Q1/2017 Commentary - Redwood Income Growth Class

Market Recap and Outlook

Top-Down Indicators

Our primary economic and market indicators have been positive since Q2/2016, and the portfolio has been “on offence” since that time. During the first quarter of 2017, the Fund remained offensively positioned.

In mid-February, the shorter momentum indicators began to show some signs of weakening. However, this is a normal occurrence, especially after the large upward move the markets made following the election in the U.S. Often, this weakening in the shorter-term indicators is a pause in market momentum that allows the markets time to recharge internal energy prior to a push higher. The intermediate- and long-term indicators have remained positive throughout the quarter, even with the weakening in the short-term indicators.

As we enter the second quarter, these shorter-term indicators are beginning to show signs of positive momentum, and the intermediate- and long-term indicators remain positive. As a result, the portfolio remains positioned on offence.

The chart below shows one of our primary indicators: the 17-week/43-week moving average crossover. As you can see, the 17-week moving average is comfortably above the 43-week moving average. The pane on the bottom is the Price Momentum Oscillator (PMO). The two lines converged in February, but are beginning to narrow towards a positive momentum crossover.


Economic Indicators

Both the Economic Cycle Research Institute (ECRI) and RecessionAlert Weekly Leading Indices continue to point to economic expansion, with no sign of a recession in the near term. The Chemical Activity Barometer shown below is also signalling continued expansion in the economy.


We continue to see sector rotation as investors look for the next area of market outperformance. Currently, there are five sectors in the leading quadrant, one in the weakening quadrant and three in the improving quadrant.

We are watching with interest to see where the TSX Financials sector goes. Currently it’s the one sector in the weakening quadrant. After a large move during the last year, will Financials take a back seat to other sectors or is it simply recharging the internal energy prior to the next move higher?


Portfolio Attributes

When we build the bottom-up portion of the portfolio, we target companies with accelerating revenue, cash flow, and earnings growth that are trading at reasonable multiples. We also want the companies in the portfolio to be technically strong (Demand in control of Supply). We continue to see many catalysts in the individual companies held in the portfolio. We build the portfolio to have strong attributes that lead to long-term outperformance. The current attributes of the portfolio are:

Fund Attributes Redwood Income Growth Class S&P/TSX Composite Index
Beta 0.8 1.0
Expected Yield 6.11% 2.81%
Quarterly EPS Growth -4.1% 5.1%
Next Year’s EPS Growth 19.6% 12.9%
Technical Rank 67.2% N/A


As always we welcome any questions about individual holdings or top down portfolio positioning. Feel free to contact us with any questions you may have.



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