Canso Corporate Value Mandate

Contributed by: Canso Investment Counsel Ltd.

The portfolio returned 5.0% in the quarter, ahead of the benchmark return of -3.5%. Performance was led by further recoveries in pandemic affected issuers.

As investors looked forward towards a strong economic rebound, bonds issued by companies including Hertz, American Airlines and AMC Entertainment rallied significantly in price. With a low duration relative to the Corporate Index and in excess of a 17% allocation to floating rate securities, the portfolio was also well positioned to withstand the sell-off in longer duration assets caused by rising government bond yields. For the one year period, the portfolio returned 36.7% and over five years the 9.6% return was 5.7% ahead of the Index. Since inception, the 9.8% return represents 4.5% of added value.

The AAA/AA weight in the portfolio increased by 0.9% in the quarter as the portfolio begins to shift toward higher credit quality. AAA-rated NHA MBS was the main contributor to this increase, which also pushed the Federal Government weight up to 1.7%. The BB & Below weight decreased by 3.7% in the quarter, to 61.8%, as Cenovus was upgraded and we began to sell down high yield holdings as spreads normalized. Portfolio duration remains low at 3.6 years versus 6.7 years for the Index. We continue to only extend duration when we believe we are being compensated for the incremental interest rate risk. The weight in foreign currency holdings dropped by 2.9% in the quarter. The foreign currency exposure continues to be fully hedged back into Canadian dollars.

 

Canso Investment Grade Mandate

Contributed by: Canso Investment Counsel Ltd.

Rising yields led to negative returns in the bond market in the first quarter. The portfolio returned -3.1% in the period, which was ahead of the benchmark return of -3.5%. Lower than benchmark duration and security selection helped to overcome an overweight in long term issues and spread widening in higher quality maple bonds. The portfolio benefited from relative strength in long BBB issues, strong performance in the Limited Recourse Capital Notes of RBC, BMO and Manulife as well as the floating rate positions. For the most recent year, the 10.9% return was 3.3% ahead of the benchmark. Since inception, the 4.7% return represents 1.1% of valued added.

Portfolio yield increased 0.4% during the quarter largely due to rising underlying government bond yields. The yield continues to be greater than the benchmark index despite an increase in AAA/AA rated issues. There was an increase in higher quality bonds as we are gradually increasing credit quality as spreads continue to tighten. The duration fell by 0.5 years due to large cash inflows being invested primarily in mid term issues. Shorter portfolio duration will be defensive relative to the benchmark if yields continue to push higher.

 

Cardinal Canadian Equity Mandate

Contributed by: Cardinal Capital Management Inc.

The portfolio returned 11.08% in the first quarter, beating the S&P/TSX by over 300 basis points. Much of this quarterly outperformance occurred in the month of March. Over the last six months, our portfolio returned 458 basis points over the return of the S&P/TSX and slightly trails the index over the one year.

Hints of a rebounding economy boosted expectations for inflation and pushed the long end of the interest rate curve higher. Also rising were most commodity prices (except for gold) as they reached pre-COVID levels (and higher). For energy prices, WTI and Brent advanced 21.9% and 22.7% respectively.

Cyclically biased value sectors whose fortunes are closely tied to the health of the global economy and the reopening trade outperformed their growth-oriented counterparts. Surging energy and financial stocks helped propel the S&P/TSX to new all-time highs.

In the S&P/TSX, only last year’s top performing sectors (information Technology and Materials) posted negative returns in the quarter. Meanwhile, last year’s largest underperformers (energy, Financial and Health Care) substantially outperformed. The Energy and Financial sectors accounted for over half of the TSX performance in the first quarter. Even though Health Care was a top performing sector, the modest weighing limited its overall impact in the benchmark.

In the portfolio, double-digit gains were realized in the Energy and Financial sectors and were comparable to the returns in the benchmark,

The lagging sectors for the portfolio this quarter was the Consumer Discretionary and Communications Services sectors. Both sectors had outperformed the index sector performance last quarter but did not participate as much this quarter. Also, a few companies within the index sector (not owned in the portfolio) had double-digit gains that drove performance.

The portfolio continues to have no holdings in the Information Technology and Health Care sectors but a small weighting in Materials was initiated and had a small negative effect on the portfolio.

In the quarter, the lack of weightings in these sectors (especially Materials and Information Technology) was initiated and had a small negative effect on the portfolio.

In the quarter, the lack of weighting in these sectors (especially Material and Information Technology) was a large contributor to the outperformance of the portfolio versus the index. The Financials sector also was a large contributor.

