Equities continue to experience heightened volatility as capital markets adjust to the US Federal Reserve rate hike on December 16, 2015. The buoyant US economy and expectation of higher rates in the US (and lower-rates-for-now around the rest of the world) has continued to drive the US dollar to new heights. Similar to August 2015, the currency roller coaster has again created short-term volatility in markets such as China. Refer to our “China Unlikely To Spread Financial Contagion” AFINA Angle that was published yesterday for more details.
Referring to the graph below, US equities are at the most oversold levels since August 2015, August 2011 and late 2008 during the US financial crisis. As our style of investing is value-oriented, corrections are painful in the short-term to live through but have the potential to generate above-average returns in the medium-to-long-term for patient investors that have the luxury of time.
The AFINA investment products under-performed in December as the negative performance of global equity markets was compounded by year-end tax loss selling by investors. Our portfolios are comprised of high-quality companies that generate solid cash flow and typically pay dividends. However, we typically buy these companies when they have already been beaten up and forgotten by investors, resulting in disproportionate selling pressure as investors attempt to sell their past losers (and our expected future winners) at year-end.
The largest holdings across the AFINA investment products at the end of 2015 included IBM, Gilead Sciences, Michael Kors, Western Digital, and LyondellBasell Industries. A summary of performance is as follows:
- The AFINA Affinity Fund was down 8.9% in December (-9.8% in 2015). At the end of 2015, financials represented the largest sector weighting at 41.4%, followed by consumer/health care (25.3%) and technology (20.8%). Currently, the dividend yield of the AFINA Affinity Fund is 5.1%.
- The AFINA Optima10 was down 9.1% in December (-7.1% in 2015). The Optima10 currently has its largest weighting in financials (50%) and technology (20%). The current dividend yield in the AFINA Optima10 is 4.2%.
As of December 31, 2015. All figures are net of fees and other expenses. Past performance is not indicative of future results. Refer to afinacapital.com/legal/ for full details and disclosures.
(1) The AFINA Affinity Fund LP fully hedges its US dollar exposure. Accordingly, the AFINA Affinity Fund LP benchmark represents the 50% weighting of the S&P 500 Total Return Index in US dollars and a 50% weighting of the S&P/TSX Composite Total Return Index in Canadian dollars.
(2) The AFINA Optima10 Managed Account does not hedge its US dollar exposure. Accordingly, the AFINA Optima10 benchmark represents the 50% weighting of the S&P 500 Total Return Index in Canadian dollars and a 50% weighting of the S&P/TSX Composite Total Return Index in Canadian dollars.