3/31/2019 12:00 AM < Back
Sub-Manager Commentary Q1 2019 - Investment Strategies


Short Term Floating Rate Notes

Contributed by Canso Investment Counsel Ltd.


The Short-Term Floating Rate Bond portfolio (the “Portfolio”) returned 0.7% for the quarter, which was slightly ahead of the benchmark return. The GE Capital floating rate issue outperformed, offset somewhat by underperformance of the Kraft Canada FRN. For the five year period, the Portfolio return was 0.3% ahead of the benchmark and since inception, the 2.0% return represents 0.6% of added value.

The yield to maturity of the Portfolio declined slightly but remains 0.6% higher than the benchmark, and 100% invested in short-term issues with a short duration. The weight in AA & higher rated issues increased by approximately 5% with a corresponding decline in A rated issues due to security selection. The weight in Federal Government issues increased by almost 6% with the purchase of an NHA MBS issue.


Canso Corporate Value Bond

Contributed by Canso Investment Counsel Ltd.

The Corporate Value portfolios (the “Portfolios”) returned 2.3% to 2.4% in the quarter underperforming the benchmark by 1.6% to 1.7%. Issues of Lloyds, Maxar and ClearStream lagged in the quarter, partially offset by issues of Bombardier, GE and Teva. Over the last year, the Portfolios returned 3.2% to 3.3%, underperforming the benchmark by 1.6% to 1.7%. For the seven year period, the Portfolios achieved annualized performances of 6.7% to 7.0% which was 2.7% to 3.0% ahead of the benchmark respectively. Since inception, the Portfolios returned 8.5% to 8.8% on an annualized basis, outperforming the benchmark by 3.1% to 3.4%.

The average short term holdings of the Portfolios decreased from 82.3% to 76.5%, while average mid term holdings increased from 14.0% to 20.0% over the quarter. This was largely the result of the purchase of a new Bombardier issue with a term to maturity above 5 years, financed from the sale of short term holdings. The average long term holdings remained essentially unchanged over the quarter. The overall average yields increased slightly from 3.4% to 3.7% over the quarter, resulting from the portfolio’s average mid term yield increasing from 5.8% to 6.1%. This increase resulted from the purchase of higher yielding securities such as Bombardier. The average investment grade holdings decreased from 88.0% to 81.6% over the quarter, and was largely the result of the purchase of the new Bombardier issue with the proceeds of investment grade holdings. The average Federal Government holdings decreased from 6.9% to 5.9% on average over the quarter in favour of Foreign Corporate holdings which increased 1.0% on average. This increase resulted from the purchases of Foreign Corporate holdings with the proceeds of several NHA MBS lines.


Canso Investment Grade Bonds

Contributed by Canso Investment Counsel Ltd.​

The Investment Grade Bond portfolios (the “Portfolios”) returned 2.9% to 3.0% this quarter, underperforming the benchmark by 0.2% to 0.3%. The long BBB’s in the account lead performance with strong returns from Shaw Communication, Pembina, and AT&T. This was offset by underperformance from floating rates notes. The three year returns in the Portfolios ranged from 3.7% to 3.9%. Since inception, the Portfolios have returned 4.1% outperforming the benchmark by 0.7%.

Yields dropped in the quarter by 0.3% to 0.5% due to a drop in Canada yields and credit spread tightening. This decline was smaller than the Index which declined by 0.6%. The Portfolios saw an increase in Federal Government and Foreign Corporate holdings due to purchases of NHA MBS and UniCredit. This came at the expense of bonds in the Canadian Corporate sector. Credit structure, term structure and duration of the Portfolios were largely unchanged.


Mawer Canadia​n Large Cap Stocks

Contributed by Mawer Investment Management Ltd. 

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The S&P/TSX Composite Index (the “TSX”) returned 13.3% in the first quarter of 2019. The quarter stood in stark contrast to the fourth quarter of 2018, despite the growing narrative of a synchronized global economic growth slowdown. The change in market sentiment appears to be largely tied to confidence in the China-U.S. trade negotiations and the reversal of the U.S. Federal Reserve’s hawkish tone where there were indications of a willingness to reconsider the trajectory of future rate hikes. The Bank of Canada, and other major central banks around the world followed suit, shifting to more accommodative policies which could ultimately lead to an environment of lower rates for longer. This led to a fall in bond yields and the appreciation of virtually all global risky asset classes. More cyclical or perceived risky assets, such as cannabis stocks within Health Care and high growth Technology stocks, performed particularly well, as well as assets tied to bond yields, such as Real Estate. 

