Sub Advisor Insights—Investment Strategies Q4 2022

Canso Corporate Value Mandate

Contributed by: Canso Investment Counsel Ltd. 

The portfolio returned 2.0% in the quarter, ahead of the benchmark (FTSE Canada All Corporate Bond Index) return of 1.0%. Below investment grade bonds, including issues from American Airlines, Avis and Bombardier, contributed to portfolio outperformance as credit spreads narrowed over the period. Air Canada and Spirit Aerosystems executed cash tenders in the quarter, leading bond prices higher. Limited Recourse Capital Notes were a detractor to performance as prices dropped across the securities held.

For the full year, the portfolio was down -4.7% and over five years the 7.0% return was 5.9% ahead of the Index. Since inception, the 8.6% return represents 4.5% of added value.

Canso Investment Grade Mandate

Contributed by: Canso Investment Counsel Ltd. 

Yields rose slightly in the quarter but the now higher prevailing yields offset that to produce positive returns. Credit spreads narrowed so that corporate bonds outperformed. For the quarter, the return was 0.8% versus 1.0% for the benchmark (40% FTSE Canada Mid Term Corporate Bond Index & 60% FTSE Canada Short Term Corporate Bond Index). The portfolio's weight in the safety of government bonds was a detractor and the AT1 holdings were also lower on wider spreads. The overweight in mid term bonds was a small positive contributor versus the benchmark. The annual return of -10.3% was 0.4% behind the benchmark but over longer periods relative returns are positive. The 3 year return is 1.2% ahead of the benchmark and since inception the portfolio has outperformed by 0.9% per annum.

Cardinal Canadian Equity Mandate

Contributed by: Cardinal Capital Management Inc.

The portfolio returned 2.93% in the quarter and ended the year with a positive return of 1.53%. While the quarter performance trailed the S&P/TSX Total Return Composite return of 5.98% by 305 basis points, the portfolio outperformed the negative return of the benchmark for the year by 737 basis points. Longer term portfolio returns also have added value versus the benchmark returns.

The Industrial and Energy sectors had the largest gains for the portfolio. The rail companies in the Industrial sector posted solid returns as a strong Canadian grain crop will help support volumes over the next few quarters. The Energy sector gains were helped by strong price performance in Suncor Energy Inc. during the quarter and by Pembina Pipeline Corp., following their solid earnings report and improved 2023 guidance.

The weakest sectors in the portfolio were the Consumer Discretionary and Materials sectors. The Consumer Discretionary holdings underperformed as recession fears continue to rise. The Materials sector holdings also underperformed in the quarter, however this came after strong outperformance throughout the year. The lack of exposure to the Information Technology sector also contributed to the underperformance of the portfolio.

Cidel Canadian Total Return Mandate

Contributed by Cidel Asset Management Inc. 

The fund posted a total return of 4.6% in the fourth quarter underperforming the S&P/TSX Index’s total return of 6.0%. The reason for the underperformance compared to the S&P/TSX Index was due to negative security selection. Positive sector allocation was a partial offset to the underperformance.

For a clearer picture of the impact of individual equities had on overall performance, irrespective of which sector they reside in, the top detractors were not owning Shopify (+26.4%), partial position in Canadian Natural Resources (-5.8%) and holding Ritchie Brothers (-8.9%). This was partially offset by the positive contributions made by holding Boyd Group (+20.3%), holding Restaurant Brands (+20.1%) and not holding CIBC (-8%).

Mawer Canadian Equity Mandate

Contributed by Mawer Investment Management Ltd. 

In the fourth quarter, the Mawer Canadian Equity Fund marginally underperformed the S&P/TSX Composite Index.

Companies that added value during the quarter include industrial equipment dealer Finning International which reported strong results, driven by continued healthy demand in both Western Canada and Chile, that led to a record order backlog. The company’s strong execution and supply chain management enables them to capitalize on continued momentum in their end markets and meet growing demand from their customers. Oil and gas producer Canadian Natural Resources saw its shares advance as the company posted higher revenues driven by a focus on continuous improvement, cost control and a disciplined approach to capital allocation. Additionally, Canadian Pacific Railway performed well during the quarter as the company posted solid results supported by volume growth, and strong pricing, that more than offset increased fuel costs. The company remains well positioned to benefit from grain and potash bulk volume increases, coupled with resilient pricing.

Companies that detracted from relative performance included names held within the Information Technology and Materials sectors. As an example, Telus International declined over the quarter despite strong operational and financial results across their business lines in the face of a challenging macroeconomic environment. Potash producer Nutrien’s shares fell during the quarter as revenues were lower than expected on the back of reduced demand, due to higher fertilizer prices and a shortened application season as a result of weather patterns. However, the underlying demand drivers remain strong, and global fertilizer supply challenges persist, creating a supportive environment for the company going forward. Label maker and specialty packaging company CCL Industries experienced some bearishness following a period of healthy performance, despite posting another quarter of strong results driven by organic growth, as concerns around weaker economic growth and the potential for reduced demand set in.

Mawer Canadian Small-Cap Mandate

Contributed by Mawer Investment Management Ltd. 

The portfolio returned 7.7% over the fourth quarter, underperforming the S&P/TSX Small Cap Index by -0.7%.

The most notable detractor for the portfolio was its lack of exposure to gold producers which were among the strongest performers. In a high-inflationary market, the strength of gold is not surprising, and it may very well persist into the new year. It is worth noting that our team has been evaluating companies within the space for some time, but thus far, companies which meet all of our investment criteria have been difficult to come by. Aside from an absence of gold investments, the portfolio’s overweight exposure to technology continued to weigh on relative performance.

