The Manager's Commentary - June 2010

"Everything is fine today, that is our illusion.” – Voltaire

Voltaire, the 18th Century French philosopher couldn’t have said it better. While he wasn’t referring to the monetary and fiscal induced sugar high that the Western world has been experiencing over the last year, it does, in our opinion, summarize it well. The illusion, of course, is what the next few years have to offer in terms of economic growth. We don’t think economic growth will be able to attain the pace it did prior to the beginning of the financial crisis in late 2007.

Interestingly, the default rate of corporate bonds which reached a record 13.7% in 2009 is now on pace, according to Fitch Ratings, to reach just 1% in 2010. This low default rate highlights how sensitive the high yield bond market is to macroeconomic and capital market developments. Without the monetary stimulus, through low interest rates and quantitative easing, many companies would not havebeen able to refinance debt to a longer maturity date. For many corporate entities this monetary stimulus has provided an “illusion” that everything is fine.

While a forecasted default rate of 1% might suggest a narrowing in spreads, recent volatility of some sovereign credits (i.e. Greece and Spain in particular) has increased the risk premium of many asset classes, including corporate bonds which have increased 60 and 150 basis points over the last 2 months for investment grade and high yield respectively. We have used this as an opportunity to add to some of our favourite positions in the fund. Of note, the National Money Mart 10.375% bond position is now a top 5 holding.

Matthew Shandro
June 30th, 2010