Q4 2018 Commentary – Mackenzie Systematic Strategies Team | Mackenzie Investments

Q4 2018 Commentary

Mackenzie Systematic Strategies Team

Market Review

Canadian Focused Equity

The fourth quarter of 2018 showed a negative return for the Canadian Focused Equity category, the worst 4th quarter in several years.  November had a slight bounce back into positive territory after a continued trend of negative returns from September to October.  However, the continued global political turmoil further punished the market in December returning it to negative territory.  All sectors had a negative return, with Energy being the worst. Global Stocks with high exposure to growth factors were the only stocks that did well over the quarter.  Stocks with high exposures to volatility, momentum, liquidity, and value factors did very poorly over the quarter.

Global Small Cap Equity

The fourth quarter of 2018 was the worst 4th quarter for the Global Small Cap Equity category in several years. November had a slight bounce back into positive territory after a continued trend of negative returns from September to October.  However, the continued global political turmoil further punished the market in December returning it to negative territory.  All sectors had negative returns for the quarter, with Energy being the worst. Global small cap stocks with high exposure to larger size and earnings yield were the only stocks that did well over the quarter.  Stocks with high exposures to volatility, momentum, liquidity, growth, and value did very poorly over the quarter.

Global Equity

The fourth quarter of 2018 was the worst 4th quarter for the Global Equity category in several years.  November had a slight bounce back into positive territory after a continued trend of negative returns from September to October.  However, the continued global political turmoil further punished the market in December returning it to negative territory.  All sectors had negative returns for the quarter, with Energy being the worst. Global stocks with high exposure to larger size and earnings yield were the only stocks that did well over the quarter.  Stocks with high exposures to volatility, momentum, liquidity, growth, and value did very poorly over the quarter.

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, medium term momentum, and liquidity.  Exposure to all of these factors hurt performance over the quarter. Stock selection in Materials, Information Technology, and Industrials detracted from performance the most.  Poor Stock selection was mostly concentrated in the United States and Canada.

The Stock selection model for Canadian Focused Equity was negative 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. These exposures slightly hurt performance over the quarter.  Stock selection was very poor for the quarter detracting from performance, with Health Care, Consumer Discretionary, and Materials comprising the lion’s share of negative stock selection.  Stock selection was poor in Australia, Japan and the Unites States

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.  Exposure to all of these factors hurt performance over the quarter.  Stock selection was very negative for the quarter, with Consumer Discretionary, Health Care, and Industrials leading the way.  Poor Stock selection was mostly concentrated in the United States, while the Pacific rim showed slightly 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 Q4, 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.

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 December 31, 2018 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.

This document includes forward-looking information that is based on forecasts of future events as of December 31, 2018. 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.