Yorkville Asset Management

It’s not often we write to clients, advisors, and friends twice in the same week. Economic circumstances and our inherent desire to maximize opportunities for our clients has me writing to you again.

By the end of 2013, Yorkville decided to exit most of its Energy Sector positions resulting in our investors being handsomely rewarded in 2014 and 2015. The story was, however, totally different for most of 2016 as energy prices rallied (oil peaked at $54.50) and many struggling Energy Sector stocks delivered high double-digit share price returns despite weak sales and earnings. Also alarming during this period, many energy companies began selling-off income generating assets to enhance cash flow when sector revenues were off 33% and earnings off almost 50% respectively. Energy companies sold assets to meet immediate cash flow needs, but also gave up future earnings potential resulting from a smaller revenue base. We feel this general deterioration will reach an equilibrium level in the later part of 2018.

In 2016, Yorkville’s Analyst Team had an important decision to consider:

• Do we follow market momentum (that was against our portfolio positioning) in order to participate in a rally that was not supported by expected growth in sales or earnings?  OR,

• Do we stick to our investment process that clearly indicated that Energy Stocks' performance is not supported by supply, demand, sales or earning fundamentals (clearly a bubble)? 

In retrospect, we decided to stay true to our fundamental research model and avoid the Energy Sector in most of Yorkville’s funds. We also reiterated our view of energy prices (equilibrium price of $42-$47 per barrel) at our 2017 Investment Forecast events earlier this year. As an Investment Manager, it is sometimes difficult to be an “outlier” when most of the investing community is revising their crude oil and energy stock estimates higher. However, we believe in sticking to our principles and time-proven process.

Today we have zero exposure to the energy sector in our American QVR fund and are less than half the market weight in our Canadian QVR fund. Our energy position in Canada is dominated by premier companies including a sizable exposure to “toll-taking” pipeline companies.

Our 2017 Forecast also calls for an improving US dollar and a deteriorating Canadian dollar. Interest rate differentials have been widening – the Bank of Canada has refrained from lowering rates resulting in only a modest expansion. Lower current oil prices and a broadening economic gap with our southern neighbor have pushed the Loonie lower to what we believe is a true equilibrium exchange rate. We are looking to modestly hedge our US dollar exposure if it gets extended beyond fair value.

As political and economic winds are quickly shifting, we thought we would send you these reminders to ensure your confidence that our Yorkville Team has been proactive and is ahead of these developments.  

Please let me know if you have any questions.

Regards,

Hussein Amad,

President and CEO

Yorkville Asset Management Inc. is registered with the Ontario Securities Commission as a registered portfolio manager, investment fund manager and exempt market dealer.

This newsletter does not constitute and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation by Yorkville Asset Management Inc. or its affiliates, or any other third party, of any security, including any mutual funds managed by Yorkville Asset Management Inc. or any other third party.

This information is provided for general informational purposes only. It is not intended as investment, financial, legal, insurance or tax advice and you should not construe it or rely upon it as such. Professional advice should be obtained with respect to any investment. Views expressed regarding a particular company, security, industry or market sector are the views of only that individual as of the time expressed and do not necessarily represent the views of Yorkville Asset Management Inc. or any of its representatives and are not a recommendation to buy or sell. These views may not be relied on as investment advice or other advice. Market information used on this newsletter is obtained from non-proprietary market sources. While we believe this information is accurate, Yorkville Asset Management Inc. and its affiliates cannot attest to the validity of information culled from other sources and cannot guarantee that it is current or complete at all times. The information contained is subject to change without notice and Yorkville Asset Management Inc. and affiliates cannot be held liable for any loss arising from any use of or reliance on the information contained in this newsletter.

To all Yorkville Asset Management Private & Institutional Clients, Advisors, and Friends:

This is a quick note to let you all know that Yorkville does not presently have exposure to Canadian alternative mortgage lenders. Furthermore, we have a short to mid-term negative bias toward Canadian real estate.

Our concerns began three years ago and were driven mainly by ballooning consumer debt-to-disposable-income ratios that have reached an all-time high. This concern is compounded by sluggish employment growth and worsening salary growth across all provinces. The potential for the Bank of Canada to meaningfully raise interest rates in 2018, CMHC tightening their policies, and new banking and government rules could further squeeze the real estate market in many areas.   

We have concerns over indirect exposure that Canadian banks and insurers have to the real estate market and alternative mortgage lenders. We believe their exposure may be material enough to cause prolonged stock price declines. Further, we could experience a short term drop in Canadian Financials as this negative news may continue in the summer months. 

For this reason, Yorkville has reduced our equity exposure to Canadian banks and insurers in favour of cash. We choose to be cautious at this stage and sit on the sidelines ready to reinvest with the view to increase our exposure to Canadian banks once the dust settles.

I hope you take confidence that we have never had exposure to embattled Canadian alternative mortgage lenders, and our recent conservative actions are consistent with our practice of Managing Risk and Nurturing Wealth.

Regards,

Hussein Amad

Yorkville Asset Management Inc. is registered with the Ontario Securities Commission as a registered portfolio manager, investment fund manager and exempt market dealer.

This newsletter does not constitute and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation by Yorkville Asset Management Inc. or its affiliates, or any other third party, of any security, including any mutual funds managed by Yorkville Asset Management Inc. or any other third party.

This information is provided for general informational purposes only. It is not intended as investment, financial, legal, insurance or tax advice and you should not construe it or rely upon it as such. Professional advice should be obtained with respect to any investment. Views expressed regarding a particular company, security, industry or market sector are the views of only that individual as of the time expressed and do not necessarily represent the views of Yorkville Asset Management Inc. or any of its representatives and are not a recommendation to buy or sell. These views may not be relied on as investment advice or other advice. Market information used on this newsletter is obtained from non-proprietary market sources. While we believe this information is accurate, Yorkville Asset Management Inc. and its affiliates cannot attest to the validity of information culled from other sources and cannot guarantee that it is current or complete at all times. The information contained is subject to change without notice and Yorkville Asset Management Inc. and affiliates cannot be held liable for any loss arising from any use of or reliance on the information contained in this newsletter.