Q1 2018 Commentary
- For Q1, Mackenzie Canadian Balanced Fund returned -0.5% vs. the blended index (57.5% S&P/TSX Composite TR and 42.5% FTSE TMX Canada Universe Bond Index) return of -2.6%.
Contributors to Performance
- At a sector level, overweight exposure to Information Technology contributed to positive returns relative to the benchmark. Stock selection in Energy and Health Care also contributed to relative performance.
- At a regional level, the Fund’s stock selection in Canada and the United States contributed to relative performance.
- At a security level, Canfor Corporation, Constellation Software Inc., and Banco Bradesco were the largest contributors during the period.
Detractors to Performance
- At a sector level, stock selection in Consumer Staples detracted from relative performance.
- At a regional level, stock selection the United Kingdom and Denmark detracted from relative performance.
- At a security level, Ivanhoe Mines Ltd., Canadian National Railway Company, and CVS Health Corporation were the largest detractors from performance.
- The 7.0% exposure to high yield bonds and 7.1% in floating rate loans detracted from relative performance vs. the benchmark with 0% exposure. Both high yield bonds and floating rate loans lagged the broader benchmark, returning -0.5% and +0.2%*, respectively. (*As represented by the S&P/LSTA Leveraged Loan Index Hedged to CAD and ICE BofAML Global High Yield Index Hedged to CAD)
- Equity: At a regional level, the Fund increased exposure to the United States, while reducing it in Canada and Sweden. From a sector perspective, exposure Consumer Staples increased, while exposure to Telecommunication Services and Financials decreased.
- Fixed Income: The team continues to maintain an overweight allocation to corporate bonds relative to the index and continues to improve to credit quality of the corporate bond exposure, which helps manage risk from potential market declines.
Equity Team’s Outlook:
- The Systematic strategies group maintains exposure to certain factors, which we believe will consistently add value over time. We will vary the weightings of these factors depending on our forecasts of the rewards to these factors. Another key component of our investment process is our Stock selection model. In general, the more successful the stock selection model is, the better the portfolio will perform.
- At the end of Q1, our portfolios were generally positioned with positive exposures to growth, valuation, and medium-term Momentum. The funds also have a high Alpha exposure, across all industries and sectors to the Stock Selection model. Thus, aside from our stock-specific risks, we would expect our portfolios to perform above their market benchmarks in an environment which value stocks with positive growth characteristics, trading at cheaper-than-peer valuations, with positive medium-term momentum. Our Regime model is currently showing a neutral regime, and we expect growth, valuation, and momentum to be rewarded equally.
Mackenzie Fixed Income Team’s Outlook:
- The first quarter of this year was ushered in by strong stock markets, rising inflation and interest rate expectations, and the appointment of a new chairman of the US Federal Reserve. After a prolonged period of low volatility for stock markets, prices began to wobble the very week in early February that Jerome Powell was sworn in at the Fed. Market volatility became the story through the rest of the quarter.
- Market expectations for economic growth and corporate earnings had moved higher, based on optimism created by the passage of US tax reforms in late 2017. Bond yields also moved higher in response to that optimism and to an expanding US fiscal deficit that needs financing.
- As it turned out, economic data failed to hit these lofty expectations, plus there was an uptick in inflation and a slightly more hawkish tone from the Fed to begin the tumult in February. Into March, geopolitics took center stage as renegotiations of US trade policy with Canada and Mexico became only one front of a possible trade war. The US first imposed tariffs on imported steel and aluminum from certain countries, then announced potential tariffs on a range of goods from China. China announced a plan to retaliate with tariffs on some US goods.
- Some observers suggest that the US trade policy changes are merely an attempt by the Trump White House to gather support among Republican voters in key states with mid-term elections in the Fall. While there is likely some validity to this, remember that Trump campaigned in 2016 by promising to get tough on trade and reduce the trade deficit with China. In any event, markets may have to get used to the ebb and flow of geopolitics as a source of volatility.
- In light of the recent volatility and softer-than-expected data, bond yields peaked and moved slightly lower toward the end of the quarter. It remains an open question as to whether the new FOMC led by Powell will be sensitive to market volatility in their messaging and actions with the path of tightening. The market still expects two to three more hikes from the Fed this year, with Powell having just served up his first in March.
- With US economic growth likely to remain solid, the portfolio managers believe it will probably take a bit more volatility and more data disappointments to keep the Fed from following its “dot-plot”. If more rate hikes come through this year, the portfolio managers expect to see the yield curve continue to flatten with most of the upward pressure on the front-end.