Q4 2016 Commentary – Mackenzie Systematic Strategies Team | Mackenzie Investments

Q4 2016 Commentary

Mackenzie Systematic Strategies Team

Market Review

  • The fourth quarter of 2016 showed positive market returns in each of the three months, which was unexpected due to the tremendous uncertainty entering the US Presidential Election.  The markets cheerfully welcomed President-Elect Trump, with the S&P 500 rallying 3.8% from the election to the end of the year.  The Financials sector was the best performer over the quarter, putting up double digit returns due to the “Trump-Bump”.
  • In the Canadian-Focused fund area, only stocks with superior valuations showed nicely positive returns, and these were mainly driven by the Financials sector.  Stocks with any sort of price momentum, smaller market cap, or growth were punished.  This is an interesting reversal to the previous 9 months.
  • Health Care and Materials stocks were also punished in the Election’s aftermath, as they are the two main sectors that will most likely be negatively affected by the incoming U.S. Administration.
  • 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 and medium term hurt our performance by 37 bps over the quarter.  However, our exposures to Valuation helped our performance by approximately 50 bps.  Stock selection was negative for the quarter by 107 bps, with Technology, Financials and Utilities leading the way down.  Stock selection was positive in the U.S., but negative across Germany and Asia.
  • Global small cap stocks started out the fourth quarter  with very poor returns, and then rallied over the next two months of quarter thanks to the U.S. Presidential Election and the Trump-Bump.  Small cap Technology, Financials and Materials led the way with double digit returns from all 3 sectors.  Global small cap stocks with high exposures to Valuation were the only stocks that did well over the quarter, and stocks with high exposures to Short or Medium term price momentum, smaller capitalizations, or Growth did poorly over the quarter.
  • In the global small cap arena, our funds generally have positive exposures to Growth, Valuation, Medium Term momentum, and Liquidity.  The exposure to Valuation was the only factor that significantly added to performance, and it helped performance by 65 bps.  Conversely, our exposures to Medium term momentum, Liquidity, and Growth hurt our performance by approximately 125 bps.  Stock selection was slightly positive for the quarter by 28 bps, with Consumer Discretionary and Real Estate leading the way.  However, Stock Selection in Financials was quite negative. Stock selection was good in the UK, but hurt the portfolio in the US and Hong Kong.

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 in the Canadian area was positive in November, but negative in October and December, leading to an overall negative stock selection result for the fourth quarter. The Stock selection model for global small cap was positive over all months of 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.  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.

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, 2016 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 December 31, 2016. 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.