Short Term Floating Rate Notes

Contributed by Canso Investment Counsel Ltd.

The Canso Short-Term Floating Rate Bonds portfolio (the “Portfolio”) returned 0.7% for the quarter, which was outperformance of 0.2% over the benchmark. The GE Capital floating rate issue continued to outperform, offset somewhat by underperformance of the Lloyds 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 Portfolio had maturities of Enbridge and an NHA MBS which was reinvested alongside interest payments in a new 5-year NHA MBS pool, short treasury bills, and TD Covered FRN 2023. The RBC Covered FRN 2020 was decreased to buy a new issue RBC Covered FRN 2022 that was a spread pickup of 22 basis points. The yield to maturity of the Portfolio declined to 2.2% from 2.5% due to credit spread tightening and a small decline in CDOR. Duration remains short due to the floating rate nature of the portfolio. The Portfolio continued to increase credit quality as it invested the proceeds of the Enbridge maturity in AAA rated covered bonds and NHA MBS. The Portfolio saw a movement of federal government sector and Canadian corporate sector into cash and equivalents as maturities in those sectors were temporarily invested in short term treasury bills.

Canso Corporate Value Bond

Contributed by Canso Investment Counsel Ltd.

The Corporate Value portfolios (the “Portfolios”) returned 0.9% to 1.2% in the quarter underperforming the benchmark by 1.5% to 1.8%. The Portfolios saw strong spread tightening in General Electric, Ford Motor Credit, and Maxar Technologies, offset by the accounts short duration and relative underperformance of floating rate notes. For the seven year period, the Portfolios achieved annualized performances of 6.7% to 7.0% which was 2.6% to 2.9% ahead of the benchmark respectively. Since inception, the Portfolios returned 8.4% to 8.8% on an annualized basis, outperforming the benchmark by 2.9% to 3.3%.

The Portfolios saw a significant movement of approximately 10% from the mid term to the short-term sectors due to the sales of Bombardier and Teva bonds, and the purchases of NHA MBS and other short-term floating rate notes. Duration shortened slightly (0.1 - 0.2 years) during the quarter driven by the sales of Bombardier and Teva bonds and the purchases of floating rate notes. The Portfolios yield declined by 0.6% due to an improvement in credit quality, general spread tightening, and lower yields on Canada’s across the curve.  Credit quality improved significantly during the quarter as declines of 4% in BB and Lower and 4% in BBB moved primarily into the AA & Higher sector.  The Portfolios’ Federal Government holdings increased due to purchases of NHA MBS during the quarter. This came at the expense of Canadian Corporate holdings, primarily driven by maturities and the sale of Bombardier bonds.

Canso Investment Grade Bonds

Contributed by Canso Investment Counsel Ltd.

The Investment Grade Bond portfolios (the “Portfolios”) returned 1.9% to 2.0% this quarter, flat with their benchmark. Performance was helped by continued outperformance from General Electric bonds, as well as relative outperformance from AT&T and Shaw long bonds. This was offset by continued underperformance from floating rates notes and some private placements. The three year returns in the Portfolios range from 3.4% to 3.5%. Since inception, the Portfolios have returned 4.3% outperforming the benchmark by 0.7%.

The Portfolios participated in three new issues during the quarter with two purchases of new 5-year NHA MBS pools and a new issue RBC Covered FRN due in 2022. The Portfolios also continued to increase their position in UniCredit and Lloyds Banking Group PLC. These purchases were primarily funded through maturities and some sales of long BBB’s. 

The term structure of the Portfolios was largely unchanged with small increases in the short term sector with small declines in the mid term and long term sectors. The duration of the accounts extended between 0 and 0.2 years during the quarter. Yields dropped in the quarter around 0.2% due to declines in both the underlying Canada yields and tightening credit spreads. This decline was in line with the Index. The Portfolios continued to increase their credit quality with sizable increases in AA & Higher due to purchases of NHA MBS, WTH, and RBC Covered Bonds. The Portfolios saw small increases in Federal Government due to new issue purchases of NHA MBS. Most of this increase came from a reduction in Canadian Corporates.

Mawer Canadian Large Cap Stocks

Contributed by Mawer Investment Management Ltd.

