Mackenzie Systematic Strategies Team
Canadian Focused Equity
The first quarter of 2018 showed a poor return of for the CFE Category. January was barely positive and the next 2 months were down leading to the negative return. Canadian stocks had negative returns and the US stocks had slightly positive returns, which was not enough to bring the Category into positive territory. The Information Technology sector was the best performer over the quarter, putting up strong positive returns, followed by the Consumer Discretionary sector. 8 of the remaining 9 sectors had negative returns for the quarter.
In the Canadian-focused fund area, only stocks with medium term momentum or growth showed positive returns. All other factors showed negative returns. Stocks with higher volatility or short-term price momentum were especially punished over the quarter.
Global Small Cap Equity
The first quarter of 2018 started off where Q4 ended with a continued rally of a relatively strong (compared to large cap) return for global small cap stocks. Each month exhibited positive returns, with January leading the way. The majority of the return was led by the Health Care and Technology sectors which posted strong positive returns. Global small cap stocks with high exposure to medium term momentum and growth were the only stocks that did well over the quarter. Stocks with high exposures to volatility and short-term momentum did very poorly over the quarter.
The first quarter of 2018 started off with a very strong return for global stocks in January. Unfortunately, that was the highest point, as February was basically flat, and March had a poor negative return. Global stocks had weak positive returns for the quarter. The Information Technology and Consumer Discretionary sectors led the way with strong positive returns. All the other sectors were flat to down with Energy stocks shedding the most. Global stocks with exposure to medium term momentum or growth did well over the quarter, but all other exposures were money-losers, with Volatility being punished the worst of all factor exposures.
Outlook & Strategy
What are the key opportunities you see?
In general, the Systematic strategies group maintains exposure to certain factors, which we believe will consistently add value over time. We will vary the weightings of these factors depending on our forecasts of the rewards to these factors. Another key component of our investment process is our stock selection model. In general, the more successful the stock selection model is, the better the portfolio will perform.
In the Canadian-focused equity (CFE) arena, our funds generally have positive exposures to growth, valuation, and medium-term momentum. The exposure to growth and medium-term momentum helped our performance over the quarter. Stock selection was slightly positive for the quarter, with defensive sectors such as Consumer Staples and Energy leading the way. Stock selection was very positive in Canada, but negative in the United States.
The Stock selection model in the CFE area was positive in 2 of the 3 months of the quarter.
In the Global small cap arena, our funds generally have positive exposures to growth, valuation, medium term momentum, and liquidity. The exposures to medium term momentum and growth contributed positively to performance. Conversely, our exposure to volatility and valuation detracted from performance. Stock selection was poor for the quarter and detracted from performance, with Financials, and Consumer Discretionary comprising the majority of negative stock selection. Stock selection was poor in the US, South Korea, and Hong Kong.
The stock selection model for global small cap was positive 2 out of 3 months in the quarter.
In the Global Equity arena, our funds generally have positive exposures to growth, valuation, medium term momentum, and liquidity. The exposures to medium term momentum, and growth stocks contributed positively to performance. Conversely, our exposure to volatility and valuation detracted from performance. Stock selection was positive for the quarter, with defensive sectors like Consumer Staples and Energy leading the way. Unfortunately, Consumer Discretionary and Health Care stock selection hurt the portfolio. Stock selection in the US, Hong Kong and Canada had a positive impact on the portfolio, while stock selection in Japan had negative impact, a continuation from Q4.
The stock selection model for global concentrated was positive in 2 of the 3 months in the quarter.
How are you positioning portfolios in response to this outlook?
At the end of Q1, our portfolios were generally positioned with positive exposures to growth, valuation, and medium-term momentum factors in the CFE strategy; positive exposures to growth, liquidity and medium-term momentum factors in the global small cap and global equity strategies. The funds also have a high Alpha exposure, across all industries and sectors to the stock selection model. Thus, aside from our stock-specific risks, we would expect our portfolios to perform above their market benchmarks in an environment which value stocks with positive growth characteristics, trading at cheaper-than-peer valuations, with positive medium-term momentum in the CFE strategy; stocks with positive growth characteristics, with positive medium-term momentum, and that are more liquid than the average small cap and global stocks in the global small cap and global equity strategies, respectively. Our regime model is currently showing a neutral regime, and we expect growth, valuation, and momentum to be rewarded equally.