The Mawer Canadian Equity Fund (the “Fund”) returned 12.9% before management fees, underperforming the benchmark by 0.4%. The Fund’s relative underperformance was due to sector allocation with its allocation to cash impacting relative performance. Additionally, the Fund’s lack of exposure to Health Care stocks, the best performing sector over the quarter, further detracted from relative performance. Security selection provided some relief to the positive side, with the Fund benefitting from selection within Financials, Information Technology and Industrials. 

Our investment philosophy, with a focus on higher quality, often more defensively oriented businesses that are less cyclically exposed, means that many of our companies don’t tend to react as strongly in either up or down markets. As an example, Rogers Communications and Loblaw were some of the steadiest performers in the fourth quarter of 2018, thereby contributing to downside protection, but while they all delivered positive returns Q1, they lagged the broader market. Cineplex and Peyto Exploration & Development were the only stocks in the Fund to end the quarter with a negative total return. Peyto, a natural gas focused energy company, continues to be negatively impacted by an unfavorable natural gas environment and Cineplex the largest theatre exhibition business in Canada continues to see headwinds within its core business. 

On the positive side, the top contributors to the Fund’s return were alternative asset manager Brookfield Asset Management, factory automation designer ATS Automation Tooling Systems and Constellation Software. Brookfield’s share price saw steady gains throughout the quarter, likely benefitting from the possible lower interest rate environment. Further, they announced the acquisition of a majority stake in U.S. credit fund manager, OakTree Capital. ATS released positive results, including significant growth of their order backlog year-over-year. Constellation benefitted from continued management execution and capital deployment. 


QV Investors Canadian Large Cap Stocks

Contributed by QV Investors Inc.

​​The QV Canadian Equity Strategy (the “Strategy”) returned 10.1% in the quarter versus 13.3% for the S&P/TSX Composite Total Return Index (TSX). The one-year return was 1.3% for the Strategy compared to 8.1% for the benchmark.

Following 2018’s late-year sell-off, Canadian equities rebounded sharply in the first quarter. The recovery was widespread, with all benchmark sectors posting positive returns. Given the strong equity returns, the Strategy’s cash level detracted. The health care sector, driven by cannabis stocks, advanced over 49% in the period. The Strategy’s lack of direct health care exposure contributed to underperformance on a relative basis. The Strategy’s top contributing investments were Power Financial Corp., AltaGas Ltd. and Enbridge Inc. The largest detractor from absolute and relative returns was SNC-Lavalin Group Inc., as further discussed below.

SNC-Lavalin has been facing heightened legal, political and operational challenges over the last few months. A new management team took swift action to overhaul the company’s corporate governance and compliance procedures after bribery charges were laid in 2012. SNC was widely expected to negotiate a settlement on these past charges, but so far this has not occurred. Adding to negative sentiment, management preannounced 2018 earnings that were significantly below initial expectations due to cost overruns at a large mining project and a softening oil and gas business. While headline risks are likely to cause continued near-term volatility, we believe the current share price understates the value of SNC. We continue to closely monitor key controllable operational milestones.

During the quarter we initiated on Finning International Inc., an operator of heavy equipment dealerships in Western Canada, South America and the U.K. We have owned this business in the past and saw an opportunity to own it again with an attractive valuation and improved business mix. Finning enhances diversification within the portfolio by providing indirect mining exposure.

Canada has been one of the top performing equity markets year to date, more than offsetting last year’s negative return. Value stocks kept pace with their growth counterparts during this rebound, a dynamic we haven’t seen in the recent past. Renewed optimism in equities can be linked to strong corporate profitability and rising expectations that the Bank of Canada will eventually cut overnight interest rates on account of slowing economic growth.

Within energy, mandated production cuts and an expected ramp up in crude-by-rail volumes helped the WTI/WCS differential settle well below long-term averages. While this may have helped Canadian energy stocks achieve double-digit absolute returns, price to book metrics within the sector continue to look attractive relative to historical levels.

