Mackenzie Systematic Strategies Team
Canadian Focused Equity
The third quarter of 2018 started out with promise, but returns turned negative in September, as a result of a potential global trade war. The Quarter finished with a slight positive return for the CFE Category. Canadian Stocks returned slightly negative for the quarter. Continental Europe and Asia had mixed returns for the quarter, while U.S Stocks were up strongly. The Health Care sector was the best performer over the quarter, followed by Information Technology and Industrials.
In the Canadian-focused fund area, stocks with high exposure to large capitalization, medium term momentum, and earning yield factors showed significant positive returns. Stocks with high exposure to higher volatility, exchange rate sensitivity, and growth factors were punished over the quarter.
Global Small Cap Equity
The third quarter of 2018 returned a slightly negative for the global small cap category. July was flat and August was up slightly, but the fears of a trade war led to a negative return for September. The majority of the return was led by the Health Care. The majority of the remaining sectors had negative returns. Global small cap stocks with high exposure to medium term momentum, larger size, and earnings yield were the only stocks that did well over the quarter. Stocks with high exposures to foreign exchange rates and volatility did very poorly over the quarter.
The third quarter of 2018 showed a moderate positive return for the global stock category. July and August had positive returns respectively. However, increasing expectations of a global trade war caused a negative return for September. The Health Care and Information Technology sectors led the way with strong positive returns. The Materials and Real Estate sectors both showed moderate negative returns. Global stocks with exposure to medium term momentum and larger capitalization did very well over the quarter, but liquidity, volatility and growth were punished the worst of all factor exposures.
Outlook & Strategy
What are the key opportunities you see?
In general, the Systematic strategies team 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 negative for the quarter, with the Consumer Discretionary and Information Technology sectors leading the poor stock selection. Stock selection was very negative in the US and Canada for the quarter.
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 valuation added to performance. Conversely, our exposure to volatility and liquidity hurt relative performance. Stock selection was poor for the quarter and detracted from performance, with Information Technology, Real Estate, and Consumer Discretionary comprising the leading share of negative stock selection. Stock selection was poor in Sweden, Hong, Kong, and France.
The Stock selection model for global small cap was negative 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 added to relative performance. Conversely, our exposure to volatility, liquidity, and size hurt our performance. Stock selection was very negative for the quarter, with Information Technology and Consumer Discretionary as the leading detractors from relative performance. Stock selection was poor in the Asia Pacific, but Continental Europe and the US had mostly positive stock selection.
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 Q3, 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, valuation and medium-term momentum factors in the global small cap, and positive exposures to growth, liquidity, and medium-term momentum factors in the global equity strategy.
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.