We were pleased to see how this year began versus last year. January 2016 was one of the worst starts to a year recorded posting a 6.73% loss for the TSX and almost 5% for the S&P/500. 2017 saw a much more benign start with major indices all recording gains in each month of the quarter continuing the rally we have experienced since Trump was elected. We are proud to report the Total Return Fund was up 4.81% for the quarter doubling the TSX (+2.41%) but could not keep pace with the very strong performance of the S&P/500, which was up over 6%. Outperformance for the Fund was primarily driven by our Technology, Consumer Non-Cyclical, and Industrial weightings which we will discuss more in detail further.
Below is an analysis of the Fund and some comparative indices in Q1:
|Q1 2017||YTD 2017||Since Inception|
|Jemekk Total Return Fund||4.81%||4.81%||85.26%|
|S&P 500 (USD return)||6.07%||6.07%||117.30%|
*Benchmarks quoted in Total Returns
Broad based markets continued to show strength in Q1 picking up where Q4/16 ended. The TSX was positive for each month in the quarter led by gains from the Technology, Materials, and Consumer Discretionary sectors and the underperformance for the index was almost entirely from the Energy side. WTI was down nearly 6% for the quarter caused by a combination of negative build numbers, further uncertainty of OPEC production plans and increasing crude inventories in the US. Toronto IPO market was active as well, welcoming both Freshii Inc. (quick serve restaurant focusing on ready-made salads) and Canada Goose (apparel company focusing on winter outerwear). Both deals were oversubscribed signaling the strength in Canadian capital markets (note we did not play either deal). The S&P 500 posted an impressive quarter however not from the same sectors that rallied on the back of the ‘Trump Trade.’ Stocks that will benefit from tax reform and domestic focus immediately outperformed following the election but have lagged year to date – financials however, have been the standout winner.
The significant tax cuts proposed by the Trump administration should act as a tailwind for corporations and as a boost for individuals’ disposable income and consumption. However, so far this is all a proposal and the recent health care repeal failure from the Trump administration questions execution from the Republicans. Turning to markets we agree there is a lot to be worried about as well. For instance, the US markets are hitting new all-time highs and we are in year 8 of a bull market and market experts are the first to point out the average bull market lasts on average 9 years. The PE ratio for the S&P 500 is above its average range suggesting the market is overvalued. The Fed announced its first rate hike of the year this quarter (we are expecting two more) which directionally is negative for equities. We believe active management is becoming more prevalent and simply chasing hot sectors is and never has been in our purview. We aim to find the best risk/reward opportunities and produce alpha for our clients. For example, when certain ‘Trump Stocks’ began to run we stayed clear as we saw the market pricing in too much too fast (these hot names have now lagged the market year to date). We attempt to find value in stocks the market has not fully accounted for, as such, our Financials exposure is 6% whereas its 34% for the TSX.
While it changed throughout the quarter, net long remained flat at 80% for the Fund. We are comfortable with this exposure but this number will be taken down as we layer on new hedges that were rolled off at quarter end. Events in the quarter that led to the outperformance are as follows: we had gains from a breadth of sectors namely Technology (Facebook), Consumer Non-Cyclical (Premium Brands), Industrials (Uni-Select) and Precious Metals (Barrick Gold). Energy on the other hand was a drag on the Fund with losses from names such as Spartan Energy and Seven Generations. Below we highlight a new name for the Fund:
Adobe Systems Inc. (ADBE) – Not just a pdf company, Adobe is a developer and marketer of computer software applications. The company operates in two primary segments, Digital Media (Creative Applications) and Digital Marketing (Cloud Based Applications). The de facto web based publishing company, Adobe is widely known by its household products such as Acrobat, Photoshop, and Flash. Why own Adobe now?
- ‘GARP’ Name – The company recently reported (3/16th) and posted a strong quarter (beat driven by outperformance internationally, increase in conversion to subscription pricing increasing ARPU) and thus we view ADBE is a Growth at Reasonable Price stock. ADBE is not ‘cheap’ on stand-alone metrics (~20x 2018 EV/OCF) but we see the company delivering in the mid-20 range on operating income, EPS and operating cash flow. And we believe investors will chase subscription software vendors that can deliver on growth and increasing cash flows.
- Adobe Summit – The company post quarter hosted its largest Digital Marketing Conference ever, with over 12,000 attendees, including 1,000 of its global partners. There were several key announcements that further excited investors. Along with announcing product extensions, heightened integration, entry into new markets (Adobe Sensei, the company’s Artificial Intelligence and Machine Learning offering), ADBE also announced its deepening relationship with Microsoft. Highlights include, integration between Adobe Marketing Cloud and Microsoft Dynamics, as well as Microsoft Azure hosting Adobe Experience Manager but most notably our read through is Microsoft is stepping away and clearing a path for ADBE to be the leader in cloud marketing. We speculate the renewed partnership between ADBE and MSFT benefits both parties and builds a more competitive moat while taking a shot at Salesforce.
Adobe has a leading position in content management/creation and analytics that provides customers with an end to end solution in web publishing. The full product offering from Adobe is the most robust it has ever been and we believe ADBE can continue to grow ARPU and steal share from competitors. New growth vectors such as video marketing (Adobe made a splash into this lucrative market with the acquisition of TubeMogul in December 2016) and Artificial Intelligence add to our excitement for the future of Adobe.
As Q2 begins we are faced with how best to position the Fund for the balance of the year. We are mindful of the underlying risks in the market and identify both macro and fundamental issues. That said, we remain constructive on pockets of the market again reiterating our push for the importance of active management and in the event of market turmoil our hedges will come into play and the nature of your Fund allows for quick exit. We also wanted to highlight the Fund anniversary, Total Return turns 9 years old in and has only printed one negative year since inception. A stat we are proud of and strive to continue.
We would like to take this opportunity to share some corporate developments with you since our re-org last year. We are pleased to add new members Peter O’Connell, Scott MacNicol and Chris Hercus to our team. Peter joins us from the sell side of the street in various roles with 20+ years in the investment industry building relationships with institutional and retail clients. As Managing Director Pete will be running sales for us and should significantly improve our ability to service our partners. Scott joined the team in early 2017 as a Senior Advisor to the group bringing with him decades of sell side experience, most recently as Head Trader at TD Bank following their acquisition of Newcrest Capital. And finally, Chris joins us as a Trading Associate from Front Street Capital and will significantly help us scale, both from a trading perspective and as importantly, in operations.
Lastly, we would like to share with you our decision to return to our roots by rebranding as Jemekk Capital Management again. Our partners know us as Jemekk, our Funds continued to be called Jemekk and our history as Jemekk that spans back to 2004 is something we want to embrace. Although this will take little effort from your perspective it is something we are anxious to get moving on to minimize any brand confusion created by adopting the J2 moniker. Look for further updates from us with respect to this fairly seamless change.