Tera Funds Performance Update – September 2018

  Price YTD 1 Year 3 Year 5 Year
Tera Global Innovation $108.49-8.2%-12.4%-0.6%-0.4%
Class A$31.58
Class B$76.91
Tera High Income Fund$26.034.9%6.8%6.1%4.3%
  • 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

September and the third quarter in general saw a return to the depressing trends of the past couple years. US markets up; Canadian markets down. Led by the 2% move in the large-cap Dow, US benchmarks handily beat the S&P/TSX which was down 1.2% for September, down 1.3% for the quarter and down 0.8% for the year.  Bonds have provided no safe haven in either country, with all but short bonds essentially negative for the year.  The only haven in 2018 has been preferred shares, which are up 2.3% in 2018.  In this negative return environment we are content to keep the dividends we have earned.  Looking ahead, we see increasing investment headwinds.  US long rates are now above 3%, post-tax cut earnings momentum is on the wane, and debt levels around the world continue to rise.  Our cautious view continues, though we are trying to be nimble when opportunities arise.

Tera Global Innovation Fund
Howard Sutton – Portfolio Manager
Price: $108.49

The Innovation Fund finished the month at $108.49 up 3.7%.

The three top U.S. holding names in the Class A units are Google, Microsoft and AMD.  While Google was relatively unchanged, both Microsoft and AMD continue to perform well.  We maintain the theme of cloud services and strong server demand; both sweet spots for MSFT and AMD.  The Chinese electric vehicle and battery maker BYD continues to perform, up 30% since the purchase in the summer. There are now 21 names in the Class A units. The underperformer has been space/satellite Maxar Tech following a US shorting fund alleging accounting irregularities.  The company has strongly denied the allegations, but it has materially impacted the performance.  The company was acquired into the portfolio as it transitions into higher growing businesses.

ViQ is bouncing back and helping the performance of the Class B illiquid units.  Following a weak summer and rather mundane 2Q financials, the prospect of better performance with the launch of new products and services is anticipated.  As we enter 4Q, the LP is doing some tax planning and will crystallize some capital losses to offset capital gains.  All gains/losses are forwarded to the unitholders.  Pesa has ramped up development towards a secure IP media transport solution.  Year over year growth is good, and the outlook is positive.  There are no liquidity events foreseen in 2018, however, the companies have grown and increased in value.

At month end, the LP was invested in 28.6% Class A and 71.4% Class B.

Tera High Income Fund
Lyle Stein – Portfolio Manager
Price: $26.03
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 High Income Fund was down 1.4% in September, and since inception in mid-2008, has generated an annualized return of 5.9% (after-fees), well in excess of the S&P/TSX return of 4.8%, with significantly more stability. We continue to target an annual total return of 6%-7% for the Fund, which, despite the rise in interest rates, remains difficult to achieve. Over 90% of the Fund’s income comes from dividends, which offer significant tax advantages compared to interest income. We continue to see no reason to own traditional debt securities.

September portfolio performance was once again led by Parkland Fuel (only up 7% this month), and was one of only a few stocks to post a gain.  While most stocks were down on the month, large losses were limited to Altagas (down 5%), Enbridge (down 6%), and WPT REIT (down 6%). September saw a nice collection of dividends, which helped to offset the fact that most stocks were down.

We were not too active in September. We added a new position in Algonquin Power, a diversified, primarily-US-based utility company. AQN assets are out of Canada (the dividend is paid in $US), and the growth plans the management has laid out.  We also “captured” the dividend. Northland Power preferred shares were sold, and we added to holdings of Cineplex.

In the past we have commented on the difficult environment for Canadian energy shares.  The announcement of the LNG Canada go-ahead should be a real bonus for our energy infrastructure holdings.

At month-end the holdings of the fund can be broken down as follows: Cash 7%, Debt 6%, Prefs 19%, and Equities 68%.  At month-end the yield on the Fund was 5.7%.

*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.