Q2 2017 Commentary – Mackenzie Systematic Strategies Team | Mackenzie Investments

Q2 2017 Commentary

Mackenzie Systematic Strategies Team

Market Review

Canadian Focused Equity

The second quarter of 2017 showed a nicely positive return of 1.5% for the Canadian Focused Equity (CFE) category for the month of April. Sadly, the next two months were both negative, wiping out the April return and more. The CFE Category returned -0.40% for the Quarter. The TSX returned 0.83% and the S&P 500 returned 2.57% for the quarter. The healthcare sector was the best performer over the quarter, putting up a 5.1% return, followed closely by the Industrials sector at 4.39% for the quarter.

In the Canadian focused equity area, stocks with superior valuations and medium term momentum showed nicely positive returns. Stocks with higher volatility or short term price momentum were punished. The low volatility trade has persisted all year.

The only sectors that showed negative returns for the quarter were Energy and Materials. All other sectors were positive for the quarter.

Global Small Cap Equity

The second quarter started off with a very strong 4.52% return for global small cap stocks in April. However, the next two months were not so kind with -0.54% and -2.35% negative returns for May and June respectively. Global small cap stocks returned a healthy 1.51% for the Quarter. The Healthcare, Technology, and Telecomm sectors led the way with over 4% returns from all 3 sectors. However Energy stocks were punished over the quarter returning -16.1%. Global small cap stocks with high exposure to medium term momentum and growth did well over the quarter, and stocks with high exposures to volatility and higher capitalization did poorly over the quarter.

Global Equity

The second quarter started off with a very strong 4.09% return for global stocks in April, and an additional 0.96% in May. However, June was not so kind to global stocks with a -3.45% return. That being said, global stocks returned a healthy 1.47% for the quarter. The Healthcare, Industrials, and Financials sectors led the way with over 2% returns from all 3 sectors. However Energy stocks were punished over the quarter returning -7.25%. Global stocks with high exposure to medium term momentum and growth did well over the quarter, and stocks with high exposures to volatility and higher capitalization did poorly over the quarter.

Outlook & Strategy

What are the key opportunities you see?

The Systematic Strategies team selects stocks based on fundamental factors such as: earnings, sales and cash flow growth; valuation metrics such as: price to earnings, price to cash flow, and quality metrics such as: leverage and earnings visibility. 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 is expected perform. The final step is portfolio construction. A proprietary portfolio construction methodology is applied, with the objective of maximizing expected returns subject to constraints using some of the industry’s best practices.

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 by 93 bps over the quarter. However, our exposure to valuation and volatility hurt our performance by approximately 75bps. Stock selection was positive for the quarter, with Technology and Consumer Discretionary leading the way. Stock selection was positive in France and Canada, and negative in the United States.

In the Global Small Cap Equity arena, our funds generally have positive exposures to growth, valuation, medium term momentum, and liquidity. The exposures to valuation, medium term momentum, and growth stocks added to performance, and helped performance by approximately 125 bps. Conversely, our exposure to volatility and liquidity hurt our performance by approximately 72 bps. Stock selection was negative for the quarter by 105 bps, with Industrials, Financials, and Materials comprising almost all of the negative stock selection. However, stock selection in Technology and Energy was quite positive for the quarter. Stock selection was good in China and South Korea but hurt the portfolio in the United Kingdom.

In the Global Equity arena, our funds generally have positive exposures to growth, valuation, medium term momentum, and liquidity. The exposures to valuation, medium term momentum, and growth stocks added to performance, and helped performance by approximately 96 bps. Conversely, our exposure to volatility and liquidity hurt our performance by approximately 134 bps. Stock selection was positive for the quarter by 181 bps, with Consumer Discretionary and Telecomm leading the way. However, stock selection in Financials and Consumer Staples was negative for the quarter. Stock selection was good in China and Australia but hurt the portfolio in the United States.

The stock selection model in all three strategies were positive 2 out of 3 all months in the quarter.

How are you positioning portfolios in response to this outlook?

At the end of Q2, our portfolios were generally positioned with positive exposures to Growth, Valuation (Liquidity for Global Small Cap and Global Equity), 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 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 (and that are more liquid than the average global small cap stocks and global stock respectively).

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 June 30, 2017 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 June 30, 2017. 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.