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U.S. Financials Income Fund

 

USF.UN
CLASS U

Portfolio Manager Updates

 

Portfolio Manager Updates for 2017-09-30

As of September 29, 2017, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $8.23, unchanged from June 30, 2017. The NAV of the Class U unit on September 29, 2017 was US$8.38 vs. US$8.36 on March 31, 2017.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the quarter.

The Class A units closing price on September 29, 2017 was $8.28 which represents a $0.05 premium to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets for the most part maintained or continued their strong first half rally through the third quarter of 2017. The MSCI Emerging Markets Index was again one of the strongest performing indices in the third quarter with a total return of 8.0%, while the S&P 500 Index in the U.S. was up 4.5%. Here in Canada, the S&P/TSX Composite Index bounced back, rising 4.1 % after declining by 1.6% in the second quarter.

During the period the S&P 500 Financials Index rose to 429.08 from 409.59, while the S&P 500 Real Estate Sector Index remained relatively flat at 199.20 from 199.01 on June 30, 2017. Stocks within the portfolio had varying returns led by Ameriprise Financial Inc., which rose 12.0% during the period. This was somewhat offset by our holding in M & T Bank Corporation, which declined 11.6% while held in the Fund.

Volatility remained subdued overall during the period with only a few days where it spiked towards 16. Due to our favourable view on the market as well as the low level of volatility, the call writing activity was limited over the period. The Fund on average had 4.1 percent of the Fund subject to covered calls vs. 8.8 percent the previous quarter.

The Fund ended the quarter with a cash position of 3.1% vs. 4.9% for the previous quarter.

The U.S. dollar was mostly hedged back into Canadian dollars throughout the period and ended September with approximately 100% of the U.S. dollar exposure hedged, helping negate some of the negative impact of the 3.9 % decline in the U.S. dollar vs. the Canadian dollar during the quarter.

 

Portfolio Manager Updates for 2017-06-30

As of June 30, 2017, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $8.23 versus $8.13 on March 31, 2017. The NAV of the Class U unit on March 31, 2017 was US$8.36 vs. US$8.19 on March 31, 2017.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the quarter.

The Class A units closing price on June 30, 2017 was $8.07 which represents a discount of 1.9% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets for the most part maintained or continued their strong first quarter rally through the second quarter of 2017. The MSCI Emerging Markets Index was one of the strongest performing indices in the second quarter with a total return of 6.4%, while the S&P 500 Index in the U.S. was up 3.1%. Here in Canada, the S&P/TSX Composite Index declined 1.6% as weakness in the energy and materials sectors dragged down the performance.

The Health Care sector was by far the best performing sector in Canada and the U.S. in the second quarter of 2017 with returns of 13.4% and 7.1% respectively. Meanwhile the Energy sector remained the worst performing sector in Canada in the second quarter with a total return of -8.3% while the Telecommunication Services sector was the worst performing sector in the U.S. with a total return of -7.1%.

During the quarter the S&P 500 Financials Index rose to 409.59 from 394.58, while the S&P 500 Real Estate Sector Index rose to 199.01 from 195.41 on March 31, 2017. Stocks within the portfolio had varying returns led by The Blackstone Group L.P., which rose 15.4% during the period. This was somewhat offset by our holding in Wells Fargo & Company, which declined 6.3% while held in the Fund.

While volatility remained subdued overall, it spiked for a brief period in the middle in April and May before drifting back toward historically low levels. The call writing activity was opportunistic over the period and took advantage of signals generated by the Strathbridge Selective Overwriting (“SSO”) strategy. The Fund ended June 30, 2017 with 2.4 percent of the Fund subject to covered calls, the same amount as at the end of the previous quarter.

The Fund ended the quarter with a cash position of 4.9% vs. 1.8% for the previous quarter.

The U.S. dollar was mostly hedged back into Canadian dollars throughout the period and ended June with approximately 100% of the U.S. dollar exposure hedged, helping negate some of the negative impact of the 3.5% decline in the U.S. dollar vs. the Canadian dollar during the quarter.

