Q3 2017 Commentary – Mackenzie Systematic Strategies Team | Mackenzie Investments

Q3 2017 Commentary

Mackenzie Systematic Strategies Team

Market Review

Canadian Focused Equity

  • The third quarter of 2017 started where the month of June ended with a negative return of 0.71% for the CFE category for the month of July. Luckily, the next two months were both positive, allowing the CFE Category to return +2.06% for the Quarter. The TSX returned 3.46% and the S&P 500 returned 3.96% for the quarter. The Energy sector was the best performer over the quarter, putting up a 6.15% return, followed by the Technology sector at 4.34% for the quarter.
  • In the Canadian-focused fund area, stocks with superior valuations and medium term momentum showed nicely positive returns. Stocks with short term price momentum were punished.

Global Small Cap Equity

  • The third quarter continued where the second quarter ended for small cap stocks, with both July and August being negative return months. However a very strong September allowed global small cap stocks to finish with a 0.95% return for the quarter. The Energy, Technology, and Materials sectors led the way with over 4% returns from all 3 sectors. However Consumer Staple stocks underperformed over the quarter returning -1.5%. Global small cap stocks with high exposure to medium term momentum, valuation, and higher capitalization did well over the quarter, and stocks with high exposures to short term momentum did poorly over the quarter.

Global Equity

  • The third quarter started off where the second quarter ended with an additional negative 1.08% return for global stocks in July. However, August and September were both positive months, allowing global stocks to return a respectable 1.05% for the quarter. The global energy, materials, and technology sectors led the way with returns over 4.50% for all 3 sectors. However, consumer staples stocks were punished over the quarter returning -4.02%. Global stocks with high exposure to medium term momentum, value, and growth did well over the quarter, and stocks with high exposures to short term momentum and leverage 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 these 3 factors helped our performance by approximately 92 bps over the Quarter. Stock selection was slightly negative for the quarter, with negative selection in the Energy sector causing most of the negative performance. Stock selection was negative in Japan and Canada, and somewhat offset by positive selection 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 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 195 bps. Stock selection was overwhelmingly positive for the quarter by 396 bps, with Technology, Financials, and Utilities leading the way in stock selection. Stock selection was very good in the US, Germany, and Taiwan. The Stock selection model for global small cap was positive in all 3 months of the Quarter.
  • In the Global Equity arena, our funds generally have positive exposures to growth, valuation, and medium term momentum. The exposures to valuation, medium term momentum, and growth added to performance, and helped performance by approximately 160 bps. Conversely, our exposure to smaller size and less liquid stocks hurt our performance by approximately 31 bps. Stock selection was positive for the quarter by 194 bps, with Consumer Discretionary and Utilities leading the way. However, stock selection in Healthcare was negative for the quarter. Stock selection was good in Hong Kong and Japan but hurt the portfolio in the United States. The Stock selection model for global equity was positive 2 out of 3 months in the Quarter.

How are you positioning portfolios in response to this outlook?

  • At the end of Q3, 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 September 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 September 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.

The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund.