Q3 2018 Commentary – Mackenzie Global Sustainability and Impact Balanced Fund | Mackenzie Investments

Fund Commentary

Q3 2018 Commentary

Mackenzie Global Sustainability and Impact Balanced Fund


Market Overview

  • During the third quarter of 2018, global equities, as measured by the MSCI ACWI Index, generated solid returns. The rally was led by the U.S. market, as the S&P 500 Index’s 7.7% gain marked the best quarter since 2013. Non-U.S. developed markets managed to eke a gain on the strength of Japan’s performance. Emerging markets declined slightly due to a combination of weakening currencies and the negative impact of China’s slowing economic momentum.
  • The U.S. economy continued to be the standout as the combination of tax cuts, increased fiscal spending, and deregulation lifted both business investments and consumer spending. On the other hand, the Chinese economy, the second largest in the world, faced the twin challenge of reduced credit impulse and external trade tension with the U.S. As a response, Chinese policymakers have allowed the renminbi to weaken since late April to help its exports. However, since mid-August, the renminbi appears to have stabilized for now. European markets were hurt by concerns over Italy’s proposed budget deficits which may not be approved by the European Commission, and the Brexit negotiation that has failed to make much progress. Investors were even more cautious on Emerging Markets, which were negatively affected by rising U.S. interest rates as well as a stronger U.S. dollar. Investors were especially concerned about countries with current account deficits as their external funding environment became more challenging.
  • The Fed has indicated that it will be on course to raise the fed funds rate four times this year, and will likely hike three more times in 2019. However, the Fed did not offer much information on their assessment of the impact of tariffs, which remained a fluid situation. On the positive side, the U.S. appeared to have averted a trade war with the European Union for now, and a new tri-lateral trade agreement among the U.S., Mexico and Canada, called the USMCA, was ironed out on the final day of the third-quarter. However, the Trump Administration has gradually imposed new tariffs on Chinese imports to the U.S., with the possibility of further escalation in early 2019.
  • It appeared that the positive outcome from Trump’s trade negotiation with the European Union, Mexico and Canada may have been one of the factors in driving equities higher during the third-quarter. Investors also did not appear to be rattled by the continued trade tension escalation between the U.S. and China. In fact, equities rallied when Trump imposed a 10% tariff on $200 billion of imports from China, with an automatic increase to 25% in 2019. Investors may have felt that this two-stage tariff hike meant that a settlement could be reached before year end 2018.
  • In energy, the price of Brent oil moved higher on concern that the U.S.’s renewed sanction on Iran will reduced oil supply. Base metals moved mostly lower during the quarter on China’s slowing economic momentum. Precious metal prices also declined due to its inverse relationship with the U.S. dollar.
  • For the global equity market, as measured by the MSCI ACWI Index, the best performing sectors during 3Q18 were healthcare, information technology, and telecom services. Ironically, these sectors’ outperformance may have reflected less confidence in the global economy’s cyclical strength, as healthcare and telecom have generally been viewed as being more defensive, and info tech’s leaders such as Amazon, Alphabet, and Apple have typically been viewed as secular growth stories largely immune from cyclical forces.
  • The worst performing sectors during 3Q18 were real estate, materials and utilities. Real Estate and utilities may have been hurt by rising interest rates, while materials reflected concern over China’s economic momentum.

Fund Commentary

  • Our strategy outperformed the benchmark during the 3Q18 despite being underweight in information technology and our decision to not own Apple, the largest component in the benchmark. 
  • The Fund’s outperformance was led by the consumer discretionary and healthcare sectors. In the consumer discretionary sector, Royal Caribbean Cruises was the largest contributor as the company’s strong execution and consumer demand for cruises were finally recognized by investors. It did help that we had dialed up our Royal Caribbean Cruises holding earlier in the year when the stock was under pressure. In the healthcare sector, Dexcom, a position we initiated in January 2018, continued to exceed market expectations. 
  • The information technology sector was the main detractor during the third quarter as Facebook and Tencent both declined more than 15% due to company specific issues. Facebook took down its long-term margin guidance, and the latter had a shortfall in its online gaming business. We remain confident in both companies’ long-term outlook and had added to weakness in 2018. The Fund’s lack of exposure to Apple also detracted from performance, as its share price was buoyed by new product introduction. We believe that Apple’s high growth phase is over, and it could fall victim to the growing trade tension between the U.S. and China. 
  • During the quarter the Fund initiated three new positions -- Taiwan Semiconductor Manufacturing (TSMC), Rubis SCA, and First Horizon National. TSMC has surpassed Intel as the global leader in semiconductor process technology. We took advantage of the stock’s weakness in the early summer to initiate a position. The recent sell off in Rubis on concerns about its Turkey exposure, created an attractive opportunity to buy a high-quality energy infrastructure business at a discount to long-term average multiples. We initiated a position in First Horizon, a regional U.S. bank. We believe the recent relaxation of regulation for banks under $250bn in assets should be an opportunity for the bank going forward.
  • Several positions were sold during the quarter including BNP Paribas due to its exposure to Turkey. The proceeds were added to other European financial stocks in the portfolio. We took profits on Samsung SDI as it became fully valued in our estimates. We also exited Tokyo Gas on the concern that rising energy prices could pressure its earnings down the road.

