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 Preservation Capital maintained a positive net market exposure of 12% (beta adjusted net exposure = -19%) during July and experienced a loss of 4.16% on the month.  Year to date the fund is down 2.76%. The monthly return can be attributed to losses in the financial, basic materials, consumer cyclical and diversified sectors. Various index unit short positions also dragged returns on the month.
Specifically, positions in the financial sector combined for losses of approximately -1.7%, while basic materials sector positions also dragged returns another -1.0%. Positions in the consumer cyclical and diversified sectors combined to lose a further -0.8%. Various index unit short positions also contributed negatively in July (approximately -0.6%).
The Canadian and US short books lost -6.1% for the month while the Canadian and US long books combined to offset some of this loss (+1.9%).
At the end of July, the fund was net long in Canada (+11%) and net long in the US (+1%).  Overall, approximately 59% of the fund was invested in Canada and 41% in the US.  Net exposure stood at +12% by the end of the month, while gross exposure stood at approximately 112%.
With the ongoing uncertainty in the economy, several longer term structural issues and rising deflationary risks, the manager intends to maintain a defensive stance. Since inception (May 1999) the Preservation Capital has shown a negative correlation (-0.21) to its benchmark, equal weightings of the S&P 500 and S&P/TSX Composite Index. The Preservation Capital has generated annualized returns of 12.6% while its benchmark has gained 1.6% annualized over the same period.