 

Portfolio Manager Updates for 2017-03-31

As of March 31, 2017, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $8.13 versus $8.32 on December 30, 2016. The NAV of the Class U unit on March 31, 2017 was US$8.19 vs. US$8.28 on December 30, 2016.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the same quarter.

The Class A units closing price on March 31, 2017 was $7.86 which represents a discount of 3.3% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets for the most part continued their strong post-Trump election rally into the first quarter of 2017. The Nasdaq Composite Index was one of the strongest performing indices in the first quarter with a total return of 10.1 %, while the S&P 500 Index in the U.S. was up 3.8%. Here in Canada, the S&P/TSX Composite Index rose 2.4%.

The Financials sector which was by far the best performing sector in Canada and the U.S. during the fourth quarter of 2016 on expectations of higher net interest margins and less regulation gave way to the Information Technology and Consumer Discretionary sectors in the first quarter of 2017. Meanwhile, the Energy sector which was one of the best performing sectors in 2016 has been one of the worst performing sectors so far in 2017.

During the quarter, the S&P 500 Financials Index rose to 3394.58 from 386.53 on December 30, 2016. Stocks within the portfolio had varying returns, led by KKR & Co L.P. which rose 19.5% during the period. This was somewhat offset by our holding in Simon Property Group Inc., which declined 5.5% while held in the Fund.

Volatility as measured by the CBOE Volatility Index (VIX) remained at the low end of the range it has been trading at over the past few years, namely in the 10.5% to 13.0% range. The Fund stayed open on most of the portfolio during the period but did selectively write some covered calls and ended the quarter with 2.4% of the portfolio written vs. 2.6% at the end of the previous quarter.

The Fund ended the quarter with a cash position of 1.7% vs. 3.4% for the previous quarter.

The U.S. dollar was mostly hedged back into Canadian dollars throughout the period and ended the first quarter with approximately 100% of the U.S. dollar exposure hedged.

 

Portfolio Manager Updates for 2016-12-31

As of December 30, 2016, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $8.32 versus $7.20 on September 30, 2016. The NAV of the Class U unit on December 30, 2016 was US$8.28 vs. US$7.18 on September 30, 2016.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the quarter.

The Class A units closing price on December 30, 2016 was $8.08 which represents a discount of 2.9% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Most global equity markets rallied strongly in the fourth quarter of 2016 with the majority of the performance coming after the election of Donald Trump as the President of the United States on November 8, 2016. The S&P/TSX Composite Index rose 4.5% while the S&P 500 Index in the U.S. was up 3.8%. Meanwhile, Asian markets declined during the period, dragging the international MSCI EAFE Index down 0.6%.

During the quarter, the S&P 500 Financials Index rose to 386.53 from 320.82 on September 30, 2016. The Financials sector was by far the best performing sector in the fourth quarter on expectations of a steeper yield curve and less regulation. Stocks within the portfolio had varying returns led by Goldman Sachs Group Inc., which rose 48.9% during the period. This was offset by our holding in KKR & Co. LP, a Private Equity firm which declined 12.5% while held in the portfolio.

Volatility moved higher heading into the U.S. Election as the Chicago Board Options Exchange Volatility Index (VIX) went from 13% on October 24th to 22.5% on November 4th. After the election, volatility declined swiftly hitting a low for the year on December 21st at 10.9%. The Fund stayed open on most of the portfolio during the period but did selectively write some covered calls and ended the quarter with 2.6% of the portfolio written vs. 4.6% at the end of the previous quarter.

The Fund ended the year with a cash position of 3.4% vs. 7.6% for the previous quarter.

The U.S. dollar was mostly hedged back into Canadian dollars throughout the period and ended December with approximately 50% of the U.S. dollar exposure hedged.

 

Portfolio Manager Updates for 2016-09-30

As of September 30, 2016, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was C$7.20 versus C$7.24 on June 30, 2016. The NAV of the Class U unit on September 30, 2016 was US$7.18 vs. US$7.20 on June 30, 2016.

Class A unitholders received distributions totaling C$0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the quarter.