Towards the end of the quarter, a portion of the Canadian yield curve inverted for the first time since other interest sensitive areas of the portfolio benefitted from the decline in 10-year bond yields, including our sizable position in utilities.

The market's P/E ratio has returned to a long-term average multiple of 15.8x, up from its six-year low of 13.5x at the end of December. At a P/E of 13.4x, the portfolio trades at an attractive discount to the benchmark, and its holdings remain better diversified while offering a competitive dividend yield of 3.2%. We continue to seek out businesses with healthy balance sheets, sustainable cash flows, and reasonable valuations relative to market levels.


Mawer Canadian Small Cap Stocks

Contributed by Mawer Investment Management Ltd. 

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The Mawer New Canada Fund (the “Fund”) returned 11.0% in the quarter before management fees, effectively in-line with the performance of its benchmark. From a security selection perspective, the portfolio benefited from our positions in equity administration plan software company Solium Capital, collision repair shop operator Boyd Group, logistics and supply chain management software provider Descartes Systems Group, and fiberglass storage tank manufacturer ZCL. Solium and ZCL were targets of take-overs during the quarter. Solium, a top 5 holding, announced a proposed acquisition by Morgan Stanley at a substantial premium to share price at the time. Meanwhile, ShawCor, another portfolio holding, announced an all-cash offer for ZCL. Boyd reported a very strong Q4 as the company continued to add locations in new markets and expand in markets where they have a current presence, while Descartes announced strong results driven by its recent acquisitions.

On the other hand, companies with cyclical headwinds and quarterly stumbles fared poorly again this quarter given concerns around slowing growth. Some of our long-term top-performing holdings that didn’t perform over the quarter included plastic packaging manufacturer Winpak, bus manufacturer NFI Group, and restaurant operator MTY Food Group. Winpak reported a disappointing quarter with muted growth that is due, in part, to its competition becoming more price competitive. With NFI, industry weakness continues to put pressure on the company’s profits and order book, while MTY reported weak results that missed sell-side expectations on growth. The portfolio was also hurt in relative terms by not owning any gold companies.


Mawer US Equity

Contributed by Mawer Investment Management Ltd. 

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The Mawer U.S. Equity Fund (the “Fund”) returned 11.7%, before management fees, resulting in a relative outperformance over the benchmark. Outperformance can primarily be explained by stock selection in the Heath Care and Information Technology sectors. Sector allocation partially offset these positives with the Fund’s allocation to cash having the largest impact on relative performance in an upward trending market. Additionally, a slight overweight to Financials and lack of exposure to Energy further detracted from relative performance.

From a security level perspective, Verisk Analytics, Waters Corporation and Marsh & McLennan Companies were the top contributors. Historically, Verisk has been able to show steady growth that tends to be non-cyclical in nature and was seemingly rewarded by investors in an environment of slowing global economic growth. Health Care company, Waters Corporation, reported strong results including a 6% growth in recurring revenue which forms approximately half of their total revenue. The company also launched a new product that may improve their competitive position. Similarly, Marsh & McLennan reported positive quarterly earnings with stable growth prevalent across all divisions while simultaneously being able to improve margins.

On the negative side, CME Group was the largest detractor from the Fund’s performance, while International Flavors & Fragrances and International Speedway ended the quarter flat. CME owns and operates derivatives and futures exchanges—essentially the infrastructure for many different types of market transactions and expectations of lower interest rates, and thereby lower volatility, could lead to lower activity on CME’s various platforms.


Mawer International Equity

Contributed by Mawer Investment Management Ltd. 

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The Mawer International Equity benchmark (the “Benchmark”) posted a 7.90% return during the period. After a large downdraft in Q4 of last year, markets bounced back strongly, led by gains in the U.S. and Canada. There was a shift in sentiment in Q1, foremost, the U.S. Federal Reserve reversed its hawkish tone to a more dovish one; signaling a willingness to push rate hikes further into the future. Furthermore, movement towards more dialogue between China and the U.S. helped ease tensions between the two countries, seen as a major risk last quarter, further helped alleviate investor concern. All sectors in the Benchmark finished in positive territory led by Information Technology and Real Estate, each posting positive double digit returns. Geographically, all regions also posted positive performance, led by Canada, the U.K., and Asia Pacific ex. Japan. All performance values are provided in Canadian Dollar terms (unless otherwise stated).

