In light of the disappointing 2006
performance of our ABC Fully-Managed Fund and a comparatively excellent
performance of our ABC Fundamental-Value Fund, I thought that a brief
explanation and a 2007 outlook/plan of action were in order.
Firstly, we had high expectations
for ABC Fully-Managed Fund entering 2006. By the end of April, for
instance, the Fund had already appreciated 4.6%. However, the Fund then
reversed course and declined to its year low at the September 30 quarter
end, recording a nine month total return of -3.46%. Although the Fund
did recoup most of this loss by year end 2006, its performance was
negatively impacted by several factors:
-
the federal government’s October
31 income trust proposals;
-
weakness in a handful of small
capitalization oil & gas related stocks (e.g. Caribou Resources, Endev
Energy, GreyWolf Exploration and Saxon Energy Services);
-
a few poor-performing,
undervalued, REITs/income trusts (e.g. Daylight Energy Trust,
Huntingdon REIT, Lanesborough REIT and TerraVest Income Trust);
and
-
several disappointing and
subsequently sold stocks including Dominion Homes, Fraser Papers,
Handleman and Sea Containers.
Fortunately, most of these losses
were counterbalanced by at least five holdings which appreciated
significantly including: Anvil Mining, Atlas Cold Storage units, Canfor
Corp., Legacy Hotels REIT and Presidential Life common shares.
Unfortunately, it wasn’t enough to provide our usual top quartile
performance.
In comparison, the ABC
Fundamental-Value Fund also experienced mediocre performance to the
September 30 quarter end; this was largely due to the same
underperforming stocks as ABC Fully-Managed Fund. However, the last
three months of 2006 saw the ABC Fundamental-Value Fund make an
extraordinary recovery to the 2006 year end. The Fund achieved a net
2006 total return of 19.13% versus a comparable TSX Index return of
17.26%.
To explain the differential
between the ABC Fully-Managed and ABC Fundamental-Value Funds, one must
review each fund’s objective and risk/reward parameters. Unlike the
Fully-Managed Fund, ABC Fundamental-Value has a wide mandate to acquire
more aggressive (higher risk/reward) common stocks. In some instances,
we were less successful (i.e. African Copper, Ivernia Inc., Richmont
Mines and Danier Leather), however, in the case of three particular
holdings (EuroZinc Mining, Hudbay Minerals Inc. and LionOre Mining Ltd)
these three stocks accounted for the bulk of the ABC Fundamental-Value
Fund’s 2006 outperformance. For instance: the EuroZinc holding of over
20 million shares at a 60¢ cost was sold between $1.50 to $3.00;
LionOre’s 2 million shares are still held at $12.75 with a cost of $5.95
and the 2 ¾ million Hudbay Mining shares purchased at $2.75 closed out
2006 at a price of $21.84.
With regard to the general
investment environment and our five ABC Funds, we remain fundamentally
optimistic for 2007. We believe the ABC Fully-Managed Fund is
well-positioned for 2007 with a significant number of oversold and
undervalued holdings. In the case of all five ABC Funds, we believe that
at least 2/3 of our portfolio holdings are made up of merger, takeover
and reorganization candidates. Patience and perseverance, however, will
be key.
As the largest single-unitholder
of the ABC Funds, I have a particular personal and professional interest
in their success. Rest assured that I and the rest of our ABC Funds
investment team are committed to achieve exceptional investment
performance for 2007 and beyond.
Irwin A. Michael, CFA
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