Tera Funds Performance Update – April 2019

  Price YTD 1 Year 3 Year 5 Year
Tera Global Innovation $99.27-0.2%-10.5%-1.9%-0.7%
Class A$31.8416.7%
Class B$67.43-6.6%
Tera High Income Fund$25.149.2%6.3%6.7%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

April added to 2019’s winning ways, with markets around the world (except S&P/TSX Small Cap Index) showing gains of 3% or more.  Once again, large cap technology names led markets higher as FOMO (“Fear of Missing Out”) gripped investor psychology.  With Canadian and US markets now showing mid- to high-teen returns for the year, our sense is that there is not much in the way of disappointment now priced into market levels, as evidenced by the P/E expansion seen since the beginning of the year.  While Q1 earnings have not disappointed, results have also not set a tone of revised upward expectations. We find it perplexing that on the one hand the market is assuming that the low level of interest rates (reflecting low growth) is good for stocks at the same time low growth is not good for earnings.  Nonetheless we are playing along, with only a small cash reserve. 

Tera Global Innovation Fund
Howard Sutton – Portfolio Manager
Price: $99.27

The Innovation Fund finished the month at $99.27 down 0.7% for the month.

The Class A units were up 3.6% for the month bringing YTD performance to 16.7%. The Class A units are liquid assets participating in broad technology themes; 5G networking, communications, payment processing, semiconductors, social media and streaming.  The large cap names had a good month with Apple up 6%, Applied Materials 11%, Amazon 8%, Microsoft 10% and Ericcson up 8%.  The Chinese names were down with the exception of Tencent and Byd.  A new name this month is Qudian, a Chinese provider of credit products thru mobile phones targeting the younger working class market.  With revenues now over $1B and growing profitably, Qudian’s financials are very strong.  The LP has taken an equal weight position in Qudian.  The Class A units are positioned over 90% long.

Offsetting the Class A strength are the larger Class B units (illiquid) which are down 2.6% in the month with YTD performance down 6.6%.  The only position that changed in the month (and year) is ViQ. As ViQ implements its new leveraged financial model (larger debt along with share dilution to invest in 3 new acquisitions), shareholders will not see the full benefit of the integration until later in the year.  ViQ is now the third largest of four material positions within the Class.

At month end, the LP’s weighting was 31% Class A units and 69% in Class B units.

Tera High Income Fund
Lyle Stein – Portfolio Manager
Price: $25.14
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 returned 0.5% in April, and it is up 9.2% for the year.  Since inception over ten years ago, has generated an annualized return of 5.8% (after-fees), nicely ahead of the S&P/TSX return of 5.0%, 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.

April portfolio performance was led by the Fund’s Preferred share holdings.  With yields in excess of 5%, preferred shares offer pre-tax returns well in excess of high yield bonds, but without the risk.  The best performing names (Atlantic Power and Husky Energy) are special situations which offer upside to their dividend income yields. On the Equity side, there were few standouts, either up or down.  Chorus Aviation saw the largest gain, while a new position, Whitecap Resources, saw the largest decline.

We were active in April. The position in European Commercial REIT was sold, booking a nice gain.  While we continue to like the story, with the stock moving smartly after declaring a $0.50 dividend, we thought it best to take the money and run. We used a portion of the proceeds to add to our Fiera Capital position, which carries a 6% yield.  Late in the month we added two Energy names, Vermillion Energy and Whitecap Resources.  While our timing may have been a bit better, both names can easily pay their dividends and meet cap ex requirements should oil trade at $40.  With oil at $60 (and the Canadian discount narrowing to $12), these quality companies should spin lots of cash over the next few years.

We go into May holding 2% Cash, 6% Debt, 31% Preferred and 61% Equities.  The yield on the Fund is now 5.8%.  In the current market environment, a yield of 5.8% is about as high as we think we can get for the time being.

*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.