Market Commentary
Second Quarter 2014
Cambridge Global Asset Management
Chief Investment Officer Alan Radlo and
Portfolio Managers Robert Swanson and Brandon Snow
Global equity markets continued to reach record highs during the second quarter of 2014, as
economies in North America, Europe and Asia continued to grow, although at a slow rate. The
Canadian economy showed continued, if uneven, improvement, adding some support for the
Canadian dollar. Unemployment continued to fall in Canada as manufacturing and exporting activity
picked up. Retail sales and housing starts continued to improve as well, although this was
accompanied by the first decline in housing prices in several years. Consumer expenditures have
been falling in recent quarters, likely related to elevated personal debt levels.
In the United States, manufacturing continued its upward climb, although growth slowed in
consumer-related industries, including housing and retail. Economic weakness in the first quarter
due to the cold and stormy winter carried into the second quarter. Consumer savings rates
increased steadily during the first half of 2014. Higher employment and improved consumer
confidence implies that consumer spending will recover during the second half of the year. Given
the unevenness of economic activity and the lack of inflationary pressure, interest rates continued
to ease during the quarter, resulting in a 2.5% return for 10-year U.S. Treasury bonds. Credit
spreads continued to contract, which contributed to excess returns for investment-grade and highyield bonds.
It was a unique quarter for capital markets as almost all asset classes across all developed markets
registered positive returns. Bond prices rose as interest rates fell around the world, with credit
spreads continuing to contract. High-yield bonds gained 2.6% during the period, compared with
1.5% for the broad Canadian government bond market.
Equities also rallied due to lower rates, improving economic conditions and continuing low
inflation. Canadian stocks outperformed most major markets, as the S&P/TSX Composite Index rose
6.4%, led by its dominant energy sector. U.S. equities continued their record setting advance with
the S&P 500 Index returning 1.5% in Canadian-dollar terms (4.7% in U.S. dollars), led by energy
and health care stocks. Global stocks, as measured by the MSCI World Index, gained 1.4%. Among
global markets outside North America, Japan and emerging markets outperformed, each up 3%,
while equities in Asia ex-Japan and Europe lagged.
Commodities produced positive returns as geopolitical concerns and supply disruptions sent oil
prices higher, while global economic improvement provided support for industrial metals. Most
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Market Commentary
agricultural benchmarks fell, however. The Canadian dollar moved higher, buoyed by the
combination of higher oil prices and lower U.S. interest rates.
Overall, we slightly underperformed the benchmarks, as we took a cautious approach due to high
equity valuations and uncertainty about economic growth, particularly in the consumer sectors. We
moved to a more defensive position and generally maintained high cash balances.
Canadian equity funds
Our Canadian equity funds underperformed due in part to a high cash position of approximately
20%. Underweight exposure to financials and energy also detracted from relative performance. The
exception was Cambridge Pure Canadian Equity Fund, which outperformed the benchmark with its
heavy focus on the Canadian market and overweight positions in the consumer discretionary and
information technology sectors.
Energy remained the fund’s largest sector, bolstered by a key addition, PrairieSky, a royalty holder
that was spun off from Encana. Another key acquisition was Spartan Energy. In the consumer
discretionary sector, we sold Shoppers Drug Mart to focus on our investment in its newly associated
companies, George Weston and Loblaw. We added Middleby, B&M European Value Retail and
Dollarama, and sold PetSmart. We trimmed our position in U.S. grocer Kroger, although we intend
to retain this stock as a core holding. In financials, we added U.S. Bancorp to help position the fund
to take advantage of expected economic growth in the United States. We also added CI Financial,
our parent company, and sold Brookfield Asset Management.
U.S. equity funds
The U.S. equity portfolio modestly underperformed the benchmark because of our overweight
positions in health care and industrials. Energy made the biggest contribution to absolute
performance. Our active currency hedging during the quarter also made a contribution.
We increased exposure to consumer discretionary and financials during the period. Our largest
sectors continued to be health care, industrials, consumer discretionary, information technology
and financials. The cash position fell to 8.1% during the quarter from 11.9%. Among individual
securities, our key additions included Southwestern Energy, Microsoft, Goldman Sachs, Intel and
Cullen/Frost Bankers, while the existing position in Orbital Sciences was increased. We sold Merck,
Masco, Amgen and Norfolk Southern.
Global equity funds
In our global equity funds, we favoured North American securities because a greater number of
companies here met our objectives of providing both organic (internal) growth opportunities, as
well as growth in shareholder returns through a combination of dividend increases and/or share
buybacks. Within Europe, we focused on Germany, the United Kingdom and Switzerland.
