Since Canada Day last year, we’ve reduced the cash weighting in Trimark Global Small Companies Class from about 26% to 16%. We have put substantial dry powder to work for our investors and I’m here to share a few of the details.
As stock markets have hit new highs, energy is one of the few sectors that still presents value. Because we’ve identified what we believe are real opportunities, we have done much more than dip our toes in. Nearly 50% of the cash we deployed between July 1, 2014 and the end of February 2015 has been invested in energy-related firms.
After the 2008 financial crisis, we increased the Fund’s weighting in our top ideas. We put investors’ money where our convictions were at that time and purchased quality businesses that were unfairly punished by investors’ indiscriminate selling. These are the companies that have propelled the Funds’ performance until now. We weathered some tough months, held fast to our discipline and ultimately produced strong absolute returns. (18.2% annually over 5 years and a 1st quartile ranking over five years.)
We hold similar conviction for select companies in the energy sector today and look forward to watching the investments we’ve made play out over the next three to five years. I wrote a little about energy in our Q4 2014 commentary for Trimark Global Small Companies Class:
Notoriously a cyclical industry, the energy sector’s large energy producers are in a period of reducing capital spending on new production growth and instead focusing on generating cash out of existing wells.
This has reverberated throughout the energy services group, resulting in many energy services providers seeing a reduction in short-term earnings, something the market has extrapolated.
With the recent 50% decline in oil prices, this sentiment is even more prominent [which has led to further stock price weakness in energy stocks
As oil prices collapsed, energy-related stocks plunged in sympathy, irrespective of fundamentals, domicile or business focus. We took the opportunity to double our exposure to a few of these businesses at prices we believe provide a significant margin of safety. We focus on cash flow potential in the longer term – three to five years.
Here are a few examples of companies we’ve increased our ownership in or newly bought in the Fund, since July 2014:
- A new purchase in the Fund
- Monaco-based owner and operator of liquefied natural gas (LNG) carriers
- Bought the company at US$18 in mid-December last year
- Purchased initially in January 2010
- Cyprus-based operator of accommodation (hotel) rigs for the oil and natural gas industry
- 190% increase in our share ownership between July 1, 2014 and February 28, 2015
Ultra Petroleum Corp.
- Purchased initially in March 2013
- U.S.-based natural gas producer
- 115% increase in our share ownership between July 1, 2014 and February 28, 2015
The companies above saw abrupt declines, but our in-depth understanding of them gave us the conviction to step in and, at a minimum, double our exposure and take advantage of the temporary price dislocations caused by the short-sighted nature of the market.
While we would never presume to forecast the recovery of oil prices, based on fundamentals we firmly believe that the businesses we’ve chosen provide a strong risk/reward profile.
As always, if you have any questions, please don’t hesitate to leave them in the comment area below.
*The companies discussed are selected for illustrative purposes only and are not intended to convey specific investment advice.
Trimark Global Small Companies Class, Series A provided the following performance returns as at February 28, 2015: 1 year, 8.66%; 3 years, 21.01%; 5 years, 18.23%; Since inception, 7.14%.
Source for all data and dates, unless otherwise specified Invesco Canada, as at February 28, 2015.
Quartile rankings for Trimark Global Small Companies Class, Series A (Global Small/Mid Cap Equity category): 1-year (144 funds ranked), 3; 2-year (115 funds), 2; 3-year (106 funds), 2; 5-year (78 funds), 1.
Quartile rankings are comparisons of the performance of a fund to other funds in the Canadian Investment Funds Standards Committee’s (CIFSC’s) category, ranked out of the number of eligible mutual funds by each time period noted, and are subject to change monthly. The quartiles divide the data into four equal segments expressed in terms of rank (1, 2, 3 or 4). Source: Morningstar Research Inc. This is the Morningstar quartile ranking of Series A units of the Fund as of February 28, 2015.