A key component of our portfolio risk management framework is to select holdings that are inherently contradicting in the macroeconomic variables that will drive their profits. Holdings that contradicted our weaker performers inevitably had a positive impact on performance. Most notably, specialty insurer Trisura had a strong fourth quarter. While many businesses were hurt by rising rates, Trisura benefitted as its investment income increased. Furthermore, the insurance industry follows a cycle somewhat independent of the general economic cycle, and conditions for insurance providers are actually improving currently, even as the general economy weakens.

Other businesses such as Element Fleet Management and pressure treated wood producer Stella-Jones also performed well over the quarter as they demonstrated the inelastic demand for their offerings as well as less economic and interest rate sensitivity. Lastly, given the continued strength of oil and gas and following strong production results, oil producer, International Petroleum Corporation (IPCO)increased over the quarter which positively contributed to the portfolio.

Mawer US Equity

Contributed by Mawer Investment Management Ltd.

The Mawer U.S. Equity Fund (the “Fund”) returned 8.65%, before management fees, resulting in relative outperformance against the benchmark (S&P 500 Index) which returned 6.07% during the fourth quarter. 

Companies that added value to the portfolio during the quarter include laboratory instrument and software company Waters Corporation that saw double-digit growth across all regions led by instrument sales. The company’s high growth initiatives are gaining interest with customers especially in battery testing and bioanalytical characterization. Procter & Gamble also rose on quarterly earnings and revenue that topped analysts’ estimates as higher pricing helped offset lower sales volume and currency headwinds. Elsewhere, credit card company Visa advanced on higher revenues as payments volume and processed transactions grew during the quarter. The company continues to benefit from its resilience in e-commerce and the ongoing recovery in cross-border travel.

Companies that detracted from performance include Amazonas the company issued a disappointing fourth quarter forecast and missed on revenue estimates. In addition, the company continues to confront macroeconomic headwinds, soaring inflation, and rising interest rates. Similarly, Google parent company Alphabet experienced some bearishness, as the company reported weaker than expected earnings and revenue and said it would decrease headcount growth. The company is continuing to focus on a specific set of product and business opportunities while working to realign resources to fuel their highest growth priorities.

Mawer International Equity

Contributed by Mawer Investment Management Ltd. 

The portfolio delivered a return that approximated that of its benchmark (MSCI EAFE Index (Net, CAD) from inception to September 30, 2016. MSCI ACWI ex US (Net), as of September 30, 2016) during the fourth quarter.

Reflecting the broad nature of the market’s advance during the quarter, the vast majority of portfolio holdings delivered positive returns. Standouts included top holdings such as health care giant Novo Nordisk and luxury retailer LVMH, both benefitting from strong results reflecting impressive organic growth. After languishing for much of the past few years, Japanese drug store operator Tsuruha also performed well on the back of a strong yen and given evidence that it is finally passing along pricing increases to its customers. And warehouse automation company AutoStore bounced due to a less dour economic outlook and the positive implications for its customers’ timelines in adopting its automation solutions.

On the other hand, the portfolio’s cash weight was a drag on relative performance in a strongly rising market. More defensive businesses like Japanese telecom KDDI and reference information provider Wolters Kluwer failed to keep up with the market’s robust advance. And while Novo Nordisk is moving from strength to strength, Roched is continued most clinical trials of an experimental Alzheimer’s drug due to poor efficacy, a setback given the high hopes for the treatment.

Mawer Global Small-Cap

Contributed by Mawer Investment Management Ltd. 

The Mawer Global Small Cap Equity Fund (the “Fund”) returned 11.1%, before management fees, resulting in 2.2% of relative outperformance against its benchmark (Russell Global Small Cap Index from inception to September 30, 2016. MSCI ACWI Small Cap (Net) Total Return Index as of September 30, 2016) during the quarter. 

Regionally, the outperformance came predominantly from our overweight position in Europe ex UK, which was a region that performed very well over the quarter.

Reflecting the broad nature of the market’s advance during the quarter, the vast majority of portfolio holdings delivered positive returns. Companies that stood out include two Italian companies: manufacturer of premium coffee and home appliances De’Longhi, and braking systems manufacturer Brembo. De’Longhi was among the portfolio’s bottom contributors over the past year in part due to margin pressure from delays in passing on increasing input costs. However, the markets concern around this was reduced when the company showed yet another quarter of increased pricing. Tied to the automobile industry, Brembo’s cyclical exposure faced headwinds throughout the year from macroeconomic factors including the energy crisis, but the performance turned around this quarter as the company saw continued strong demand for its products. Finally, after languishing for much of the past few years, Japanese drug store operator Tsuruha performed well after early evidence that it is finally passing along pricing increases to its customers.

On the other hand, the portfolio’s cash weight was a drag on relative performance in a strongly rising market. Other detractors include Aramex, a parcel delivery company focused on Africa and the Middle East, which experienced declining volumes in its courier business which pressured margins. Synsam, a leading eyewear retailer in the Nordics, saw inflationary pressure compress margins. This was compounded by a slowness in passing on these higher costs to customers in an effort to gain market share. However, the management team has already taken measures to compensate for these increased costs, which are expected to have full effect during 2023. Finally, business-to-business distributor of industrial products Global Industrial Company saw its stock sell off on weaker earnings as the company is seeing sales growth decelerate more sharply than expected as customers appear to be tightening their budgets. More short-term in nature, we deem this a temporary rather than fundamental issue, leaving our long-term thesis on the company intact.