The Class A units closing price on September 30, 2016 was C$6.99 which represents a discount of 2.9% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets rallied in the third quarter of 2016 with most of the performance coming in July and August, as September, traditionally the weakest month of the year, ended little changed. The S&P/TSX Index rose 5.4% and the S&P 500 Index in the U.S. was up 3.8% while the international index (EAFE) led the way up 6.5% as investor concerns around ‘Brexit” receded.

During the quarter, the S&P 500 Financials Index rose to 320.82 from 308.39 on June 30, 2016. Stocks within the portfolio had varying returns led by State Street Corp. and The Charles Schwab Corporation which were up 29.8% and 25% respectively during the period. Both were helped by back up in interest rates as 2-year U.S. Treasury yields rose from 0.58% at the end of June to 0.76% at the end of September on the expectations that the U.S. Federal Reserve will raise the overnight lending rate by 25 basis points before the end of 2016. This was offset by our holdings in Crown Castle International Corp., a Real Estate Investment Trust, which was down 6.5% while held in the Fund.

Volatility was range bound during the period as the Chicago Board Options Exchange Volatility Index (“VIX”) traded in a range of 10% to 15%. The Fund stayed open on most of the portfolio during the period but did selectively write some covered calls and ended the quarter with 4.6% of the portfolio written vs. 2.1% at the end of the previous quarter.

The Fund maintained an average cash position of 6.2% during the period vs. 6.9% for the previous quarter.

The U.S. dollar was mostly hedged back into Canadian dollars throughout the period and ended September with approximately 100% of the U.S. dollar exposure hedged.

 

Portfolio Manager Updates for 2016-06-30

As of June 30, 2016, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $7.24 versus $7.81 on March 31, 2016. The NAV of the Class U unit on June 30, 2016 was US$7.20 vs. US$7.74 on March 31, 2016.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the same period.

The Class A units closing price on June 30, 2016 was $7.10 which represents a discount of 1.9% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets were mixed in the second quarter of 2016 with markets in North America showing positive results while International markets were modestly lower. The S&P/TSX Index rose 5.1% and the S&P 500 Index in the U.S. was up 2.4%, while the international index (EAFE) was down 1.2% with most of the decline occurring after the “Brexit” vote was decided on June 23 with 52 percent of Great Britain voting in favor to leave the European Union. The news roiled global markets immediately following the vote but rebounded by quarter-end. The longer term impacts on the region and the world are not yet known.

During the quarter, the S&P 500 Financials Index rose slightly to 308.39 from 303.71 on March 31, 2016. Stocks within the portfolio had varying returns led by Aflac Inc. which was up 15.0% during the period. The U.S. insurer was helped by a strengthening Yen which benefitted the translation of their Japanese insurance division’s earnings. This was offset by our holding in another insurer, Lincoln National Corp., which was down 15.8% while held in the Fund with most of the decline occurring post “Brexit” as 10-year US Treasury Yields declined 28 basis points from June 23rd to June 30th to end the quarter at 1.47%.

After a fairly volatile first quarter of 2016, the Chicago Board Options Exchange Volatility Index (VIX) retreated for most of the second quarter before briefly spiking on the “Brexit” news on June 23rd. Volatility stayed elevated only for a few days before declining as markets staged a meaningful rally into quarter-end. The Fund was active in its covered-call writing during the period and ended the quarter with 2.1% of the portfolio written vs. 5.1% at the previous quarter-end.

The Fund maintained a lower average cash position of 6.9% during the period vs. an average of 13.9% for the first quarter.

The U.S. dollar was actively hedged back into Canadian dollars throughout the period and ended June with approximately 50% of the U.S. dollar exposure hedged.

 

Portfolio Manager Updates for 2016-03-31

As of March 31, 2016, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $7.81 versus $8.45 on December 31, 2015. The NAV of the Class U unit on March 31, 2016 was US$7.74 vs. US$8.27 on December 31, 2015.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the quarter.

