Q3 2018 Commentary – Mackenzie Canadian Small Cap Fund | Mackenzie Investments

Fund Commentary

Q3 2018 Commentary

Mackenzie Canadian Small Cap Fund

Performance Summary

  • For Q3 2018, the Mackenzie Canadian Small Cap Fund returned 2.0%. This compares with the S&P/TSX Small Cap Total Return Index return of -2.8%.

Contributors to Performance

  • The fund carries lower weights in metals and mining stocks than those in the index, the metal stocks have suffered double digit decline in the quarter. Our holdings in packaging names including Winpak and Intertape Polymer have recovered well as the companies started to pass through higher resin costs to customers.
  • The Energy sector has been beaten down in the quarter as investors avoided Canadian energy due to NAFTA uncertainties, pipeline concerns and larger differentials. Our better stock selections and relative underweight in this sector have generated better returns.
  • The portfolio's industrial names have performed well during the quarter, driven by consistent earnings beat and stable outlooks.
  • A few of the consumer discretionary names contributed to the fund performance, Enercare was acquired by Brookfield Infrastructure at a 52% premium, and Pollard Banknote acquired Schafer Systems, a manufacturer of plastic ticket dispensers and promotional displays, the deal was viewed at accretive and was well received by the market.
  • The portfolio also benefited from some strong performance of Real Estate and financial names in the quarter.

Detractors from Performance

  • The Energy sector has rolled over from its Spring recovery due to NAFTA, pipeline setbacks, although the fund had better stock selection, many of the producers still suffered losses during the quarter.
  • Base and precious metal weakness due to falling commodity prices had a large negative influence on fund performance, on an absolute basis.
  • Defensive names were under pressure as yield curve rising. Borelax stock was down not only due to yield pressure, but also due to the change in the new Ontario government policies, potential growth prospect in the province was curbed with the removing of support for future renewable projects.
  • Trade tension between US and Canada as well as the possibility of higher tariffs on the steel and auto sub-sectors have put a negative impact on our BUS related stocks including, NFI Group and Grand West Transportation.

Portfolio Activity

  • During the quarter we added a basket of gold names in the fund to replace BMO Junior Gold Index ETF and iShare TSX Global Gold ETF. The list includes Alamos Gold, B2Gold Corp, Centerra Gold, Detour gold, Eldorado Gold, Endeavour Mining, IAMGOLD, Kirkland lake Gold, New Gold, Novagold Resources, OceanaGold Corp, Osisko Gold, Pretium Resources, Sandstorm Gold, Semafo Inc, SSR Mining, Tahoe Resources and Yamana Gold to the fund. We also added Sylogist and Algonquin Power during the quarter.
  • We also sold Furtuna Silver from the fund.


  • Small Cap equity’s strong spring recovery took a pause in the summer as the sentiment was burdened with a lot of macro headwinds including intensifying trade war talks and languished resource sectors, energy and mining to be specific. In Canada, momentum was the sole style delivering some positive performance.
  • The quarter ended with some positive developments that will restore investor confidence, most importantly, the last-minute deal of new NAFTA has removed a big cloud of uncertainty hanging over Canadian assets. Hopefully, equity flow will revert to Canada from both domestic and global investors. Energy sector, which is significantly undervalued, finally saw some positive developments on the macro level. Brent prices have pushed above US$80 mark while WCS spread hit a record high. The recent CVE deal indicates that the crude by rail is accelerating, which could alleviate some congestions in Canada, and hopefully reduces the WCS spread seen in Q3. Two of the partners of LNG Canada have sanctioned the approval of the project, and very likely all the partners have agreed to invest in the project on Sep 28. On the same day, Husky announced a hostile bid for MEG energy for a 37% premium. The move will raise a few eyebrows on to the Canadian energy sector. It seems that the only way to convince investors that the valuation for the sector is just too low is through M&A or a change in investor sentiment. We think both things are happening.
  • The fund structure is pretty much intact with little changes made. In the quarter we made the decision to replace two Gold ETFs with a basket of Gold stocks, the overall weight on the space is unchanged. We felt the change should better align our exposure with our peers and reduce performance deviation. We had one of the best earning seasons with many of our core holdings reporting stronger Q2 numbers. The momentum of upbeat earnings is likely to carry into 2H/18. We are expecting positive performance under a more benign macro environment.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of September 30, 2018 including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index.

This document includes forward-looking information that is based on forecasts of future events as of September 30, 2018. Mackenzie Financial Corporation will not necessarily update the information to reflect changes after that date. Forward-looking statements are not guarantees of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.

The content of this commentary (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.