The S&P/TSX Composite Index (the “TSX”) returned 2.6% in the second quarter of 2019. Lower interest rates for longer remained the dominant theme of 2019 so far, propelling the global equity markets higher since the beginning of the year, despite the prevailing narrative of a slowdown in global economic growth and trade tensions between the U.S. and China. Most notably, the U.S. Federal Reserve seemed to confirm the market’s expectation that they could consider rate cuts later this year, causing bond yields to fall and gold to rally, while the U.S. dollar weakened relative to the Canadian dollar. Further, the lower discount rates have helped to boost higher-quality equities with longer sustainable growth runways. Information Technology was the highest returning sector over the period, supported by Utilities and Materials. Health Care stocks reversed some of its gains from Q1, while the Energy sector remains a weak spot in the Canadian stock market. 

The Mawer Canadian Equity Fund (the “Fund”) returned 2.0% before management fees, underperforming the benchmark by 0.6%. The Fund’s relative underperformance was primarily due to security selection. Energy is still a challenged sector in Canada, and several of our holdings including Suncor and smaller cap names like ARC Resources, Kinder Morgan and Peyto Exploration, lagged the broader energy sector. Outside of the energy sector, some of our Industrial holdings are being impacted by cyclical slowdowns. Richelieu Hardware is exposed to a slowdown in housing, higher consumer indebtedness, and slowing demand for renovations. Toromont, a heavy equipment dealer, may be seeing the signs of slowing global growth in the form of declining bookings and backlog. Sector allocation provided some relief to the positive side, with the Fund benefitting from an overall underweight to Energy stocks, overweight to Industrials and lack of exposure to Health Care, the bottom performing sector. 

Top contributors to the Fund’s performance over the quarter included Shopify, Canadian Pacific Railway and TD Bank. Shopify continues to exceed expectations, reporting impressive growth numbers and breakeven cash flow. Evidence also indicates that the high level of spending to acquire new customers and improve the Shopify platform is paying off, as recent results show that revenue from customers added in previous years grew by more than 100%. Canadian Pacific Railway reported a revenue increase driven by favourable pricing and foreign exchange movements, while management has maintained double-digit earnings growth guidance for the year. TD Bank reported results that can be perceived as an improved quarter relative to Q1, which appears to be well received by investors. 

On the negative side, the largest detractor was Saputo, while the above-mentioned Toromont (see comment) and Kinder Morgan followed closely behind. Saputo is working through several headwinds including aggressive fluid milk pricing by competitors in Canada, curtailed exports from the U.S. market due to tariffs imposed by Mexico and China. The weakness in Kinder Morgan seemed to have stemmed from a strategic review that did not result in any asset dispositions, or an outright sale of the company, as was expected from the market.  

QV Investors Canadian Large Cap Stocks

Contributed by QV Investors Inc.

The QV Canadian Equity Strategy (the “Strategy”) returned 0.6% in the quarter versus 2.6% for the S&P/TSX Composite Total Return Index (TSX). The one-year return was -3.0% for the strategy compared to 3.9% for the benchmark.

Positive contributions from the strategy’s utilities and information technology holdings were largely offset by declines in the energy sector. The Strategy’s financials and industrials holdings lagged the benchmark sectors, contributing to underperformance on a relative basis.

AltaGas Ltd. was the top contributing investment over the quarter, as the company reported strong first quarter results in May and announced the sale of a midstream asset. The company has demonstrated continued progress on its deleveraging plan and recently exported its first shipment of propane from its newly constructed Ridley Island terminal.

The largest detractors were ARC Resources Ltd. and SNC-Lavalin Group Inc. ARC shares remain under pressure alongside commodity prices. However, with its strong balance sheet we continue to have confidence in ARC’s ability to manage through difficult markets.

Shares of SNC felt further pressure after reporting weaker than expected Q1 financial results. The company continues to work through contract issues from last year, but has recently won several new projects within its highly profitable engineering and design division. Furthermore, a change of CEO made during the quarter is a positive first step towards expediting the process of value realization.

New investments over the quarter enhanced diversification within the Strategy. We introduced exposure to the telecommunications space and the real estate sector with purchases of Telus Corp. and Choice Properties REIT, respectively.

Telus is one of three main wireless providers in Canada. This strong franchise has a long track record of growing earnings and cash flow per share. Telus represents reasonable value relative to other defensive opportunities and provides a dividend yield of 4.7%. Choice Properties manages a high-quality real estate portfolio comprised mainly of grocery-anchored properties. Its relationship with Loblaws contributes to the stability of its cash flows. Choice provides sector diversification and an attractive dividend yield of 5.4%. We also added Magna International Inc. to the portfolio. Auto parts manufacturers continue to display attractive valuations. We saw an opportunity in Magna to improve the Strategy’s balance sheet metrics and diversify its auto holdings.