The Class A units closing price on March 31, 2016 was $7.40 which represents a discount of 5.2% to its underlying net asset value. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity market performance was “A Tale of Two Cities” in the first quarter of 2016. From the start of the year up to the lows on February 11, 2106, most global indices over 10% due to concerns surrounding global growth. The WTI Crude Oil spot price declined over 30% during the same period. Since then, many markets have advanced over 10% erasing most if not all of the losses incurred earlier in the year as global macroeconomic indicators started to show some signs of improvement. By the end of the quarter, the S&P/TSX Composite advanced 4.5%, the S&P 500 Index advanced 1.3%, while the WTI Crude Oil spot price ended the period down only 0.5% to end at US$36.94 per barrel.

During the quarter the S&P 500 Financials Index declined to 303.71 from 321.73 on December 31, 2015. Stocks within the portfolio had varying returns led by Nasdaq Inc. which was up 14.6% during the period on the back of strong earnings accretion coming from some recent acquisitions. This was offset by our holding in Citigroup Inc. which declined 19.0% while held within the Fund.

After a fairly stable fourth quarter of 2015, the Chicago Board Options Exchange Volatility Index (“VIX”) rose on the back of market weakness in January and February up to the 30 level which was last observed in August of 2015. The VIX has subsequently declined back to around 14, the low end of the range over the past few years. The Fund was active in its covered-call writing during the period and ended the quarter with 5.1% of the portfolio written vs. 5.2% at the end of the previous quarter.

The manager actively altered the cash position during the period and ended the quarter at 6.9% vs. 8.1% at the end of the previous quarter.

The manager became more concerned with the Fund’s exposure to the U.S. dollar during the quarter and increased the hedge to 100% of the U.S. dollar exposure from 50% at the end of 2015.

 

Portfolio Manager Updates for 2015-12-31

As of December 31, 2015, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $8.45 versus $8.30 on September 30, 2015. The NAV of the Class U unit on December 31, 2015 was US$8.27 vs. US$8.31 on September 30, 2015.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the same period.

The Class A units closing price on December 31, 2015 was $8.07 which represents a discount of 4.5% to its underlying net asset value. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets mostly advanced in the fourth quarter of 2015 with strong gains generated in October partially offset by weakness in December. The S&P 500 Index advanced 7.0% during the period, while the S&P/TSX Composite was an exception as it declined 1.4% due to weak commodity prices emanating from concerns surrounding slower growth in China and

During the quarter, the S&P 500 Financials Index increased to 321.73 from 305.33 on September 30, 2015. Stocks within the portfolio had varying returns led by Public Storage (“PSA”), which was up 17.9% during the period. This was offset somewhat by our holding in Morgan Stanley which declined 9.4% while held within the Fund.

After a fairly volatile third quarter, the Chicago Board Options Exchange Volatility Index (“VIX”) declined in the fourth quarter to an average level of 17.1 for the period. The Fund was active in its covered-call writing during the period and ended the quarter with 5.2% of the portfolio written vs. 19.5% at the end of the previous quarter.

As investment opportunities arose, the Fund’s cash position was reduced during the period with an average cash position of 8.3% and ended the quarter at 8.1% vs. 24.3% at the end of the previous quarter.

The Fund ended the quarter with approximately 50% of the U.S. dollar exposure hedged back to the Canadian dollar.

 

Portfolio Manager Updates for 2015-09-30

As of September 30, 2015, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $8.30 versus $9.11 on June 30, 2015. The NAV of the Class U unit on September 30, 2015 was US$8.31 vs. US$9.24 on June 30, 2015.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the quarter.

The Class A units closing price on September 30, 2015 was $7.97 which represents a discount of 4.0% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets were down across the board in the third quarter of 2015 due to concerns surrounding slower growth in emerging market economies (most notably China) and the effects on global growth. Global indices were down anywhere from 6.9% for the S&P 500 Index to 28.6% for the Shanghai SE A Share market, with the flash crash on August 24th contributing most of the weakness. The resource heavy S&P/TSX Composite was also down 8.6% during the quarter, due to its dependence on emerging market’s demand for its resources.

During the quarter, the S&P 500 Financials Index decreased to 305.33 from 328.94 on June 30, 2015. Stocks within the portfolio had varying returns led by The Progressive Corporation (PGR), a basket holding which was up 10.1% since we purchased it. This was offset somewhat by our holding in The Charles Schwab Corporation which declined 12.6% while we owned it.

