Q4 2016 Commentary

Mackenzie Cundill Team

Market Review

  • The final quarter of the year was a positive environment for value investing. All of the Cundill Funds performed favourably relative to their benchmarks, as should be expected in this type of environment. The portfolios were poised to benefit from the current “Great Resurrection” of value stocks, and they delivered. The investment thesis behind several of our holdings was further validated in the final quarter of the year. We believe this is the beginning of a multi-year rotation that favours value investing, which benefits from rising rates, higher inflation, and cyclical recovery. This global reflation trade is being led by the U.S., where employment and economic activities have been gathering momentum since early this year.
  • Two major events defined the returns during the quarter: the Republican sweep of the U.S. election and the November OPEC meeting. First, the election of Donald Trump resulted in a temporary dislocation followed by a strong rebound in the markets. The S&P 500 Index (CAD) ended the quarter up 5.9%. This accelerated the resurgence of value investing strategies and our funds were rewarded during the period. Our portfolios reflect our conviction in the recovering U.S. economy and the Mackenzie Cundill Value Fund is tilted towards the U.S.
  • Since the Global Financial Crisis in 2008, we have been in a low economic growth environment. Growth and low volatility strategies have been winning strategies as investors clung onto any modicum of potential growth. We are entering the stage of higher economic growth where cyclically-sensitive stocks in U.S. banks and industrials have surged higher on the expectation of stronger economic growth. Strong figures on wage growth and housing starts continue to support this trend.
  • Our U.S. bank holdings were the largest contributors across our portfolios, including holdings in Bank of America, Citigroup, Goldman Sachs, and JP Morgan. Half way through 2016, U.S. banks were trading below their book value and subsequently returned 38.6% (in local currency). Despite the run-up, banks are trading well below their previous peak of 2.2x book value and we believe they still have a long runway. Thesis progression on our U.S. banks remains on-track with an improving interest rate environment, cost cutting, loan loss reserve release, net interest margin expansion and share buybacks to realize value.
  • OPEC surprised markets with their production cut announcement in November. This greatly benefited our energy holdings including: Chesapeake, Rowan Cos., Tenaris, which are held in several of our portfolios. The proposed cut along with steadily growing oil demand support the outlook for Energy going into 2017. 

Outlook & Strategy

  • Despite Brexit and the Italian referendum, European economies as a whole have been on a path of recovery. Data on employment, housing and consumption have mainly been positive. The large countries are all showing growth in their GDP. This recovery has been bumpy, however. The timing and outcome of Brexit negotiations are still highly uncertain and that has put a pause on some business investment decisions in the near term.
  • In 2017 there will be elections in the Netherlands, France and Germany. Investors will be closely watching the political landscape for any changes that could impact the fundamentals of the Eurozone.
  • In Japan, the quantitative easing of Abenomics has produced limited real economic impact. Bank of Japan’s buying of government bonds has resulted in banks holding deposits at the BOJ, as there is no growth in loan demand.  The BOJ’s purchase of equities through ETFs is potentially distorting the price discovery mechanism of the market. Further structural change could come from Abenomics but the pace remains to be seen.
  • In China, there are currently no signs of a “hard landing”. Consumers seem to be in decent shape. However, there is excess production capacity in some industries. The high level of debt in the financial system is a concern but most debt is held domestically.
  • Trump’s election could be positive for international markets if accelerated U.S. growth spills over to other countries.  However, if his rhetoric on a protectionist stance in trade negotiations translates into real action, it could hurt global trade.  We are monitoring these developments closely.
  • Overall, the global economic backdrop has been on a path of healing. We are watchful for the development of geopolitical risks that could impact company fundamentals.
  • We see the recovery in the U.S. accelerating with improvements in the job market, housing market and industrial production and the emergence of inflationary pressures. The earnings recession we saw is largely behind us. We ignore Trump’s daily tweets and focus on what to expect from a Republican Congress and White House. We expect benefits from tax reform and deregulation will be unambiguously positive for company earnings and value stocks. We believe the rhetoric on trade and Obamacare may end up being dealt a heavy dose of reality when Republicans have to consider what is good for the country as well as what is good for the party in the mid-term elections. The acceleration in economic fundamentals we see is not only in the U.S., but around the world.

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 December 31, 2016 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 December 31, 2016. 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.