Commentary

- Vertex Fund -

The cultural level of a nation is mirrored by it rate of interest; the higher a people’s intelligence and moral strength, the lower the rate of interest.” – Eugen von Böhm Bawerk according to Richard Sylla and Sidney Homer’s A History of Interest Rates.

As we have previously (and some might say doggedly) observed, Canada appears to be following in the footsteps of Japan and Europe towards a policy of zero interest rates.

With over $14 trillion in negatively yielding global investment grade bonds, and approximately one third of the global government bond market sporting negative yields, the “Japanification” of various European markets can no longer be dismissed. For example, Austria, France, and Sweden all shifted to negative yield territory this past quarter, and German 10-year yields traded down through zero to hit seven hundred-year lows.

The current interest rate environment has the short-term Treasuries yielding more than 10-year U.S. bonds, and the yield on five-year GoC bonds

The second quarter saw the continuation of the several trends that we had identified earlier this year:

 

1.Opportunities in High-Yielding Preferred Shares and Common Stocks.

The portfolio reflects our belief that opportunity today lies in high quality, often blue-chip equities – most of which offer decades of steady dividend growth. A few of the key positions in our portfolio that represent this thesis include:

Cominar Real Estate Investment Trust (CUF-U): Cominar is involved in the acquisition and management of office, retail, industrial and mixed-use properties throughout Canada. As of June 30, Cominar offers an attractive 5.8% yield, meaning that it aligns nicely with our current preference for high yielding stocks with covered payouts and strong upside potential.

Brookfield Property Partners (BPY-U): Remains a key, long-term holding in both the Vertex Fund and Growth Fund portfolios. With a significant dividend yield (6.9% at June 30), we continue to appreciate the strong compounding power of the position. We also continue to hold a position in Brookfield Business Partners (BB-U), with a 0.64% yield at June 30th.

NuStar Energy (PFD): Yielding 9.4% at June 30th, NuStar Energy is a strategically growing U.S. based pipeline operator. Driven by continued strong shale production growth, the second quarter reports reflect NuStar’s ability to generate solid, consistent growth along with safe and responsible operations (Q2 pipeline throughputs up over 18%; adjusted EBITDA up 8% to 3.95X; DCF up almost 10%).

As at June 30th, other notable positions include: A&W Revenue Royalties Income Fund (4%); Dream Industrial REIT (yields 6%); Enbridge (yields 6.3%).

 

2. Social Capital SPAC, Silicon Valley waited for a transformative transaction from one of their best:

The intent of Social Capital has always been to acquire a privately held company and to take it public through a special-purpose acquisition company (“SPAC”). At the end of the second quarter of 2019, Social Capital had approximately 100 days left to do so. We have always been confident in Chamath Palihapitiya’s ability to identify exceptional and innovative opportunities, and we are excited to share more with you in our next quarters commentary, following an early Q3 merger announcement between Social Capital and Virgin Galactic (“VG”).

 

3. Bullish North American Energy

While our position in Petroshale Inc. (PSH) has undoubtably been a bumpy ride, the company has transitioned from an acquisition focus with non-operated interests to a development mode with organically growing operated production. We believe that management can execute on its target of continued sustainable production (to grow from 6,000 boe/d to over 14,000 boe/d).

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