 

Cidel Canadian Total Return Mandate

Contributed by Cidel Asset Management Inc.

Albeit posting a solid 7.1% return, the Fund underperformed the Index in the quarter by 96 bps. The largest source of underperformance was security selection, while sector allocation was an overall positive contributor.

Negative security selection came from the Energy sector. In particular, Parkland declined 5.8%. This fuel distributor and fuel retailer suffered in the quarter due to a return to lockdowns and travel restrictions. In addition, the market appears to be lowering the growth outlook due to lack of acquisitions (similar to Couche-Tard). We believe these factors are transitory in nature and that acquisition growth will resume in the near future.

While not enough to offset the overall underperformance, security selection was positive in the Materials sector, with the position in agricultural input producer and retailer Nutrien up 11.5% in the quarter. Nutrien’s business fundamentals continue to strengthen with rising farm output prices. From a sector allocation perspective, the underweight in the underperforming Materials sector (due to continued weakness in gold producers) was the largest contributor.

Unfortunately, partially offsetting the materials positioning was the zero weight in the outperforming Healthcare sector. As you are aware, the healthcare label is a bit of a misnomer as the sector primarily consists of cannabis producers, which were the beneficiaries of the speculative excitement mentioned above. Note that the attribution of returns between stock selection and sector allocation are unusual this quarter (which can happen over short time periods).

Since the strategy focuses on individual stocks by employing a bottom-up, fundamental research strategy, over longer periods, we expect positive contribution to come primarily from stock selection.

 

Mawer Canadian Equity Mandate

Contributed by Mawer Investment Management Ltd.

The Mawer Canadian Equity Fund (the “Fund”) returned 8.4% before management fees, resulting in relative outperformance against the benchmark. The portfolio provided a positive return in the first quarter in a continuation of the themes that drove relative performance in Q4. Areas of strength during the quarter were tied to portfolio components most exposed to re-opening. Particularly, our energy holdings, Canadian Natural Resources reported another strong quarter with the improvement in oil prices and operating cost reductions. Elsewhere, Suncor Energy, had a strong fourth quarter, reporting lower production costs, improved refinery utilization and debt reduction. Furthermore, the bank stocks we owned – notably The Toronto-Dominion (TD) Bank and Royal Bank of Canada – benefitted given steepening yield curves and the prospect of greater economic activity.

Conversely, areas of weakness included technology stocks, which have faltered in March as rising bond yields have triggered concerns around their higher than historical valuations, especially in the United States where valuations in its technology sector appeared particularly stretched. This downturn in technology crossed the border and caused two of our larger technology holdings—legal software provider Dye & Durham and supply chain management software provider Kinaxis—to suffer in this environment. Dye & Durham continues to execute on its strategy of making acquisitions and consolidating its position in a fragmented market, but its stock pulled back after a phenomenal 2020. Kinaxis continues to benefit from the current environment, shining a focus on supply chain logistics software; however, the company’s guidance pointed to a softer outlook relative to expectations, causing the stock to drop.

Elsewhere, Ritchie Bros. Auctioneers experienced a much tighter used equipment market, and also reported changes that need to be made to internal financial controls to improve systems. Agnico Eagle Mines also experienced bearishness during the quarter. However, the company continues to reduce operating costs as well as an increase to their dividend in line with management's strategy of being more disciplined with capital allocation and returning more capital to shareholders.

Looking back over the full year ended March 31st – a period of time entirely comprised of the bounce-back – the portfolio has delivered considerably strong returns that have nonetheless failed to keep pace with the benchmark. Fundamentally, the portfolio has proven more resilient through the pandemic: the revenues and operating earnings of our portfolio companies – in aggregate – have been less volatile than those of the broader market … both on the way down and on the way up. It is this consistency, along with a risk management approach that prioritizes resilience, that explains the portfolio’s behaviour and return profile relative to that of its benchmark.

 

Mawer Canadian Small-Cap Mandate

Contributed by Mawer Investment Management Ltd.

The portfolio advanced 6.6% in the first quarter, lagging the index. As we’ve forewarned before, our portfolio tends to underperform on a relative basis during periods of market exuberance, and so far, this value/high beta rally has been no exception. Our investment philosophy leads us to invest in companies that are wealth-creating: earning a return on capital above their cost of capital over an economic cycle. To do so, companies we own need to have durable competitive advantages and able management teams. The result is a portfolio that prioritizes resilience and is less exposed to deep value (stocks that one would buy purely because they appear cheap on relative valuation metrics compared to the broader market) and commodity stocks, as often these companies do not possess the competitive advantages we look for, in favour of higher quality stocks. This portfolio tends to outperform in downturns, underperform in sharp upturns, and generally outperform over longer periods as the portfolio companies create more value over time than its comparative index companies.

