Tera Funds Performance Update – October 2018

  Price YTD 1 Year 3 Year 5 Year
Tera Global Innovation $104.32-11.7%-13.8%-1.2%-0.4%
Class A$28.93
Class B$75.38
Tera High Income Fund$25.040.9%1.7%5.4%2.7%
  • 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

October was a brutal month for markets around the world as the realities of slowing earnings growth and higher interest rates finally hit home.  There were virtually no places to hide in October as equity markets saw declines in the 5%-10% range, with the biggest losses in NASDQ (Tech), small caps and emerging markets.  Canada, down roughly 6%, fared slightly better than most global markets, but relative performance does not put bread on the table. The correlation of the markets in October (stocks down – bonds down) is a concern going forward.  We continue to maintain a cautious stance.

Tera Global Innovation Fund
Howard Sutton – Portfolio Manager
Price: $104.32

The Innovation Fund finished the month at $104.32 down 3.8%.

With technology indices down 10% for the month, the Class B units and the LP were somewhat insulated due to the private holdings.  The Class A units did raise 20% cash prior to the correction by taking some profits in Google A and C units, as well as in Chinese company Iqiyi.  The Chinese holding Huya was also sold.  Over the past few months, Maxar Technologies has collapsed due to US hedge fund shorting, and disappointing results.  With the latest washout (from $70 down to $18), the LP acquired shares close to the low with the company valued at a reasonable value assuming continued growth in two performing divisions and zero value for its single underperforming division.  Byd Company, the dominant Chinese electric battery and vehicle manufacturer has performed extremely well in a volatile Chinese market.  Byd along with Intel are also large holdings in the LP.  The three top U.S. holding names in the Class A units are now Microsoft (Azure cloud strength), Apple and AMD.

We expect continued volatility and will be looking to take profits and re-invest in solid growing companies.

At month end, the LP was invested in 28.9% Class A and 71.1% Class B.  The LP has 11.4% cash.

Tera High Income Fund
Lyle Stein – Portfolio Manager
Price: $25.04
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 3.8% in October, and since inception ten years ago, has generated an annualized return of 5.5% (after-fees), well in excess of the S&P/TSX return of 4.1%, 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. Other than providing potential defensive diversification, bonds, even with US Treasury yields over 3%, offer little reward relative to cash.

October portfolio performance was negatively impacted by Altagas (down 20%) which disappointed the Street with its post-WGL acquisition financing plans (including the prospect of a dividend cut).  While we thought the dividend could be maintained, it looks like the company is now revising its business model more in the direction of being a utility company than a mid-stream company.  We will continue to review.  In general, most of our higher-yielding small and mid-cap names were hit in the month, with Parkland Industries the only gainer.

We were very quiet in terms of trading activity.  Early in the month we sold out of our last VersaBank holdings and closed the Cineplex dividend rental.  The net result was to increase cash.

While we continue to hold our cautious market view, we are increasingly finding names that show real value. As we go through tax-loss selling, we anticipate opportunities to pick up income at cheap prices. We must never forget that markets like these create wonderful opportunities to buy income cheaply!

At month-end the holdings of the fund can be broken down as follows: Cash 14%, Debt 6%, Prefs 19%, and Equities 61%.  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.