Tera Funds Performance Update – November 2018

  Price YTD 1 Year 3 Year 5 Year
Tera Global Innovation $102.84-12.9%-111.6%-5.6%0.0%
Class A$29.73
Class B$73.11
Tera High Income Fund$24.45-1.5%-1.9%4.8%2.4%
  • See Bottom Note for Disclosure: 3 and 5 yr are annual compounded returns
  • Tera Income Fund commenced July 31, 2008; Distributions: ’08- $0.795; ’09 – $1.22; ’10-$1.45; ’11-$1.45;’12-$1.30; ’13-$1.30; 14-$3.30; 15-$1.35; 16-$1.35; 17-$1.35; 18-$1.35

Market Commentary

November saw markets rebound from the October swoon, but not enough to overcome the large, previous-month, losses.  US markets once again outperformed the world, with Canada continuing to feel the negative impact of the early-year commodity stock decline.  2018 looks to be going down as one of those unusual investment periods where diversification doesn’t pay as long-lived assets (bonds, preferred shares, equities) are all showing negative returns for the year. Markets remain in a state of flux, trying to determine whether what is happening is a precursor to a recessionary environment, or just another rotating correction.  While we don’t see a recession on the horizon, we do see a difficult market environment in 2019 as earnings slow, and interest rates remain elevated, with a bias to go higher.

Tera Global Innovation Fund
Howard Sutton – Portfolio Manager
Price: $102.84

The Innovation Fund finished the month at $102.84 down 1.4%.

The Class A units holding 100% liquid public securities was up 2.4% for the month.  With over 85% of assets in U.S. names, the class is mostly US$ denominated as well.  The Class B units were down 3% on the back of soft ViQ performance down 12.5% in the month.

The LP reduced ownership in Apple following its announcement that it will not longer supply volume information on units shipped.  While increases in prices have offset lower growth in units to date, we are not confident there is any more room for price increases.  Some additional profits were taken in Microsoft and AMD.  Small positions were re-initiated in Chinese streaming companies HUYA and Iquiyi.  A top performer in the LP this year has been Chinese electric car company Byd. Within the private portfolio, losses were crystallized in embotics such that tax losses can be forwarded onto the unitholders.  The top 3 Class B holdings of approximate equal weight are ViQ, Pesa and Vive Crop.

While a Santa Claus rally is not out of the question over the near term following a difficult few months, the lowered outlooks from many of the leading tech companies have cast shadows over the sector.  Is this guidance an indication of longer term over capacity and demand softening, or is this just a temporary bump in the road.  Based on the weakness in semi conductors, especially memory chips, there are many similarities with previous technology corrections.  That is why the LP has moved up the “capital tree”, investing in larger US$ names that provide strong balance sheets with plenty of liquidity. We remain cautious.

We expect continued volatility and will be looking to take profits, re-invest in solid growing companies, and reduce net long exposure while maintaining a descent amount of cash.

At month end, the LP was invested in 28.9% Class A and 71.1% Class B.  The LP has 13.3% cash.

Tera High Income Fund
Lyle Stein – Portfolio Manager
Price: $24.45
Distributions: (’18-$1.35 ’17-$1.35: ’16-$1.35 ’15-$1.35: ’14-$3.30 ’12/13-$1.30; ’11-$1.45; ’10-$1.45; ’09-$1.22; ’08-$0.80)

The Tera High Income Fund was down 2.4% in November, and since inception over ten years ago, has generated an annualized return of 5.2% (after-fees), well in excess of the S&P/TSX return of 4.2%, with significantly more stability. Despite the current low-yield environment, we continue to target an annual total return of 6%-7% for the Fund. Over 90% of the Fund’s income comes from dividends, which offer significant tax advantages compared to interest income.

November portfolio performance was hurt by holdings of pipeline-related preferred shares, with both the Altagas and Enbridge preferred share holdings seeing losses. With the sudden shift in investor views on the direction of US interest rates, the Canadian preferred share market saw losses more a result of illiquidity than underlying fundamentals. While our “floor-reset” preferred share holdings also experienced losses, they experienced only small declines.  To put the illiquidity of preferred shares into perspective, while the Enbridge preferred shares saw a 9% loss, our Enbridge common shares were up 6%! We see this kind of anomaly as an interesting opportunity, especially in the December tax-loss-selling environment.

We sold our holdings in Altagas and American Hotel Income properties for tax-loss purposes, substantially limiting the gains you will see on your T-slips for 2018.

As noted last month, the market downturn has created buying opportunities that we haven’t seen for years.  To take advantage of these opportunities we now hold 25% of your portfolio in Cash, 6% in Debt, 18% in Preferreds and 51% in Equities. When the cash is deployed, we hope to raise the dividend yield on the portfolio into the 6%-7% total return target range.

*Commissions, management fees, performance fees and expenses all may be associated with investment funds. Please read the limited partnership/trust agreements before investing. The returns are the simple rates of return (1 month, year to date) or the historical annual compounded total returns (2 yr, 3 yr and 5yr). All returns are net of fees and in Cdn$. Rates of return shown do not take into account income taxes payable by any security holder or other charges that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.