MARQUEST WEEKLY COMMENTARY – MAY 11, 2015

Liis Palmer, Cassels Investment Management Inc.

Monthly Pay Fund

Last week the TSX was down 1.1 percent. The Marquest Monthly Pay Fund A units closed at $4.32 compared to $4.35 the previous week. Canada recorded a record $3.07 billion trade deficit in March, a sign of a slowing economy. Employment data was also moderate. The unemployment rate remains 6.8 percent. Then, the surprise NDP win in the Alberta elections caused energy shares to drop on the possibility of higher taxes. The price of WTI rose 0.5 percent on the week.

Significant contributors in the Fund last week were Magna International (up 10.1 percent), Westshore Terminals (up 3.9 percent) and Macdonald Dettwiler (up 3.7 percent). Magna reported a good Q1 with significant improvement in European operations. The company raised its operating margin guidance. Magna has balance sheet flexibility, strong free cash flow and an industry leading position. It trades at a discount to its peers. Macdonald Dettwiler reported a strong Q1, ahead of consensus and with improved margins. They have a strong pipeline of commercial satellite bids and a $3 billion backlog. MDA trades at 13 times 2016 earnings.

Laggards were Bank of Nova Scotia (down 2.1 percent), Suncor (down 6.0 percent) and Arc Resources (down 5.0 percent).

Global Balanced Fund

Last week, the MSCI World Index was up 0.4 percent. The C$ was up 0.7 percent against the US$. The Marquest Global Balanced Fund A units closed at $18.30 compared with $18.24 the previous week. Volatility in European bond markets was followed by a strong rally in equities after the UK election victory by Conservatives and US employment data releases. US wage growth was 0.1 percent month on month, relatively soft. At the same time non-farm payrolls in the US rose 223,000 and the unemployment rate dropped to 5.4 percent from 5.5 percent. It was a “Goldilocks scenario” showing some job growth but not enough strength to expect a rate increase in the immediate future.

Performance data has been delayed and so, we offer an update on the fixed income portion of the portfolio.

The average credit quality of the bonds is single B. Ratings in the portfolio are normally distributed around B although no security is rated below CCC+ or above BB+. The duration of the fixed income portion of the Fund is around 5 years. We note that high yield bonds are less sensitive to rate hikes than investment grade bonds because of the wide spreads to Treasury bond yields. The spread between the treasury yield and a higher yield corporate bond tends to compress and absorb a portion of a rate increase. Rising interest rates are associated with a stronger economy and high yield companies, because of their leverage, benefit more from economic growth than other fixed income issuers. A stronger economy allows high yield companies to access debt capital markets to refinance debt maturities.

Sector breakdown in the Fixed Income portion of the Fund is as follows:

Food/Hospitality – 22%
Forest Products – 8%
Retail – 17%
Packaging – 4%
Power – 13%
Automotive – 5%
Energy – 10%
Technology – 4%
Basic Materials – 3%

Total – 100%