Market Update from Kelowna

VPI Dixon Mitchell Quarterly Commentary

This was the 7th quarter for the VPI Dixon Mitchell Canadian Balanced Pool, with steady growth in assets since its launch in early October 2007. For the quarter ended June 30th, the Canadian Balanced Pool has returned 11.4%, and had a yield of 4% at quarter end.

Lead by continued strength in the heavily weighted Financial and Energy sectors, the recovery which began late in March continued throughout the second quarter, leaving the TSX Index with an impressive 20% gain for the quarter. With weak underlying fundamentals, we remain unconvinced that recent gains in the Energy and Materials sectors are sustainable, and so continue to be only modestly weighted in these sectors.

Given the tepid outlook for the US$, we took advantage of some strong gains in our foreign holdings and meaningfully reduced our weighting in this area. We also increased our exposure to defensive Canadian names by adding Pembina Pipelines and Shaw Communications. Pembina has long-term contracts to move oil from northern Alberta to Edmonton, with little exposure to oil price fluctuations. It should benefit from higher volumes going forward as more tar-sands projects come on-line. Similarly, we view Shaw as a communications “pipeline” which delivers media and internet content through its cable network. It too should benefit as more content and applications such as video-on-demand are delivered through its effectively monopolistic network.

Our decision to increase our weighting in investment grade corporate bonds in the first quarter, which had some of the most attractive valuations relative to government bonds in the past 30 years, greatly benefited the fixed income portion of the portfolio during the quarter. While we saw the spreads on corporate bonds tighten significantly over the quarter, the current blended yield on the corporates is still about 1.5% over the governments.

Dixon Mitchell’s investment process is orientated to creating portfolios which produce high and sustainable cash flows. Consistent with this approach, even in the context of the current challenging economic environment, several companies in the portfolio have increased their dividends in 2009. We believe dividend increases reflect management’s confidence in the future long-term outlook for their companies.

We continue to focus our efforts on finding companies with sustainable competitive advantages which we can purchase at reasonable valuations to free cash flow. We remain confident this will provide our clients solid returns over the long run with limited downside risk.

Information provided by: Rob McConnachie, CFA
Dixon Mitchell Investment Counsel, Inc.