VXFD & VGF – the lowdown


Wherefore art thou QE?

Much like a long-term relationship you wanted to end – and now miss, once it’s over – quantitative easing is done. Fear not, though, life will go on… So, what to do in a market without stimulus?

In the Vertex Fund and Vertex Growth Fund we’ve been adding equities in Europe and Canada over the past 8 weeks.

Although Europe has had a much stronger correction than North America, as seen by our results in the past 8 weeks (admittedly early in adding equity exposure), we are setting the funds up for what we believe will be a strong equity market in 2015.

European stocks yield almost twice as much as bonds, which has traditionally been a strong indicator for equities to outperform bonds – much like the conditions we saw in the US after 2009. We have been selling high-yield bonds and reducing hedges (in the Vertex Fund), to allocate more capital to European equities such as: Fiat, Royal Bank of Scotland and Barclays. Both of these banks stocks trade at a 35% discount to their book values, and trade at a 75% discount to their Canadian counterparts. In other words: dirt-cheap! Our current year-end goal, if opportunity permits, is to have the Vertex Fund at 50% equity exposure (it is currently 30%), while reducing the high yield component.

We have added exposure to Canadian oil and gas companies, as this sector has corrected by over 30%. In the interim, this has made our portfolio more volatile; looking forward, however, this should deliver higher returns to our unit holders.

Below are some examples to illustrate our thesis behind our recent purchases. Purchasing devalued stocks at low prices and subsequently selling them after a period of revaluation pays off:

We first purchased Pacific Ethanol in September 2013, after high corn prices deteriorated their earnings causing the stock to drop. Then, an oversupply of corn began to hit the market – the result of years of high prices and good weather. This brought the price of corn crashing back to earth. Accordingly, Pacific Ethanol saw a reversal of fortune and their stock rapidly increased in price. After building a position under $4, over the summer we began taking profits around $20.


Similarly, Artek Exploration sold off nearly 50%, as oil prices have declined by 25%. We think oil will provide a similar opportunity to buy low and sell high.


The following charts show the extent to which European bank stocks (in this case, Barclay’s) have suffered post-2008.


As financial conditions improve across the pond, we see a good opportunity for the revaluation of European banks. In contrast, Canadian banks (illustrated by TD Bank) have traded to rich valuations following 2008. The funds have no position in Canadian banks.


Now, back to the funds . . .

The market views the Canadian dollar as a petro-currency. As such, it too sold-off in sympathy to the price of oil. Taking advantage of this move, we hedged all US dollar exposure in the Vertex Fund and the Vertex Growth Fund for the rest of the year.

Lastly, with the general market correcting, we added to merger arbitrage deals with spreads of more than 10%. Both funds currently yield in excess of 5%, which should bode well returns in 2015.

And, there is nothing spooky about that – from the Vertex gang, HAPPY HALLOWEEN!