Mackenzie Systematic Strategies Team
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.
- 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).