The Mawer International Equity Fund (the “Fund”) gained 7.47% during the quarter (before management fees), underperforming the Benchmark by 0.43%. The Fund’s relative performance was driven by negative allocation due to the Fund’s cash allocation, and lack of exposure to Energy and Real Estate, two of the best performing sectors in the Benchmark. From a geographic perspective, negative security selection drove relative performance, driven by the underperformance of the Fund’s investments in Japan and Europe.

The top contributors during the period were Aon, Halma, and ASSA ABLOY. Global financial company, Aon, was up 15.2% during the quarter. The company reported robust organic growth, margin expansion and in our opinion, was able to successfully use its data advantage to provide better insights for clients and ultimately gain market share. Halma is a manufacturer of niche products in sensor and detection technologies. They are one of the world’s leading manufacturers of smoke detectors. The company’s management continued to deliver solid execution, remaining very active with acquisitions during the quarter. Assa Abloy, a global market leader in door opening solutions, released sound financial results during the period, highlighted by strong organic growth and robust growth in electromechanical locks. The company also continues to consolidate the market, completing five acquisitions during the quarter.

The top detractors during the quarter were Seven & I, Societe BIC, and Tsuruha. Japanese convenience store operator, Seven & I, experienced continued labour shortages and rising wages. To combat this, the company announced that they will begin trialing non-24 hour stores. Societe BIC reported sound organic revenue growth but saw its margins hit materially. Increased advertising and promotion as well as input costs all weighed on profitability. Furthermore, increased shaver competition, particularly from Amazon’s entry into the market, added to concerns over the period. Japanese drug store operator, Tsuruha, continued to report weaker results as profits fell for a second quarter due to rising personnel and supply chain costs, despite good revenue growth.


QV Global Equity

Contributed by QV Investors Inc. 

The QV Global Equity Strategy returned 7.2% in Canadian dollars (CAD) during the first quarter, versus 10.2% for the MSCI World Index. The one-year return for the strategy was 4.5% versus 7.8% for the benchmark.

All major equity markets rebounded in the first quarter, offsetting much of 2018’s late-year sell-off. The 11.3% in Canadian dollar terms. Europe and Hong Kong returned 8.7% and10.5%, respectively, in Canadian dollars, while Japan lagged at 4.4%. The information technology sector led benchmark returns, advancing over 17% since the start of the year. The strategy’s information technology holdings lagged the benchmark sector, and an underweight allocation to the space further contributed to relative underperformance. Security selection within industrials also detracted over the period.

The strategy’s top contributing investments in the quarter were Tesco PLC,  Citigroup Inc. and Apache Corp. The largest detractors were OSRAM Licht AG,Macy’s Inc. and Walgreens Boots Alliance Inc. During the quarter we initiated investments in BASF SE, MSC Industrial Direct Co. and Spectris PLC. BASF is the world’s largest chemicals company. Its vertically integrated model reduces cyclicality over the business cycle while generating strong free cash flow. BASF enhances the strategy’s valuation, dividend yield and return on equity metrics. It also increases the strategy’s European exposure at a time when European and emerging markets have significantly underperformed the US.  

MSC Industrial is a highly profitable industrial distributor with a successful track record of growing and consolidating in a fragmented market. The company trades at a 35% discount to its 10-year median P/E and has a dividend yield of 3%, near an all-time high. Strong free cash flow generation and a capital light business model give the company plenty of optionality to deploy capital for growth or share repurchases. We think the current price presents an attractive risk/reward opportunity for long-term ownership.

Spectris manufactures and sells industrial measuring instruments and controls worldwide. New CEO Andrew Heath has laid out a cost savings plan and improved focus on growth in the company’s most attractive segments. We believe this could lead to double digit earnings growth over time and an upward revision in the valuation. 

We exited UK postal service Royal Mail PLC and US insurer Alleghany Corp. in favour of more attractive risk/reward opportunities like those discussed above.

A number of leading indicators suggest recent economic weakness may abate in future quarters. The Federal Reserve’s change in language to maintain the current rate environment should support continued economic expansion as inflation remains under control and employment remains strong. With the US 10-year bond yielding only 2.5% relative to an expected earnings yield of 5.8% for the S&P 500, investors continue to be paid to own stocks even as later cycle indicators continue to build.

