Tera Funds Performance Update – December 2018

  Price YTD 1 Year 3 Year 5 Year
Tera Global Innovation $99.28-15.9%-15.9%-7.9%-0.8%
Class A$27.22
Class B$72.06
Tera High Income Fund$24.37-1.8%-1.8%4.1%1.8%
  • 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

December 2018 was one for the record books, with US markets seeing their worst December (9-10% losses) since 1931.  What had been a positive year through November was totally wiped out, right across the globe.  While Canada did relatively better, we, like all markets, finished 2018 deeply in the red. 2018 was especially unique in that cash beat all asset classes.  Going into the new year, the big market question is “Was this merely a liquidity-induced correction, or a precursor to recession?”  We, like Mr. Powell at the Fed, will be watching the data closely over the next few months to get the answer.  In the meantime, we hold lots of cash.

Tera Global Innovation Fund
Howard Sutton – Portfolio Manager
Price: $99.28

The Innovation Fund finished the month at $99.28 down 3.5% for the month and 15.9% for the year.

The Class A units holds liquid public securities and ended the year with 90% invested and 10% held in cash.  All holdings except one are US$ denominated Nasdaq listings.  The top holdings are Google (up 250% since purchased years ago), Ciena (up 9% in LP), Microsoft (flat in LP) and Intel (up 3% in LP).  The decision to push the Ciena holding into the top 3 is intended to capitalize on the Huawei crackdown.  Western governments are banning Chinese communications giant Huawei due to security concerns.  Ciena, one of the smaller companies ($5B value), is very well positioned to leverage this situation.  The LP added to the position pushing Ciena to the #2 holding.

The brunt of the loss in 2018 was due to the drop in the value of ViQ.  The value was down 50% for the year.   This position has been reduced from the top holding to the third largest holding.  The top holdings are both ViveCrop and Pesa.   Pesa grew organic revenues 50% year over year, and was profitable.  A transformation is happening as it transforms from a HW design and build company to a Secure SW Control and Solutions company.  It has managed this transition thus far utilizing its own cash flow rather than diluting shareholders.  The LP has significant ownership in the company.

While the fund was down over the year, it has made significant advances in both structure and composition.  The side pocket Class B shares were implemented to segregate illiquid holdings and protect all unit holders while the Class A units provide liquidity.

At month end, the LP was invested in 27.4% Class A and 72.5% Class B.

Tera High Income Fund
Lyle Stein – Portfolio Manager
Price: $24.37
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 0.3% in December, and since inception over ten years ago, has generated an annualized return of 5.1% (after-fees), well in excess of the S&P/TSX return of 3.6%, 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.

The Fund avoided much of the December carnage, primarily a result of its large cash holding and some gains in the bonds and preferred shares we hold, and year-end dividends collected.  While we saw 10% losses in names like Parkland Industries, Dream Global and Chorus Aviation, we also had a nice gain in European Commercial REIT, and small losses elsewhere.  Somewhat contributing the December portfolio performance was “buying the dip”, as we added to holdings of Fierra Capital, and preferred holdings in Altagas and Enbridge.  The Fund further benefitted from its direct $US exposure as the $CD fell in month.

Last month we mentioned that 2018 would be rife with tax-loss selling opportunities.  We took advantage of those to pick significant yield in Fierra, Altagas and Enbridge.  We started the month with 25% cash and finished with 16%.  In the process, the Fund’s yield went from 4.6% to 5.3%. Should we deploy all the cash, a yield in excess of 6% should be expected.  As the bulk of the Fund’s income is from equity shares, the bond-equivalent yield of a 6% dividend yield is 7.8%.

Our goal for 2019 is simple. Buy Safe Dividends Cheaply.

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 16% of your portfolio in Cash, 6% in Debt, 23% in Preferreds and 55% in Equities. When the cash is deployed, we hope to raise the dividend yield on the portfolio into the lower end of the 6%-7% total return target range.

As in past years, we will be paying a $1.35 per unit distribution for 2018 in January.

*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.