Of note, although the backdrop for gold is favourable, as we go through this uncertain period, we anticipate seeing increased volatility in the sector. Already in early March we have seen significant pullbacks in bullion and the underlying stocks. I believe this is a result of liquidity issues within the market. As the market was selling-off and margin calls were being made, gold sold off with the rest of the market as investors used the sector for liquidity. From a historic perspective, gold showed the same volatility through the 2008 crisis but bottomed well before the market. In the 2008 crisis the market bottomed in March 2009, but gold bottomed and rallied significantly starting in December of 2008. The portfolio’s gold sector weight has increased through the last quarter with the producers getting most of our attention: Elderado, Alamos, Teranga, K92 and Endeavor are a few of the names that were added to the portfolio.

With the backdrop of quantitative easing, the US dollar should begin to roll over as the Fed continues to print money and keep interest rates “low for longer”. Currently the central banks are focused on providing liquidity, but as we move forward, and economies begin to open, governments will likely need to provide fiscal packages to kickstart the global economy (most likely for “shovel-ready” infrastructure projects). With this stimulus backdrop (and a weakening US dollar), we are favourable on the outlook for base metal stocks and have added Lundin, ERO Copper and First Quantum to the portfolio during the March sell-off.

As mentioned at length earlier, energy is in a difficult spot given the oversupply and the industry’s underinvestment on takeaway capacity. While there is value in the sector, it’s only because the sector has been “left for dead” and the valuations provide opportunities if OPEC meets its’ promise of production curtailment and demand recovers. There are also many producers that will need to shut-in given the current demand destruction. Fifty percent of all energy demand in North America is related to transportation, the majority of that is ground transportation which should recover when the economy resumes. Currently we are neutral weight the sector versus the benchmark but continue to trade actively. Of interest, the portfolio has added a uranium stock, NextGen, as much of global supply has been shuddered during the pandemic and Cameco continues to keep Cigar Lake on care & maintenance.

Technology appears to be the clear winner this year. A focus on supply chains and automation are strong macro themes. Valuations have been reduced with the Q1 sell-off and provided us with opportunities to increase the portfolio’s technology weight. The portfolio is currently almost 17% overweight the technology sector and will likely add to the sector on further weakness. We have added to existing positions over the quarter in Tecsys, Kinaxis and Photon as well as a new name, Real Matters which focuses on the mortgage refinancing market.

Within the industrial space we continue to look for opportunities that will benefit from the increased government stimulus and reopening of the economy. Areas of less interest but still being monitored closely for opportunities are in consumer related businesses. Some of these industries have been the hardest hit with regards to valuation and may provide large potential returns when COVID-19 is behind us. Names we own and that we are comfortable holding given their valuation and balance sheet are Martinrea, Savaria and GoEasy.

Although the results so far have been disappointing, they do provide us with some optimism as we have ended the quarter ahead of our benchmark. We look to widen that outperformance as we move out of the current economic shutdown by investing in companies at very low valuations, strong balance sheets and good growth prospects. We see gold and technology taking the lead and look for businesses to slowly return to work with the governments taking a leading role by providing liquidity, credit, and stimulus.

We are living in historic and challenging times. From challenge arises opportunity and we look forward to coming out of this pandemic with our eyes open for these new opportunities! Stay safe and look forward to the back end of 2020!

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