In this context, our relative performance was hindered by the portfolio’s positioning within and underweight to the energy sector. Energy exploration and production companies, which we have a lack of exposure to partly because they struggle to earn sustainably high returns on capital, continued their rebound in the first quarter, driven by hopes of higher oil prices as the economy recovers. Meanwhile, technology stocks have faltered in March as rising bond yields have triggered concerns around their higher than historical valuations, especially in the United States where valuations in its technology sector appeared particularly stretched. This downturn in technology crossed the border and caused two of our larger technology holdings—legal software provider Dye & Durham and supply chain management software provider Kinaxis—to suffer in this environment. Dye & Durham continues to execute on its strategy of making acquisitions and consolidating its position in a fragmented market, but its stock pulled back after a phenomenal 2020. Kinaxis continues to take advantage of the pandemic, shining a focus on supply chain logistics software; however, the company’s guidance pointed to a softer outlook relative to expectations, causing the stock to drop.

Partially offsetting these negatives, our positioning within and significant underweight to the materials sector benefited the portfolio’s relative return. Traditional havens such as gold were battered this quarter as investors positioned themselves for an economic recovery (gold, alas, pays no dividends). But it wasn’t simply our lack of direct exposure to gold companies. Neo Performance Materials, a niche materials processing company, is one of our commodity-related holdings which does possess strong competitive advantages. Neo’s results came in significantly ahead of expectations on the back of a sharp rebound in its automotive and industrial end-markets. The company should also benefit from its exposure to global mega-trends, particularly the electrification of automobiles which should accelerate demand for their powders used to make magnets.

 

Mawer US Equity

Contributed by Mawer Investment Management Ltd.

The Mawer U.S. Equity Fund (the “Fund”) returned 1.6%, before management fees, resulting in relative underperformance against the benchmark. The portfolio provided a modestly positive return in the first quarter while lagging its benchmark in a continuation of the themes that drove relative performance in Q4.

Areas of strength during the quarter were tied to portfolio components most exposed to re-opening:

• The bank stocks we owned – notably JPMorgan and Wells Fargo – benefitted given steepening yield curves and the prospect of greater economic activity.
• Other companies also benefited from higher interest rates, such as derivatives exchange operator CME Group given its interest rate franchise.
• Within our technology holdings, Alphabet (Google) reported accelerating revenue growth and margin expansion as the company is benefitting from a rebound in advertising. Elsewhere, lab equipment, supplies and software provider Waters Corporation, had a strong fourth quarter led by decent performance in pharmaceutical and industrial end markets.

Areas of weakness during the quarter:

• The rise in discount rates hurt longer-duration companies whose valuations are most dependent on cash flow projections further into the future. Examples we own include Amazon (which had also been a beneficiary of “stay at home”), Visa, search technology company Elastic, and data analytics provider Verisk. The sell-offs were more notable when coupled with results that missed lofty expectations, e.g. Verisk.
• Furthermore, Verisk experienced a pullback after outperforming the broader market last year. Similarly, Insurance Auto Auctions (IAA), a leading global digital marketplace for vehicle buyers and sellers, lost some of its momentum from the fourth quarter.
• Less exposure than the benchmark to tougher, less competitively-advantaged business models such as banks and energy companies – all of which were among the best performing parts of the market over the period.

Looking back over the full year ended March 31st – a period of time entirely comprised of the bounce-back – the portfolio has delivered considerably strong returns that have nonetheless failed to keep pace with the benchmark. Fundamentally, the portfolio has proven more resilient through the pandemic: the revenues and operating earnings of our portfolio companies – in aggregate – have been less volatile than those of the broader market … both on the way down and on the way up. It is this consistency, along with a risk management approach that prioritizes resilience, that explains the portfolio’s behaviour and return profile relative to that of its benchmark.

 

Mawer International Equity

Contributed by Mawer Investment Management Ltd.

The Fund failed to keep pace with its benchmark in the first quarter, as it returned -0.28% against the benchmark returns of 2.10%, in a continuation of the themes that drove relative performance in the previous quarter (Q4).

Areas of strength during the quarter were tied to portfolio components most exposed to re-opening. The bank stocks we owned – notably Singapore’s DBS Group and Sweden’s Handelsbanken – benefitted given steepening yield curves and the prospect of greater economic activity. Door-lock manufacturer Assa Abloy benefitted given its exposure to new construction activity. And holdings such as luxury goods company LVMH and nutrition company Glanbia delivered good returns on expectations that headwinds faced during the pandemic would recede, e.g. in Glanbia’s case the re-opening of gyms and specialty nutritional stores that sell their products.