Valuation and performance extremes within areas of the market suggest latent risk, however, as well as a rising likelihood of changing market leadership. The US market’s outperformance relative to other developed markets has reached a two standard deviation extreme not witnessed since 1950. Within the broader market, the most expensive decile of stocks trades at 72x earnings according to data compiled by Bernstein - the highest level going back to 1950. In contrast, the cheapest decile trades near long-term averages. The strategy is well positioned for this environment. Valuations remain attractive, balance sheets are strong, the dividend yield is attractive at 2.9% and the holdings remains diversified by sector and geography.


Mawer Global Small Cap Equity

Contributed by Mawer Investment Management Ltd. - Paul Moroz

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The Mawer Global Small Cap Equity Benchmark (the “Benchmark”) posted a 10.63% return during the quarter. After a large downdraft in Q4 of last year, markets bounced back strongly, led by gains in the U.S. and Canada. There was a shift in sentiment in Q1, foremost, the U.S. Federal Reserve reversed its hawkish tone to a more dovish one; signaling a willingness to push rate hikes further into the future. Furthermore, movement towards more dialogue between China and the U.S. helped ease tensions between the two countries, seen as a major risk last quarter, further helped alleviate investor concern. In the Benchmark, all sectors posted positive returns with Information Technology, Energy, and Health Care being the strongest performers. Geographically, all regions also posted positive performance over the period. All performance values are provided in Canadian Dollar terms (unless otherwise stated).

The Mawer Global Small Cap Equity Fund (the “Fund”) gained 11.23% (before management fees) during the period, outperforming the Benchmark by 0.59%. The Fund’s relative performance was driven by security selection, notably the outperformance of the Fund’s holdings in Industrials, with Bravida leading the gains in the sector. This was slightly offset by negative allocation, due to the Fund’s cash allocation in a rising market environment and overweight in Consumer Staples, the Benchmark’s worst performing sector. Geographically, security selection also drove relative performance, led by the outperformance of the Fund’s holdings in Europe. Geographic allocation was negative due to the Fund’s underweight in the U.S. and overweight in Europe ex. U.K.

The top contributors during the period were Softcat, Bravida, and Bravura Solutions. Softcat is a U.K. based value added reseller of IT software and hardware. The company’s share price was hit during the widespread decline in Q4 before recovering; recouping back all losses and finishing the quarter higher. In early January, the company released a trading update indicating that results were materially ahead of expectations. This was later confirmed when H1 2019 results were released showing strong growth in profitability. The company continues to focus on increasing their percentage of the customer wallet which has resulted in noticeable growth coming from exiting customers. Bravida is a Nordic based company that provides technical electrical, HVAC, and plumbing services. The company reported strong Q4 results in which they saw strong sales and earnings growth, suggesting the company is still seeing growth in demand for its services. Furthermore, Bravida raised its dividend while the company’s debt levels continue to decline, helping support the share price appreciation during the period. Bravura is a wealth management and fund administration ERP software provider for pension, insurance, and third party administrators.  The company also reported strong results in sales and earnings, with a large portion being recurring sales.

Hansen Technologies, Tsuruha, and APG SGA were the top detractors from performance during the quarter. Global provider of customer billing software, and data management systems, Hansen Technologies, reported weak H1 2019 results. Weak margins due to a change in revenue mix weighed on the stock. Japanese drug store operator, Tsuruha, continued to report weaker results as profits fell for a second quarter due to rising personnel and supply chain costs. APG is a Swiss billboard advertiser. Our research indicated that the company’s margins came under pressure as it faced increased competition in its local market from an aggressive smaller competitor, the market reacted accordingly to the stock.

​The end.

The commentary provided herein was written and contributed by Sub-advisors to the Compass Portfolio Series and compiled by ATB Investment Management Inc. (“ATBIM”).  This report is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment. Although the information has been obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is made as to their accuracy or completeness and ATBIM does not undertake to provide updated information should a change occur.

Any performance data provided for mutual funds assumes re-investment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATBIM, ATBSI, ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read the fund offering documents before investing. Unit values of mutual funds will fluctuate 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 investment products that seek to track an index.  

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