North American equity markets were mixed in July. In Canada, the S&P/TSX Composite declined by 0.25%; while in the U.S., the S&P 500 was up by 1.93%. Year to date, the S&P/TSX Composite Index is down by 0.94%, and the S&P 500 has increased by 10.34%.
The Focused Opportunities Fund increased its net market exposure to +57% (beta adjusted net exposure= +42%) in July and generated a loss of 1.82%. At the end of July the fund was net long in Canada (+60%) and net short in the US (-3%). Overall, approximately 81% of the fund was invested in Canada and the remaining 19% in the U.S.; while gross exposure stood at approximately 114%.
Canadian equities were marginally weaker during July, while US equities continued to perform well. While large capitalization stocks continue to drive market averages higher, underlying trends show weakening performance among many smaller and mid-cap stocks while market liquidity has also deteriorated. The Fund lost ground on the month due to weaker performance in a number of our core Canadian positions. The fundamental performance of these investments continues to be strong. Weaker share prices during the month was again largely due to a general apathy towards smaller sized Canadian companies as foreign investor interest waned and overall trading liquidity was muted. Losing positions included: Imvescor Restaurant Group, Richards Packaging, and Freshii. Positive contributors during the month were Pollard Banknote, Alphabet (which we exited during the month), and Suncor Energy. US Short positions were also a drag on results during the month, while Canadian short positions added to returns. Nevertheless, we believe holding this portfolio protection is now more important than ever and plan to continue actively adding to our hedges.
We are growing increasingly cautious with respect to equity markets and continue to reduce our market exposure. Narrow leadership, elevated equity market valuations, and low levels of volatility (implying investor complacency), collectively suggest added caution is warranted at the current time. We plan to maintain a defensive posture and focus our attention on only the highest quality businesses. While we continue to believe the US economic backdrop is reasonably positive, we suspect much of this good news is now priced into equities and investors will have opportunities to deploy cash at better prices in the months ahead.
Since inception, the Focused Opportunities Fund has delivered strong risk-adjusted performance with a 5.55% annualized return, and a low correlation to equity markets while the benchmark S&P/TSX Composite Index has returned 3.81% annualized over the same period.