Commentary

With continued headlines of record highs on U.S. stock exchanges in the first quarter, investors may have felt confident in their investments. However, the rally has been very sector specific. The Dow Jones 30 was up over 10% in the first quarter, while the Toronto Stock Exchange (TSX) rose only 2%. The major discrepancy can be explained by the large natural resource weighting on the TSX. Resources make up over 40% of the TSX. During this period, the energy sub-index was flat, golds were down 15%, and metals were down 14%.

Norm Lamarche: It is difficult to find a period of time when the Canadian resource sector has been so out of favor. The period post-Asian contagion, from 1998-2000 comes to mind. In that period, a western economy was healthy and growing, and had absorbed the emerging nations’ issues of 1997-1998. Commodity prices had recovered, reflecting worldwide economic fundamentals, but the resource stocks remained out of favor because investors were funneling money into sectors deemed more exciting. The technology sector at the time was taking cash flows away from the resource sector.

Economic Overview and Fund Positioning

A Dedicated and Experienced Team

OFI SteelPath focuses on energy infrastructure investment primarily through the Master Limited Partnership (MLP) asset class. OFI SteelPath has a market leading position and an eight-year track record in MLP investing, including an investment
team with over 50 years of combined energy infrastructure analysis and investment experience. The Investment Team is located in Dallas, Texas, in close proximity to the majority of MLP management teams and the country’s energy industry leaders.

As we enter 2013, it appears as though the world economy is transitioning from deceleration to acceleration. The U.S. economy is the leader. U.S. growth has been very resilient, despite its own political, fiscal-cliff issues. U.S. economic growth is becoming qualitatively better, as it continues to broaden into other sectors of its economy, such as housing/construction, and consumption.

Extraordinarily low real-yields dominate the asset price structure as 2013 begins. As has been the case for several years, real fundamentals and market outcomes may continue to rest heavily on political decisions made in Washington, Brussels and Beijing. Although our core scenario calls for a still-challenging macro backdrop, we advocate overweights
in high-yield securities, securitized products, selected sovereign-debt and equities, with an underweight in safe sovereign-debt and cash.

Help me out on this one! Canada has 3% of the world’s capital in the energy universe,
but sits on 20% of the world’s natural gas reserves. (I’ve made these numbers up, but
the direction is correct). Canada has so much natural gas that it sits largely
Underdeveloped and unproduced.

After a difficult first half of 2012, Canadian stocks had a much stronger showing in Q3. There are a number of reasons for the performance, but one stood out: there was a growing sense of containment coming from Europe, as European government institutions, notably, the European Central Bank (ECB), convinced capital markets that they "were prepared to do whatever it takes to help end this crisis".

The completed quarter turned out to be much better than many had feared, a result of the gradual progress in Europe. Some of the dissipation of uncertainty was a result of assurances by policy makers in Europe to provide sufficient liquidity and statements that they will do whatever it takes to avert further erosion of confidence. Also during the quarter, other nations initiated further monetary stimuli to forestall additional economic weakness. The U.S. announced QE3, thus introducing open-ended support for the U.S.

After a strong start to 2012, equity markets, and in particular resource stocks, fell sharply in the second quarter. Political and economic turmoil in a number of countries around the globe sent investors fleeing equities into the perceived safety of bonds and cash. Many resource companies suffered due to political interference, as numerous countries raised royalties and taxes, or in the case of Argentina, expropriated outright a major oil company. Investors also stood on the sidelines, waiting for a clear picture of the economic realities unfolding in China, Europe, and the U.S.