Monthly Review - CI Investments

March 2012
Monthly Review
Market observations by Bob Swanson
I have just completed my tactical assessment of the economic,
fundamental and technical conditions of the market. My
conclusion is that we are in the “continuation phase” of the
business cycle.
I characterize the business cycle as four phases: recovery,
expansion, continuation, and contraction. The key indicators
used in assessing the state of the cycle include GDP growth,
the Leading Economic Indicator Index (LEI) and the ISM
Purchasing Managers Survey. These indicators give us a
sense of positioning within the economic cycle and are highly
correlated with the direction of the markets. The goal of this
“regime analysis” is to provide a roadmap for the capital
markets, as the performance of asset classes and sectors
are subject to the business cycle. Note the relationship
between the ISM index and the one-year performance of the
S&P 500 Index.
Chart 1 – ISM Index vs. S&P 500 Index
1800
1600
1400
1200
1000
800
600
400
200
0
S&P 500 (LHS)
Purchasing Manager’s Index (RHS)
70
60
50
40
30
20
10
0
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Mar
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Factset
The continuation phase is defined as the period from
the peak in the indicator to the point at which it hits the
contraction phase. Using the ISM indicator, contraction
begins when the indicator drops below 50. In Chart 1, it
appears that the index peaked some time during the second
quarter of 2011. The average length of time of the continuation
phase is roughly 15 months. During this phase, equities
typically generate positive, albeit less robust returns.
Relying solely on economic data to predict which asset
classes and sectors will outperform in an upcoming cycle
is challenging because there are multiple fundamental,
psychological and political influences on market behaviour.
For this reason, we also examine the fundamental condition
of the market by analyzing trends in corporate sales, margins
and earnings within the context of both current and historical
valuations. Further, we gauge the current psychological state
of the market by examining technical indicators and market
sentiment measures. The conclusions to our regime analysis
are typically derived from a “weight of evidence” approach to
guide our allocation decisions.
Our current outlook is positive on the equity market, but
with a measured dose of caution in recognition of the
elevated risk level attributed to geopolitical uncertainty. As
such, Cambridge Canadian Asset Allocation Corporate Class
is currently 65% equities, of which a good portion can be
characterized as defensive equities or even bond surrogates,
25% income instruments, consisting of bonds and preferred
stocks, and 10% cash. Our focus on risk management will
dictate a change in portfolio positioning should market
conditions deteriorate.
Gildan Activewear – Using flexibility to
take advantage of opportunity
We know Gildan well and like the company, but we had
been waiting for a better entry point for some time. That
opportunity arrived late last year and because of our nimble
asset base, we were able to quickly build positions at attractive
prices across a number of our funds.
What created the opportunity?
Highly disappointing earnings guidance issued in December
2011 drove the shares down 30% in a single day. While lower
stock prices do not always represent an opportunity, we
believed this situation was unique.
What was being misunderstood by the market?
We believed that the drivers of the earnings shortfall were
transitory and the market overreacted. The business was
fundamentally sound and the short-term weakness was due
to a disconnect between selling prices and input costs –
cotton being the most significant. Gildan, like many other
manufacturers, hedges a portion of its cotton requirements,
so that when cotton prices come under pressure, distributors
reduce inventory levels in anticipation of lower future
prices. In Gildan’s case, this created downward pricing
pressure (combined with higher input costs due to hedges),
which resulted in significant margin compression and
weak guidance.
We felt these were short-term pressures that would normalize
in a couple of quarters. We had the opportunity to talk with
management, which confirmed our belief that this was a
Monthly Review
March 2012
What has happened since?
The stock began moving higher once investors began to
understand that many of the short-term issues plaguing
earnings would be resolved. In addition, recent end market
demand and distributor inventory data has been encouraging,
which has pushed prices higher. Gildan is now trading more
than 50% higher than when we began accumulating shares
in December and higher than before it issued disappointing
guidance. This demonstrates how emotional the market can
be and why flexibility can benefit investment performance.
We have reduced the size of our position in recent weeks, but
we believe there is still additional upside from current levels.
bump in the road. We have a long history with management
and believed the assumptions implied in guidance were
highly conservative. We also felt more comfortable with
Gildan’s market-leading position because we had the
opportunity to visit its low-cost production facilities located
in Honduras and the Dominican Republic.
How did we take advantage of the situation?
Under normalized conditions, Gildan was capable of easily
earning over US$2 per share, and eventually US$3-plus,
putting the stock below 9x earnings when we began to
accumulate the position.
The Cambridge Team
Alan Radlo
Robert Swanson
Brandon Snow
Greg Dean
Stephen Groff
Emi Winterer
Principal &
Chief Investment Officer
Principal & Portfolio Manager
Principal & Portfolio Manager
Analyst
Analyst
Analyst
CDN $ Fund Code: HIC
ISC / DSC / LSC
CDN $ Fund Code: CIG
ISC / DSC / LSC
US $ Fund Code: CIG
ISC / DSC / LSC
Cambridge American Equity Corporate Class
–
294 / 794 / 1794
394 / 194 / 1194
Cambridge American Equity Fund
–
212 / 812 / 1812
312 / 612 / 1612
Cambridge Canadian Asset Allocation Corporate Class
–
2322 / 3322 / 1522
2517 / 3517 / 1217
Cambridge Canadian Equity Corporate Class
–
2321 / 3321 / 1521
2516 / 3516 / 1216
Cambridge Global Equity Corporate Class
–
2323 / 3323 / 1523
2518 / 3518 / 1218
Cambridge Income Corporate Class
–
2261 / 3261 / 1261
2661 / 3661 / 1661
Cambridge Income Fund
–
635 / 885 / 1235
637 / 887 / 1637
Castlerock Canadian Growth Companies Fund
191 / 291 / 391
–
–
Castlerock Pure Canadian Equity Fund
192 / 292 / 392
–
–
Fund Name
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus
before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This commentary is provided
as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Cambridge
Advisors is the business name of CI Global Holdings Inc. Certain portfolio managers of Cambridge Advisors are registered with CI Investments Inc.
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FSC FPO
1203-0405_E (03/12)