RowanOak Commentary – March 25 2020

It’s more than not selling when markets go down!
RowanOak Commentary – March 25 2020

You hold a wonderful investment in your portfolio called the Dynamic Equity Income fund, to which we wanted to highlight its cash flow, protection and results over the market volatility we have recently experienced.

As you may know, it pays you a monthly distribution and this monthly cash flow has never changed over the life of the fund, creating for you an internal rate of return that is reliable, predictable and especially comforting when the markets are experiencing a downdraft.

Please review the managers comments below:

Sticking to our Process

Unprecedented Correction
With COVID-19 now spreading around the world, and with much-needed quarantine measures and their unfortunate negative economic impact following rapidly behind it, equity markets are experiencing a bear market of speed and volatility nearly without precedent. With that in mind, we wanted to take a moment to reach out to our valued clients and share some of our thoughts on this crisis.

Defense Wins Championships
On the Equity Income team, we often like to say that defense wins championships. To us, defense means investing with our Quality at a Reasonable Price investment philosophy, in attractively-valued, high quality businesses that are leaders in their industries, with strong management teams, strong returns on invested capital, strong free cash flow generation, and strong balance sheets. Defense also means investing in a diversified “stew” of businesses across various industries and sectors. Defense means being willing to forego some of the upside of the markets so that we can try to protect from some of the downside as well, because slow and steady (staying invested) wins the race over a full market cycle.

(as of March 2020)
Dynamic Equity
Income Fund
Composite Index
Financials 18.2% 31.7%
Health Care 9.2% 1.0%
Energy 9.1% 12.5%
Industrials 8.9% 12.2%
Information Technology 8.3% 6.9%
Communication Services 7.4% 6.6%
Utilities 6.9% 5.6%
Consumer Staples 6.3% 4.9%
Consumer Discretionary 3.9% 3.4%
Real Estate 3.1% 3.3%
Materials 3.0% 11.9%
Cash 15.6% ——-


In addition to our defensive opening stance, we have taken steps to reduce risk in the Fund and further protect capital. We’ve raised our cash balance from 11.2% at the beginning of the year to 15.6% as of Friday March 20. We’ve trimmed or outright sold positions we believed had undue exposure to the economic damage that will follow COVID-19 quarantine measures.

As a result of this positioning and these changes, Dynamic Equity Income Fund (F-series) has delivered year-to-date performance of -24.4% vs -30.1% for the benchmark, and 1-year performance of -16.7% vs -24.3% for the benchmark, as of Friday March 20. Stock selection and sector allocation are both key drivers of YTD outperformance (with positive relative performance in 10 out of 11 GICS sectors), with FX hedges partially offsetting this outperformance. We remain vigilant to continued downside risk.

We are not epidemiologists so we will save forecasts of the virus and its effects to those more qualified. To state the obvious, the virus has proven to be destructive to vulnerable population demographics, to the normal functioning of society, and consequently to the economy, to earnings, and to share prices. Things will probably get worse before they get better.

It’s far too soon to tell, but there are some signs from the countries that were first hit by the virus that it may be possible to “bend the curve” with appropriate social distancing and quarantine measures. Many governments have been slow to act, but they are mostly acting now, as are businesses, organizations, and individuals. We do not know how this will end, nor when, but on the other side of this any recovery will be further fueled by pent-up demand and government stimulus.

In the meantime, there will be significant economic disruption, and the damage this causes will be a function of not only how long this lasts, but also how effectively governments respond to prevent widespread credit events. This is another reason to focus on businesses with strong balance sheets.

We don’t think it’s possible to call the specific timing or level of a bottom. History suggests that, eventually, markets will recover from this correction, and that the correction will provide those with multi-year investment horizons with attractive entry points. Our QUARP® approach keeps us focused on high quality businesses in each sector, and this correction is causing some of what we believe to be the very highest quality businesses out there to trade on sale for very steep discounts. These are the types of opportunities we’ll be looking for to eventually take advantage of the sell-off and position the Fund for the future.


Bill McLeod, VP & Portfolio Manger
Tom Dicker, VP & Portfolio Manager
Eric Benner, VP & Portfolio Manager

Series F Returns
February 28, 2020
Dynamic Equity Income Fund
Inception Date: March 2002
-3.7% 7.95% 7.0% 7.2% 9.8% 11.0%

Should you have any questions on this or any other portfolio holding please give our team a call.

Kindest regards,

Paul Rowan
President, Chief Executive Officer
Chairman of Investment Committee

RowanOak Private Wealth Counsel

Over the last 20 years, RowanOak Private Wealth Counsel has gained the reputation of an industry-leading innovator for its approach to wealth management. Considered a pioneer in providing the highest standards of proactive advice and planning, the RowanOak team places the interests of its clients first in all aspects of the practice.

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