The month of
August was a most treacherous and volatile month
for marketable securities. The U.S. sub prime mortgage
situation and the equally serious Canadian asset-backed
commercial paper (ABCP) problems have enervated investors.
This financial atmosphere has created a rush toward investor
liquidity, risk aversion, extreme negative psychology, front
page newspaper headlines and burgeoning fear.
This fallout,
over the past month, has affected many
investments. For instance, the S&P/TSX Venture Composite
made up largely of small capitalization stocks declined
17.07%. Furthermore, the CIBC World Markets Small Cap Index,
in August, posted its largest monthly decline since September
2001 with a return of -9.9%. This decline wiped out the
index’s entire gain for the 2007 year.
With regard to
our ABC Funds and our weak August 2007
performance, several comments should be stressed.
-
The ABC Funds
hold no asset-backed commercial paper or sub
prime mortgages. Our over $100 million of short-term reserves
are held in a daily interest account earning approximately 4%.
-
Our cash
reserve position in all five ABC Funds ranges from
6%-10%. As a matter of policy, we had been upgrading our
investment portfolios as we selectively took profits in a
number of our holdings. For instance, we sold Pacific Stratus,
Blue Note Mining, Aecon common shares and debentures, and
reinvested in new undervalued securities.
-
Over the past
few years we have made a serious commitment
to undervalued small capitalization and out of favour
securities such as Polaris Minerals, Morguard Corporation,
Seaspan Corporation etc. Generally we have done quite well
over the years. Unfortunately, being largely out of favour
and small capitalization, these stocks, due to the massive
investor rush to liquidity, performed very poorly. This is
evidenced by both the S&P/TSX Venture and CIBC Small Cap
Index performance for August.
While we believe
that there is nothing fundamentally wrong
with many of our small capitalization holdings, they were
severely depressed by month-end. Many declined by over 10%
including Saxon Energy Services, Migao, Fortress Paper,
American National Insurance and Seaspan. We believe that
these stocks are fundamentally sound, however, they were
all severely impacted by the flight to liquidity.
Nonetheless,
having experienced a number of serious market
declines of this sort over the past 30 years, we remain
unshaken and opportunistic. We will continue to upgrade our
portfolios and will selectively purchase undervalued new
selections. Moreover, we believe that investor patience,
discipline, stamina and commitment at the present time, will
lead to superior long term financial performance and investor
gratification.
Irwin A. Michael, CFA
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