Outlook

  • We believe the recent strengthening in the USD may not be sustainable. We have added to positions that we believe will benefit from EUR and GBP strengthening, on the back of a potential resolution on the Italian budget and Brexit negotiations.
  • The upcoming November mid-term elections can be viewed as a referendum on Trump’s presidency. The market census is that Democrats will likely recapture the House while Republicans will keep the Senate. However, it will be a close call as a lot will depend on turnouts among women and younger voters. Should there be a “blue wave” that sweeps both chambers, investors may start to worry about the sustainability of Washington’s pro-business policies. We believe Democrats will start to make the 21% corporate tax rate a general election issue in 2020, and markets may begin to discount higher corporate tax rates at some point. The recent decline in the Russell 2000® Index (measuring U.S. Small Cap performance) may be a sign of growing concern about this potential outcome.
  • Global growth should remain on the expansion path, in our opinion, as the U.S. economy has benefitted from aggressive fiscal stimulus and deregulation. With S&P 500 Index EPS projected growth at roughly 22% from last year and the probability of a recession in the next 12 months remaining low, we believe the bull market is still intact and further gains are more likely than not.
  • We also maintain our base case of a tougher trade war with China, as we have been concerned since the November 2016 election that Trump’s long-held protectionist instinct would lead to more confrontational trade policies. To deal with this risk, the Fund has avoided U.S. stocks with sizeable China exposure such as Boeing, Apple, Starbucks, Caterpillar, just to name a few. We also do not hold agriculture-related stocks from farm equipment makers to agricultural commodities producers. So far, the Chinese government has refrained from retaliatory actions against these companies. However, we are concerned that the trade relationship between the U.S. and China could go through a rough period before a compromise is reached.
  • We are overweight U.S. banks as we believe they should benefit from higher interest rates. In addition, European banks could potentially benefit from currency strengthening and higher rates. The Fund will remain opportunistic and seek stocks that are temporarily out of favor but possess the ability to be turned around. We also suspect value stocks may finally start to outperform growth as the U.S. reflation theme plays out.

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 reinvestment of all distributions and do and 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.

To the extent the Fund uses any currency hedges, share performance is referenced to the applicable foreign country terms and such hedges will provide the Fund with returns approximating the returns an investor in a foreign country would earn in their local currency.

This document includes forward-looking information that is based on forecasts of future events as of September 30, 2018. We will not necessarily update the information to reflect changes after that date. 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.

This information is provided in response to your specific request, for informational purposes only.  Although the information provided is carefully reviewed, Rockefeller Capital Management cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. Past performance is no guarantee of future results and no investment strategy can guarantee profit or protection against losses. Company references are provided for illustrative purposes only and should not be construed as investment advice, or a recommendation to purchase, sell or hold any security.  Certain information contained in these materials may constitute “forward-looking statements” and/or may be obtained from, or based on, third party sources that Rockefeller Capital Management believes to be reliable. No representations or warranties are made as to the accuracy or completeness of such statements, and actual events or results may differ materially from those reflected or contemplated. Opinions and analysis offered constitute Rockefeller Capital Management’s judgment and are subject to change without notice.  This information may not be copied, reproduced or distributed without Rockefeller Capital Management's prior written consent.  Rockefeller Capital Management is the marketing name for Rockefeller Capital Management L.P. and its affiliates. Investment advisory, asset management and fiduciary activities are performed by the following affiliates of Rockefeller Capital Management: Rockefeller & Co. LLC, Rockefeller Trust Company, N.A. and The Rockefeller Trust Company (Delaware), as the case may be.