has gone directly to the stock market, making markets artificially high.

We Continue to Favor Stocks over Bonds…

We agree with the bond market’s reaction and see further risk to bonds, given yields remain at low levels. We also see further risk of capital loss in yield-driven equities, such as REITS and utilities. However, our view on stocks that are economically driven is that the sell off is a buying opportunity as the slowing of FED purchases is conditional on a stronger economy.

…But Active Management is Key

Looking at historical market valuations, we’re at a point where both the Canadian and US markets look fairly valued. This means that, in order to achieve strong results, you have to be very selective in the stocks you own. This is where we excel. We run a disciplined investment process that looks at stocks at the company-specific level. Because much research goes into each stock we own, we are able to run more concentrated portfolios (approximately 25 stocks). We also actively manage the Canadian/US allocation, which means investors have access to the best opportunities across North America. We have achieved positive selection effect in 8/10 sectors, which means the stocks we hold have outperformed their sector categories, and we believe this active approach is best suited to the current market.

Company Updates:

Rogers & Bell – The reason for owning these stocks was that, as much as we see more economically sensitive stocks as better investments, these shares can be volatile and so we wanted some component of stability in the portfolio. The telecom space provided the most compelling valuations and we therefore saw less risk of capital loss when compared to REITs and utilities. Unfortunately, regulatory risks flared up and the stocks sold off on news that Verizon, a formidable competitor, may be entering the Canadian market. We continue to hold the shares but will be looking to exit the positions should we find more compelling opportunities.

Gold – We saved our clients a lot of money by having avoided gold. The Materials sector was down over 10% in June alone, with gold mining stocks driving the majority of losses. We were also overweight the Consumer sectors, which were the best performing sectors this month.

As always, feel free to contact us at any time.


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