Mackenzie Systematic Strategies Team
What factors were successful over the quarter?
The Second Quarter of 2016 was interesting as it started off with string and positive returns, which were derailed late in the Quarter by the BREXIT vote/fiasco. In the Canadian-Focused fund area, both Growth and Short term momentum showed large negative returns, while highly Liquid stocks, stocks with superior valuation, and good long term momentum were highly rewarded. This is generally what is expected when large amounts of uncertainty and fear are present in the markets.
In the Global Small Cap Arena, the same dynamics were in play, but volatile stocks were punished more than their larger cap brethren. Again, this was to be expected due to the uncertainties thrust into the markets from the BREXIT vote.
Another interesting dynamic last quarter was the extreme performance of the precious metals stocks due to the flight to safety that was observed. On Average, these stocks were up approximately 37% for the quarter vs. the average stock return of about 2.5% for the quarter.
How the funds were generally positioned relative to the successful and unsuccessful factors. What were the approximate magnitudes of the relative gains/losses in the factors?
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 hurt performance by approximately 33 bps, while our exposures to Valuation and Medium term momentum helped our performance by approximately 20 bps. In general, the CFE funds maintain a relative negative position to precious metals stocks due to their volatility and unpredictability. Our underweight to this area cost the funds this quarter.
In the Global Small Cap area, our funds generally have positive exposure to Valuation, Medium Term Momentum, and Liquidity. Our exposures to each of these factors resulted in positive performance and the aggregate performance was approximately 110 basis points.
The Stock selection model in the CFE area was negative in April, slightly positive in May and very positive in June. In the Global Small Cap area, the model performed negatively in April, but very positively in May and June.
How the fund is currently positioned with respect to the risk factors, and in what set of market conditions would you expect the fund to do well/poorly?
At the end of Q2, our portfolios were generally positioned with positive exposures to Growth, Valuation, and Medium Term Momentum. 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 likely perform above their market benchmarks if we are in an environment which highly values liquid stocks with higher than average growth rates, trading at cheaper valuations.