Q2 2018 Commentary
- For Q2 2018, the Fund returned a hefty 9.6% vs. S&P 500 Total Return Index ($CDN) which retuned 5.6%.
- For the three-month period ending June 30, 2018, the strategy beat its benchmark, the S&P 500 Index by a hefty 400 bps for the second quarter in a row. Stock selection within information technology and health care were the main contributors. Our underweight in the energy sector was a minor detractor for the period.
Contributors to Performance
- Stock selection was the leading contributor to outperformance during the period. Sector allocation had a slight positive impact. Positions within information technology, industrials, and health care contributed most.
- Within information technology, our significant overweights to Okta and Visa proved most beneficial to relative outperformance within the sector. Okta, the single sign-on and identity management software company, continued to be a strong performer as it added more partners and contracts during the period, most recently with Facebook and VMware. Led by higher spending on its branded cards, Visa shares also moved upward during the period after reporting second-quarter earnings results that beat expectations by almost 10%. Results were driven by continued double-digit growth in payments volume, cross-border volume, and processed transactions as a strong economy and a positive consumer sentiment led to higher spending.
- Outperformance within industrials was driven by our positions in Costar and Union Pacific. Overweights to Becton Dickinson and Boston Scientific led to the strong results within the health care sector. Other top contributors included overweights to Madison Square Garden, Amazon, Live Nation, and Talend.
Detractors from Performance
- Selections within real estate and our underweight in the energy sector had a modest negative impact on relative performance.
- Our positions in BlackRock and Bank of America were the leading contributors to underperformance within the financials sector. BlackRock slumped during the period as assets under management fell short of estimates, citing "investor uncertainty in the current market environment." Other top detractors included overweights to Charter Communications, Wynn Resorts, and Bristol-Myers Squibb.
- We initiated positions in Wal-Mart Inc, Raytheon & Union Pacific Corp.
- We eliminated our positions in Norfolk Southern Corp, Constellation Brands & Charles Schwabb.
- Amid heightened market volatility, U.S. equities advanced during the second quarter. While the Dow, the S&P 500, and the Nasdaq all rose, the performance of individual sectors and investment styles was much more uneven. Energy stocks had outsized returns, as oil prices continued to rise on constrained supply and renewed geopolitical uncertainty in the Middle East following the United States' decision to renew sanctions on Iran. Among other sectors, technology and consumer cyclicals also posted strong gains. Small caps led large caps, and growth stocks significantly outperformed value stocks. Among underperformers, the banking sector stumbled due in part to the flattening yield curve. Although the general market remains higher following the recovery from the first-quarter correction, volatility has been more persistent than in 2017. Despite solid U.S. economic performance and higher corporate earnings, investor enthusiasm was restrained by concerns about protectionist measures between the United States and its major trading partners.
- The portfolio is constructed in a way that attempts to minimize the impact of economic fluctuations. The businesses owned should be able to grow in excess of the overall market across a cycle regardless of economic strength. That being said, we generally have a constructive 12-month view of the underlying fundamentals across the geographies we look at and particularly for U.S. companies. At a high level, we're experiencing a synchronized global recovery, GDP is accelerating to 3%+ domestically, corporate tax rates are moving meaningfully lower with incentives for capital spend, unemployment remains historically low with signs of wage growth, central banks are largely maintaining accommodative policy, and there is significant evidence of falling regulations in multiple sectors along with repatriation. Based on consensus 2018 estimates, S&P 500 earnings are expected to grow less than 15%, which is supportive for market returns.
- The offsets that keep our optimism somewhat tempered are the fact we're getting later in the economic cycle, inflationary forces are starting to appear, and there are some meaningful regulatory risks specifically around mega cap tech, which has displayed market leadership throughout 2017. The ongoing tariff and trade is also an area of intense focus for us, and we believe input cost inflation for producers of goods and transport is going to be a reality for many of our companies this year. The ability to pass on raw material inflation to end-customers is going to be critical, and the portfolio's emphasis on pricing power synchs up well for this unique challenge.