July 2010

In July, North American equity markets rebounded after two decidedly negative months in a row resulting in only minor losses across the board year to date. In Canada, the S&P/TSX Composite Index rose 3.71%. Meanwhile the US markets posted very positive returns; the S&P 500 gained 6.88% in July and the DJIA was also positive for the month (+7.08%). The NASDAQ index posted a significant increase of 6.90%. Year to date the S&P/TSX Composite Index has lost (-0.28%), the S&P 500 has fallen (-1.21%), the DJIA is up (+0.36%) and the NASDAQ index is down (-0.64%).
The Focused Opportunities Offshore Ltd. maintained a positive net market exposure of 38% (beta adjusted net exposure= +15%) during July and experienced a loss of 0.41% on the month. Year to date the fund is up 0.84%. The loss can be attributed to positions in the basic materials and consumer cyclical sectors as well as various index unit short positions. Meanwhile positions in the technology and communications sector offset some of these losses.
Specifically, positions in the basic materials sector fell (-0.3%), while positions in the consumer cyclical sector also dragged on returns (-0.1%) for the month. Various index unit short positions combined to drag returns another (-1.8%) on the month.
These losses were offset by gains in the technology sector (combined = +0.8%) as well communications sector positions which added (+0.5%) in July.
A loss was recorded by the Canadian and US short books (-2.7%) while gains were recorded by the Canadian and US long books (approximately +2.3% contribution) on the month.
At the end of July the fund was net long in Canada (+28%) and net long in the US (+10%).  Overall, approximately 50% of the fund was invested in Canada and 50% in the US.  Net exposure stood at +38% by the end of the month due mainly to security-specific investment ideas, while gross exposure stood at approximately 97%.
With the ongoing uncertainty in the economy, several longer term structural issues and rising deflationary risks, the manager intends to maintain a defensive stance. We continue to believe that the returns of this fund will be generated by security specific events rather than the overall movements of the equity markets. Since inception, the fund has delivered strong risk-adjusted performance with a 8.9% annualized return, and a low correlation to equity markets while the benchmark S&P/TSX Composite Index has returned 3.9% annualized over the same period. Since inception the Focused Opportunities Offshore Ltd. has had a volatility of 6.8% versus 16.9% for its benchmark. The fund has also protected capital well with a maximum drawdown since inception of 14% compared to a 44% drawdown for the S&P/TSX Composite over the same time period.