Volatility was fairly subdued in July and the first half of August, but started to rise after the FOMC meeting in August when the minutes revealed there was less of chance for the Federal Reserve to embark on its first tightening cycle in over a decade. The Chicago Board Options Exchange Volatility Index (“VIX”) spiked over 45% to a level of 40.74 on August 24th, the same day as the flash crash when the Dow Jones Industrial Average was down more than 1,000 points intraday. The Fund was active in its covered-call writing during the period and ended the quarter with 19.5% of the portfolio written.

The Manager became more cautious and increased the Fund’s cash during the period. The Fund had an average cash position of 15.1% and ended the quarter at 24.3% vs. 3.2% in the previous quarter.

 

Portfolio Manager Updates for 2015-06-30

As of June 30, 2015, the Net Asset Value (“NAV”) of the Class A unit, USF.UN was $9.11 versus $9.25 on March 31, 2015. The NAV of the Class U unit on June 30, 2015 was US$9.24 vs. US$9.19 on March 31, 2015.

Class A unitholders received distributions totaling $0.125 per unit during the quarter, while Class U unitholders received distributions totaling US$0.125 per unit during the quarter.

The Class A units closing price on June 30, 2015 was $9.03 which represents a discount of 0.9% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

Global equity markets generated mixed returns in the second quarter of 2015 due to concerns surrounding whether Greece would exit the Eurozone or not. European markets felt most of the brunt of “Grexit” risk as the DAX 30 in Germany and CAC 40 in France declined 8.5% and 4.8% respectively. Although the Shanghai Class A market declined 7.2% in June, it was still the top performing market globally in the 2nd quarter, rising 14%.

The S&P 500 Financials Index increased slightly during the period to 328.94 from 324.95 on March 31, 2015.

Stocks within the universe had varying returns, led by American International Group (AIG), which the Fund held, up 13.1%, while, Boston Properties., a real estate investment trust (“REIT”) which the Fund did not own, lagged the group, down 13.4%. REITs in general were weak as 10-year U.S. Treasury Bond Yields rose from 1.92% to 2.35% over the period.

Volatility during the quarter remained towards the low end of the range it has traded in the past few years. The Fund has been selective in its covered call writing and ended the quarter with 2.8% of the portfolio written.

The Fund maintained a high investment position during the period and ended the quarter with a cash position of 3.2% vs. 10.0% at the end of the previous quarter.

 

Portfolio Manager Updates for 2015-03-31

As of March 31, 2015, the Net Asset Value of the Class A unit, USF.UN was $9.25 versus $9.33 on the Fund’s inception date, February 24, 2015. The NAV of the Class U unit on March 31, 2015 was US$9.19 vs. US$9.33 on February 24, 2015.

Class A unitholders received a regular distributions totaling $0.05 per unit during the quarter, while Class U unitholders received distributions totaling US$0.05 per unit during the quarter, each prorated from the date of inception to March 31, 2015.

The closing market price of the Class A units on March 31, 2015 was $10.00 which represents a premium of 8.1% to its underlying NAV. The Fund’s Class U units are not listed on the Toronto Stock Exchange.

The S&P 500 Financials Index decreased slightly during the period to 324.95 from 328.01 on February 23, 2014 as slower economic growth in the U.S. during the first quarter reduced 10-year treasury yields to 1.92% from 2.17% at the end of 2014.

Stocks within the portfolio had varying returns led by M & T Bank Corp, which increased 5.4%, while, Icahn Enterprises L.P., which the Fund did not own, lagged the group, down 8.4% as the company generated an annual loss of $373 million in 2014, its first since 2008.

After starting off 2015 at elevated levels, volatility slowly declined to end the first quarter at the low end of the range for the past few years. The Fund has been selective in its covered-call writing and ended the quarter with 39.3% of the portfolio written.

As of March 31, 2015 the Fund was approximately 90% invested as the manager prudently invested the proceeds of the offering in an orderly fashion.

 

 

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