Market Commentary
Cambridge Global Equity Corporate Class outperformed the benchmark, due to strategic currency
hedging and its overweight positions in the energy and consumer discretionary sectors, while
industrials and financials detracted from performance. The fund had an overweight position in
Canada for the first time in six years, which added relative value, while our underweight position in
Japan detracted. Exposure to consumer discretionary was increased during the period, while health
care, industrials and financials were trimmed. Our largest sectors continued to be health care,
industrials, consumer discretionary, information technology and energy. The fund’s cash position
stood at 11% at the end of the period, little changed from three months earlier.
Cambridge Global Dividend Fund underperformed the benchmark, due mostly to a high cash
position, which grew to more than 22% by the end of the quarter compared with 14% three months
earlier. During the quarter we became more defensive with the structure of the portfolio. We
reduced our exposure to more economically sensitive sectors such as consumer discretionary,
financials and materials, and added to industrials and health care. Energy made the biggest
contribution to our absolute performance, as oil prices rose due to political events. Consumer
staples, industrials and health care also contributed.
New additions to our global portfolio included Goldman Sachs, Komatsu, Adecco, BASF and Snam,
an Italian natural gas distributor. Among stocks sold were Accenture, Yara international, Novo
Nordisk, Lloyds Banking Group and Croda International.
Income funds
Our income portfolio underperformed its benchmark due to an increase in our exposure to the U.S.
dollar. We expected the stimulus tapering by the U.S. Federal Reserve to produce higher interest
rates and a stronger U.S. dollar, but this did not occur.
We tapped our high cash reserve, which was more than 17% of assets at the end of the first quarter,
to increase our positions in high-yield bonds, REITs and infrastructure stocks. Our cash level was
reduced to 3.7% by the end of the period. By doing so, we took a more defensive position in the face
of disappointing U.S. economic data and increased the amount of income coming into the portfolio
amid falling interest rates.
We added Cincinnati Bell, Seadrill, Dish DBS and Primero Mining to our bond portfolio. Among
infrastructure issues, we introduced Telefonica and Suez Environnement. Within REITs, we
increased our positions in Annaly Capital, American Capital Agency and Hatteras Financial, to take
advantage of their attractive yields and low valuations.
Asset-allocation fund
Cambridge Canadian Asset Allocation Corporate Class underperformed its benchmark due to our
large cash position and, to a lesser extent, our exposure to the U.S. dollar. More than one-third of
Market Commentary
our assets were in cash at the end of the period, as we continued to be wary of elevated equity
valuations.
We reduced our equity weighting by 13 percentage points and increased our positions in high-yield
bonds and infrastructure stocks by five percentage points each. Our new bond holdings included
Chesapeake Energy, Seadrill, Biomet and HCA. Among equities, we added PrairieSky, Signature
Bank, Telefonica and CI Financial, our parent company. We sold positions in PetSmart, Suntrust,
Sumitomo Mitsui Financial, Yara International, Sawai Pharmaceutical, Yamato Holdings, Twenty
First Century Fox, Viacom and Nomura Holdings.
Outlook
Looking ahead, if the consumer and manufacturing sectors can re-synchronize, we expect U.S.
economic growth to accelerate during the second half of the year. This should lead to higher
interest rates and a stronger U.S dollar. Equities should also benefit from a more coordinated
expansion, as long as investors do not become overly concerned about excessive valuations. With
multiples at 16-times earnings, we believe the market should remain fairly valued, as long as
earnings rise in line with expectations. With the continued interest in income producing
investments, we anticipate that dividend-paying and particularly dividend-growing companies will
provide the best total return opportunities for investors.
Compared to the long-term, equities appear to be expensive – but they nonetheless remain fairly
valued given the backdrop of low interest rates and inflation. We believe that volatility, now at
historically low levels, could begin to increase should further uncertainty develop over economic
and earnings growth, or if rising inflation becomes a concern. A stock-market correction is possible
after a succession of record highs, producing new buying opportunities. Overall, we anticipate that
fundamentals will remain solid for equity markets.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the
prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be
repeated. This commentary is provided as a general source of information and should not be considered personal investment advice or
an offer or solicitation to buy or sell securities. Cambridge Global Asset Management is a business name of CI Investments Inc. used in
connection with its subsidiary, CI Global Investments Inc. Certain portfolio managers of Cambridge Global Asset Management are
registered with CI Investments Inc. ®CI Investments, the CI Investments design and Cambridge are registered trademarks of CI
Investments Inc. Published July 2014.