Areas of weakness during the quarter were mainly associated with an investment philosophy that prizes consistent, recurring revenue streams. These “boring” businesses abound in the portfolio, including Japanese drug store chain Tsuruha, industrial gas company Air Liquide given its utility-like cash flows, and exchanges such as Japan Exchange Group. The portfolio has less exposure than the benchmark to tougher, less competitively-advantaged business models such as energy, banks, shipping, and diversified mining companies – all of which were among the best performing parts of the market over the period.

Yet, the portfolio was also weighed down by specific holdings. The timing of our initiation in Autohome, China’s leading online platform for automobiles, was unfortunate as it was soon followed by a share issuance in Hong Kong that resulted in dilution. The offering allows the US-listed company to expand its investor base closer to its home market. We don’t, however, believe the company needed the additional capital, i.e. that the ample cash it already had on its balance sheet was sufficient to fund any near-term investments. Autohome is the clear market leader in China – it is responsible for 50% of total industry lead generation – and benefits from virtuous network effects and a scalable platform. We have continued to build our position on price weakness.

Companies reliant on future growth to justify their valuations were punished by earnings releases or guidance that missed expectations. Japanese IT consultant Nomura Research Institute, which despite confirming sustained order momentum and record-high operating margins, saw its stock price react negatively as expectations were evidently even higher. SimCorp, a company that provides mission-critical software to investment management organizations (like Mawer), issued more conservative guidance with its most recent results. Our investment thesis is indeed predicated on client and market share gains to justify its valuation, but we believe this is a short-term overreaction and have added to our position given a more reasonable valuation.

Looking back over the full year ended March 31st – a period of time entirely comprised of the bounce-back – the portfolio has delivered considerably strong returns that have nonetheless failed to keep pace with the benchmark. Fundamentally, the portfolio has proven more resilient through the pandemic: the revenues and operating earnings of our portfolio companies – in aggregate – have been less volatile than those of the broader market … both on the way down and on the way up. It is this consistency, along with a risk management approach that prioritizes resilience, that explains the portfolio’s behaviour and return profile relative to that of its benchmark.

 

Mawer Global Small-Cap

Contributed by Mawer Investment Management Ltd.

The Mawer Global Small Cap Equity Fund (the “Fund”) returned 3.1%, before management fees, resulting in relative underperformance against the benchmark. Overall, the pattern of returns in the portfolio has been consistent with our philosophy and expectations. The portfolio provided a modestly positive return in the first quarter while lagging its benchmark in a continuation of the themes that drove relative performance in Q4.

Areas of strength during the quarter were tied to portfolio components most exposed to economic re-opening, especially, technology value-added resellers, U.K-based Softcat and Nordic-Based Atea, delivered excellent results and upbeat guidance. Our investment thesis in both companies appears to be progressing as our research indicates they are among the larger players continuing to gain market share and are benefitting from the dual tailwind of stable software and more economically sensitive hardware demand. Elsewhere, Italian kitchen appliance company De’Longhi, had a strong start to 2021 driven by strong e-commerce sales while margins improved as their kitchen segment saw less price competition.

Conversely, areas of weakness during the quarter included underweight exposure to tougher, less competitively-advantaged business models such as banks and energy companies – all of which were among the best performing parts of the market over the period. New Work, an employment social network based out of Germany, had reasonable fourth quarter results, but still faces challenges in a pandemic-impacted environment. However, the company showcased good resilience and we are optimistic on what we view as dominant market positioning. Japan-based Broadleaf accelerated its investments in its next generation cloud software offering which compressed margins in the near-term, however we believe these investments will be an important driver of the company’s future growth as the new cloud offering adds potentially new revenue streams. Although some holdings had relatively weak performances during the quarter, we still believe in an investment philosophy that prizes consistent, recurring revenue streams. Examples of these “boring” businesses that held back portfolio performance in the quarter included Japanese drug store chains Tsuruha and Kusuri no Aoki.

Looking back over the full year ended March 31st – a period of time entirely comprised of the bounce-back – the portfolio has delivered considerably strong returns that have nonetheless not kept pace with the benchmark. Fundamentally, the portfolio has proven more resilient through the pandemic. It is this consistency, along with a risk management approach that prioritizes resilience, that explains the portfolio’s behaviour and return profile relative to that of its benchmark over this 1yr time frame.