Year-to-date to February 28, the Sprott Focused Global Dividend Class generated a total return of 2.42% compared to the S&P Global 1200 Index, which generated a total return of 3.10%.
Returns in the month of February were disappointing on both a relative and absolute basis, with the Fund generating a total return of -1.35% while the benchmark generated a total return of 0.02%. After a fantastic start to the year, the inevitable and normal 2% to 4% market correction quickly accelerated into something more dramatic. From its high on January 26th of 2,872, the S&P 500 declined to an intraday low of 2,532 on February 9th, a drop of approximately 11.8% in just 10 days.
The selling was likely triggered by a rally in the US 10-year yield to a five-year high, driven by fears of rising inflation and accelerated FED tightening. As market volatility spiked, systematic strategies were forced to rebalance their portfolios by selling equities irrespective of valuation or fundamentals, which led to the much larger than anticipated market drawdown. Threats of tariffs on steel and aluminum and talk of an ensuing trade war did nothing to help sentiment. However, the outlook for economic growth and corporate earnings has changed very little during the month and the markets have since recouped some of the losses. From our perspective, the correction has provided an opportunity to high-grade our portfolios and add exposure to sectors and stocks that benefit most in a mid to late-cycle environment.
Our modelling continues to indicate that the Canadian dollar should weaken in 2018. Although the Canadian dollar strengthened through January on accelerating global growth expectations, the currency did indeed weaken in February. But with at least some of the recent move related to the threat of a global trade war, which may turn out to be less severe for Canada than initially feared, we have hedged approximately half of our USD exposure in order to reduce currency-related volatility in the Fund.
Top contributors to the year-to-date performance of the Sprott Focused Global Dividend Class included Mastercard (+72 bps), Raytheon (+62 bps) and Microsoft (+50 bps). Top detractors year-to-date included Brookfield Asset Management (-44 bps), Suncor Energy (-27 bps) and Valeo (-24 bps).
Held in the Sprott Focused Global Dividend Class, Siemens AG (SIE GR), one of the largest electronics and engineering companies in the world, is set to proceed with an IPO of its healthcare division, named Healthineers. The offering of Siemens’ 15% stake will likely value the division between €26 and €31 billion and generate proceeds between €3.9 and €4.7 billion for the company. With the value-creating IPO planned for March 16, we will look for an updated strategic and financial outlook shortly.
The Sprott Focused Global Dividend Class was concentrated in 28 positions as at February 28, 2018 with the top 10 holdings accounting for approximately 43.6% of the fund. Over the past year, 20 out of our 28 holdings have announced a dividend increase, with an average hike of 17.1%. We will continue to apply a disciplined investment process, balancing various quality and valuation metrics, in an effort to generate solid risk-adjusted returns.
Jeffrey Sayer, CFA
1 All returns and fund details are a) based on Series F shares; b) net of fees; c) annualized if period is greater than one year; d) as at February 28, 2018; e) 2015 annual returns are from 11/25/15 to 12/31/15.
The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: ADR risk; Capital depletion risk; Capital gains risk; Class risk; Credit risk; Currency risk; Cybersecurity risk; Derivatives risk; Exchange traded funds risk; Foreign investment risk; In ation risk; Interest rate risk; Liquidity risk; Market risk; Securities lending, repurchase and reverse repurchase transactions risk; Series risk; Short selling risk; Speci c issuer risk; Tax risk.
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