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Normally we connect with clients quarterly, however, 2020 is an unusual year and this is our second “mid quarter” communication.

Your DK Equity portfolio has outperformed the broad market in the months since the onset of the global pandemic. The market rotation into smaller capitalization value and resource businesses, which commenced last year, has continued in 2020. This has been overlooked by many due to the focus on the pandemic. The results to date:

  • Since the March 23rd market bottom the DK portfolio is up 80% (vs 50% for the S&P/TSX)
  • Since the June 30th reporting period the DK portfolio is up 15% (6 week performance vs 7% for the S&P/TSX)
  • Since September 30, 2019 when we noted an emerging market rotation the portfolio has returned approximately 8.3% (vs 2% for the S&P/TSX).

Our review of second quarter reporting met or in many cases exceeded our expectations. Our companies have healthy and defensive balance sheets and have demonstrated their competitive positions with strong operating results.

The benefit of owning resources has been highlighted as these essential products have produced solid earnings and cash flow in a difficult economic environment. The past decade of bear market conditions for most commodities has prepared operators for this pandemic. They have the best balance sheet position in years, and have become increasingly efficient low cost suppliers. When we look at the businesses available to purchase as a public market investor, natural resource companies have the highest earnings visibility and cash flow outlook in today’s uncertain climate.

History shows that widespread ‘disinterest’ in key resource sectors and value stocks cannot persist forever. Our investors experienced this before in the late 90s when our portfolio underperformed the high valued dotcom stocks of the era. This ended suddenly and spectacularly with the bursting of the tech bubble, and without any change in philosophy or approach, our portfolios went on to significantly outperform for several years.

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