Mackenzie Systematic Strategies Team
The third quarter of 2016 showed positive market returns in each of the three months, in spite of the large economic uncertainties due to the Brexit vote and the contentious US election cycle. The Technology sector was the best performer over the quarter, supplying double-digit returns.
In North American large cap stocks generally, companies with strong valuations and high volatility produced nicely positive returns, and stocks with large short term price momentum were punished. This is a reversal of the characteristics exhibited in the second quarter.
Global small cap stocks rallied over the quarter in spite of the economic uncertainty coming from the Brexit vote. Small cap Technology, Financials, and Materials led the way with double digit returns from all 3 sectors. Global small cap stocks with elevated exposures to valuation and volatility did well over the quarter, and stocks with high short-term price momentum and smaller capitalizations did poorly over the quarter.
In continuing with the reversal from Q2, Utility and Real Estate stocks were the only sectors with negative returns, which may be due to the increased probability of an interest rate increase from central banks.
In the global small cap arena, our funds generally have positive exposures to growth, valuation, medium term momentum, and liquidity. The exposure to growth was neutral to performance, while our exposures to valuation and medium term momentum helped our performance by approximately 50 bps. Stock selection was slightly positive for the quarter by 37 bps, with Financials, Materials, and Consumer Staples leading the way. However, stock selection in Real Estate was quite negative, resulting in only slightly positive selection for the quarter. Stock selection was good in the US and the UK, but hurt the portfolio in Canada.
In the Canadian and US large cap arena, our funds generally have positive exposures to growth, valuation, and medium term momentum. The exposure to growth was neutral to performance, while our exposures to valuation and medium term momentum helped our performance by approximately 32 bps. Stock selection was positive for the quarter by 191 bps, with Energy, Technology and Materials coming out on top. Stock selection was also good in the US, Canada, and the UK.
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.
The stock selection model for global small cap was positive in July and September and negative in August, for an overall neutral quarter for our model. The stock selection model in the Canadian area was positive in July and September, and negative in August, but overall nicely positive for 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. 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 values stocks with positive growth characteristics, trading at cheaper-than-peer valuations, with positive medium term momentum.