North American equities have been direction-less and volatile since the beginning of 2015 and this trend continued in July. The S&P 500 has gyrated within a 5% range for the past several months, which is very characteristic of the market anticipating an initial upward move in the US Federal Funds rate. Refer to our March 30, 2015 article on Lessons from the 2004 Fed Tightening for more details on typical market volatility ahead of the first Fed monetary tightening event.
AFINA’s July results were as follows:
- The AFINA Optima10 was down -1.7% in July (+8.8% YTD) and has generated an +16.7% annualized return since 2010. The AFINA Optima10 has had a solid 2015 with an +8.8% return.
- The AFINA Affinity Fund was down -2.9% in July (-1.0% YTD) and has generated an annualized return of +0.9% since its October 2014 inception. The AFINA Affinity Fund’s overall cash weighting at the end of July was 32%. Financials accounted for the largest sector weighting at 24.1%, followed by consumer/health care at 19.7%, technology at 11.2% and industrials at 8.0%.
As of July 31, 2015. All figures are net of fees and other expenses. Past performance is not indicative of future results. * 2014 results for the AFINA Affinity Fund LP include performance from October 1, 2014. Refer to afinacapital.com for full details and disclosures.
This quarterly earnings reporting season has seen abnormal volatility following the release of financial results as demonstrated by the table from Bank of America Merrill Lynch below. Companies that missed their revenue and earnings projections dropped -5.9% in the following five days after reporting versus companies that beat projections rose just +1.3% over the same period. We always take a long-term approach to investing and view quarterly earnings as a “check-up appointment” on our overall thesis. However, the current volatility certainly can skew overall portfolio performance in the short-term.
As this earnings season volatility more directly relates to holdings in the AFINA Affinity Fund and AFINA Optima10, Torstar Corporation and Home Capital Group saw significant volatility following their earnings that both missed expectations. In the case of Home Capital, we have added more to our position as the Company continues to generate a 19% return on equity (in a “miss” quarter) and trades at just 1.3x its book value. In contrast, while Torstar remains a small holding, we have become less optimistic on the investment thesis as management blew its cash hoard on an acquisition that will do little to improve its free-cash-flow.