Q1 2019 Commentary
- For Q1 2019, the Fund returned 15.1% vs. S&P 500 Total Return Index ($CDN) which retuned 11.3%.
- In the first quarter of 2019, the fund outperformed the benchmark by 3.8%. This was due to an overweighting and security selection in Industrials and Information Technology, and security selection in the Health Care sector.
Contributors to Performance
- The equity market rebounded in dramatic fashion in the first three months of 2019. That was to be expected, given the enormous shift in sentiment in the fourth quarter. For the three month period ending March 31, 2019, the strategy posted strong absolute performance and outperformed the S&P 500 Index. Stock selection was the leading contributor to relative outperformance. Sector allocation had a positive impact as well. Positions within the industrials, health care, information technology and consumer discretionary sectors proved most beneficial.
- Within industrials, our overweights to CoStar Group and Transdigm Group Inc. added favorably to relative outperformance. CoStar's shares soared after it reported strong fourth-quarter earnings. The real estate information and analytics company earned $83.5 million in the fourth quarter, an 89% increase over the past year, with a 24% increase in revenue year over year. It also continued its double-digit revenue and profit growth over the course of 2019. CoStar's business can generally be split into two. Its software business is built around CoStar Suite, a product that is to physical real estate what a Bloomberg Terminal is to stocks. It also has a fast-growing advertising-driven business in the form of its ownership of LoopNet, Apartments.com, ForRent.com, and other websites that allow landlords and brokers to list commercial and multifamily properties for sale or rent online.
- Similarly, Transdigm, the aerospace component supplier, reported strong quarterly results that were well ahead of consensus. The company also reported 11.6% organic sales growth and double-digit sales growth for both its defense and commercial businesses and saw commercial aftermarket orders jump 20%.
- Outperformance within the health care sector was driven by our significant overweight position in Shares were up significantly after the industrials and medical device maker announced it had acquired General Electric's biopharmaceuticals business. Other top contributors included overweights to Worldpay, ServiceNow, Live Nation, and Paypal.
Detractors from Performance
- Selections within consumer staples and financials detracted modestly from relative performance.
- Our significant overweights to weaker-than-broad-market performer Intercontinental Exchange led the financials sector to relative underperformance. Other top detractors included our positions in UnitedHealth Group Inc., Biogen Inc., Biomarin Pharmaceuticals and McCormick & Co.
- Portfolio Activity
- There are no new buys or sells that we can disclose at the moment.
- S. equities recorded solid gains for the first quarter, with the S&P 500 Index posting its best quarter in nearly 10 years. Stocks rebounded in January from the fourth-quarter sell-off. Positive corporate earnings lifted markets, and all three major U.S. indexes moved higher after the Federal Reserve voted to hold rates steady and indicated a willingness to pause on further rate hikes. At the same time, stocks struggled periodically as Congress remained gridlocked before finalizing a spending deal to avert a second partial government shutdown. Growth concerns and the widening trade deficit also weighed on equity markets, and stocks tumbled when the yield curve inverted for the first time since 2007 — historically an indicator of an impending recession. Stocks were lifted by positive economic data, including a surge in housing starts in January and increased optimism about a resolution to the U.S.-China trade conflict.
- Our investment outlook over the next twelve months is reasonably constructive in spite of some emerging headwinds such as protectionist trade policies and a currently inverted yield curve. Lower corporate tax rates, domestic GDP acceleration, reduced regulations, central banks with accommodative policy, low unemployment, and signs of wage growth all support a healthy underlying economy. That being said, the goal with the mandate is to minimize the impact of economic fluctuations by investing in secular growers with defensible moats and high, sustainable returns. The growth profiles for many of these companies are supported by long-tailed themes, and we explicitly take prior cycle downside capture into account within our risk framework. There are certain factors that suggest we are getting later in the cycle, and we make sure to incorporate the possibility of an economic slowdown or downturn into our scenario analyses.