Tera Funds Performance Update – August 2018

  Price YTD 1 Year 3 Year 5 Year
Tera Global Innovation $104.54-11.5%-13.8%-1.0%-1.0%
Class A$31.05
Class B$73.49
Tera High Income Fund$26.396.4%9.9%6.1%5.2%
  • 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

August was a good month for markets in the US, but not so much for Canada and the world.  Up 3% in August, the US S&P500 is up 8.5% for 2018, compared to a S&P/TSX index which was down 0.8% in August and up only 2.3% for the year.  The heavy weight groups in Canada, Financials and Energy remain in negative territory for the year, compared to a tech-heavy US market which has seen NASDAQ gain 17.5%. In a nutshell, our domestic equity market does not have what the world wants, and to make it worse, has created barriers for our companies to provide what the world needs.  We continue to take a cautious stance as the divergences in markets seen so far this year suggest that some mean reversion is in order.

Tera Global Innovation Fund
Howard Sutton – Portfolio Manager
Price: $104.54

The Innovation Fund finished the month at $104.54, down 2.9%.

The LP is split into two classes of units; Class A Net Asset Value plus Class B Net Asset Value equal the Tera Global Innovation LP.   Class A units consist of liquid securities.  The larger holdings include Google, Microsoft and AMD.  All have performed well year to date.  We continue to like Microsoft.  It now has the largest, and growing cloud service in the world, larger than Amazons.  Amazon, with a greater than $1T value makes a great percentage of its profit from it’s cloud business AWS. It makes very little from it’s delivery service business. Microsoft is also investing heavily in AI.  It’s not standing still.  AMD has been the best performing investment over the past few months, up close to 100%. It has successfully implemented its latest chip set on a smaller die size, not only closing the gap with intel, but surpassing them.  It is winning server designs, the backbone of the cloud.

The Class B units (side pocket) hold the illiquid securities.  These include all the privates and ViQ Solutions.  The three largest holdings, ViQ, Pesa and Vivecrop are all approximately the same weight.  Pesa’s news for August was the launch of a new Secura line focusing on Secure, Department of Defence grade video distribution solutions.  Built for both government, military and commercial applications with patent pending technology, the outlook is very promising.  The company in August opened a new office in Norway to service Europe and the Middle East; an area with promising growth potential.  The company is experiencing significant growth in 2018.  On the downside, the ViQ Solutions stock price continues to weaken, now down close to 50% year to date.  This holding, was the cause for the monthly weakness, but overall is now a much smaller position in the portfolio.  They plan on launching their AI assist product beyond a few pilots prior to year end which should boost growth into 2019.

At month end, the LP was invested in 29.7% Class A and 70.3% Class B.

Tera High Income Fund
Lyle Stein – Portfolio Manager
Price: $26.38
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 up 1.2% in August, and since inception in mid-2008, has generated an annualized return of 6.1% (after-fees), well in excess of the S&P/TSX return of 4.9%, 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. We see little reason to pursue interest-paying bonds as a source of generating the high yields we seek.

August portfolio performance was again led by Parkland Fuel (up 16%), which saw further buying after its positive Q2 earnings announcement.  American Hotel Properties REIT (up 11%) also put in a nice move as its Q2 gave investors more confidence in its recovery plans.  On the negative side, Altagas (-8.4%) was the biggest loser in the month, followed by Northland Power (-8.2%).  The Preferred Share portfolio was generally unchanged.

Where we were quiet in July, we were active in August.  We executed two “dividend rental” trades during the month – Cineplex and High Liner Foods. In the case of Cineplex we earned both the divided and a capital gain. We did not hold High Liner long enough to earn the dividend, but did book a 10% capital gain instead. While we continue to be cautious on Canada,

As we have noted in previous monthly comments, we remain increasingly cautious on the outlook for the Canadian economy and this belief was further reinforced by the TransMountain pipeline decision.  As we have also stated, we will not let big picture caution keep us from executing on what we believe to be opportunities, as evidenced by the dividend rentals.

At month-end the holdings of the fund can be broken down as follows: Cash 6%, Debt 6%, Prefs 24%, and Equities 64%.  At month-end the yield on the Fund was 5.6%.

*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.