Q4 2018 Commentary
- For Q4 2018, the Mackenzie Canadian Small Cap Fund posted a loss of -16.0% This compares with the S&P/TSX Small Cap Total Return Index return of -14.4%.
Contributors to Performance
- The fund carries lower weights on energy stocks than those in the index, energy stocks lost over 30% value in the quarter due to a rapid decline in oil price and a historical high Canadian differential.
- The Portfolio benefited from the stability among its Real Estate holdings during a broad market selloff.
- Gold holdings provided some lift as other equities were deeply oversold.
Detractors from Performance
- The equity markets have experienced a broad-based correction, all sectors were down which was triggered by an expected loss of economic and earnings momentum.
- The fund's many holdings in industrial and consumer discretionary sectors had a rough go during market sell-off, earning season was uninspiring for the quarter as a result. The most significant detractor was our underweight position in the Materials sector.
- The Energy sector was heavily discounted in the quarter as oil price dropped below $50 amid unprecedented Canadian differentials.
- There are no buys or sells that we can disclose at the moment.
- 2018 turned out to be a very tough year for equity investors. Unless a portfolio held a significant amount of cash, there was nowhere to hide amid a broad market selloff that intensified in December. The correction started with a disappointing earnings season that failed to ignite any strong growth prospects, and followed by fears centered around a protracted trade war and a less dovish Fed view on rate hikes.
- We have seen some recovery from destructive December in the new year, but sentiment is still fragile, that could lead to increased volatility into the new year. A debate on how soon a recession is upon us has swung the market dramatically. Small Cap equities were not immunized to the change, contrast performances between gold stocks and all the other sectors is witnessed daily. It is evident to us that growth prospects have slowed down but so do expectations. Valuations have come down a lot, S&P 500's P/E ratio has declined nearly 30% peak-to-trough in 2018, Canadian equity valuations have declined in a similar fashion. Many of our top holdings with strong defensive business operations, have given up most of the gains of the year. In our view strong balance sheet companies with solid business fundamentals will outperform. We will opportunistically top up positions in such holdings.
- Key indicators are not yet signaling the end of the business cycle. We have reason to believe that much of the bad news has been priced in. We look forward to greater transparency on a lot of outstanding issues over the next few months, such as, Brexit, resolution from trade talks and further economic data out of the US and China, and finally the Fed policy.
PORTFOLIO MANAGEMENT TEAM:
Scott Carscallen, Vice-President, Investments, Mackenzie Financial Corporation
Dongwei Ye, Associate Portfolio Manager