We reduced our positions in Bank of Nova Scotia and Canadian Imperial Bank of Commerce. Although their capital ratios are well-above regulatory minimums, they have been slower to build up capital when compared to other big banks. The dividend yields and valuations of these companies remain attractive, but we are more mindful of the ability to build capital reserves in the later stages of the credit cycle.

As the market cycle ages, we believe it is increasingly important that the portfolio provides downside protection. To achieve this, we continue to focus on healthy balance sheets characterized by sensible debt levels in relation to cash flow stability. This is particularly important when we assess the quality of cyclical companies. We continue to emphasize diversification across sectors with a bias towards high quality, defensive companies (i.e. good cash flow and earnings visibility). The Strategy remains notably overweight within the utilities and consumer staples sectors.

The Strategy trades at a 20% discount to its 15-year average price to book multiple. This implies a healthy return when multiples eventually revert to the mean, even without the additional benefit of book value growth generated by our companies in the meantime.

Mawer Canadian Small Cap Stocks

Contributed by Mawer Investment Management Ltd.

Lower interest rates for longer remain the dominant theme of 2019 so far, propelling global equity markets higher since the beginning of the year despite the prevailing narrative of a slowdown in global economic growth and trade tensions between the U.S. and China. Most notably, the U.S. Federal Reserve seemed to confirm the market’s expectation that they could consider rate cuts later this year, causing bond yields and gold to rally, while the U.S. dollar weakened relative to the Canadian dollar. Further, lower discount rates have helped to boost higher-quality equities with longer sustainable growth runways. Despite these tailwinds, the S&P/TSX SmallCap Index couldn’t follow-up on the blistering pace it set in Q1, returning -0.3% over the past three months weighed down by continued weakness within the Energy sector and a stronger Canadian dollar.

The Mawer New Canada Fund (the “Fund”) returned 5.6% in the quarter before management fees, outperforming the benchmark by 5.8% due to both security selection and sector allocation. The Energy sector was a significant source of outperformance during the quarter. In addition to the Fund benefitting from a significant underweight to the worst performing sector, the Fund’s Energy holdings also outperformed those of its benchmark peers, mostly due to not owning some of the bottom performers in the sector, while the companies the Fund did own, Parkland Fuel, ShawCor and CES Energy, outperformed the broader sector’s return.

Many of the top contributors during the quarter are among the largest weights in the portfolio and are good examples of high-quality businesses with effective management teams and significant growth runways. Collision repair shop operator Boyd Group continued to execute effectively on its growth-by-acquisition strategy, and management has indicated that opportunities to deploy capital at attractive rates of return remain plentiful. Restaurant operator MTY Group released strong results backed by attractive synergies from recent acquisitions; the Fund added to its position on what we thought to be an undemanding valuation. Altus Group, Canada’s largest independent provider of commercial real estate consulting and advisory services, bounced back as it reported double-digit growth in its Analytics division and strong recurring revenue growth.

On the negative side, Savaria Corporation, Richelieu Hardware and CES Energy were the largest detractors from performance. Savaria Corporation is one of North America’s leading residential mobility aid companies. It has struggled to integrate recent acquisitions. Richelieu is a distributor of specialized hardware and other home renovation-related products in Canada and the U.S. Slowing renovation spend and the loss of a larger customer twelve months ago drove negative sentiment. CES was unable to escape the negative headwinds facing its industry, while the market seems to be losing some confidence in whether management can deliver margin improvements.

Mawer US Equity

Contributed by Mawer Investment Management Ltd.

The U.S. equity market as measured by the S&P 500 Index (the “S&P”) gained 2.0% during the second quarter of 2019. Lower interest rates for longer remained the dominant theme of 2019 so far, propelling the global equity markets higher since the beginning of the year, despite the prevailing narrative of a slowdown in global economic growth and trade tensions between the U.S. and China. Most notably, the U.S. Federal Reserve seemed to confirm the market’s expectation that they could consider rate cuts later this year, causing bond yields to fall and gold to rally, while the U.S. dollar weakened relative to the Canadian dollar. Further, the lower discount rates have helped to boost higher-quality equities with longer sustainable growth runways. Financial stocks led the way, followed closely by Materials and Information Technology companies. All performance values are provided in Canadian dollar terms, unless stated otherwise.

The Mawer U.S. Equity Fund (the “Fund”) returned 4.2%, before management fees, resulting in a relative outperformance of 2.2% over the benchmark. Outperformance can primarily be explained by stock selection, as the Fund’s holdings of high-quality companies with strongly perceived competitive advantages continued to thrive. Most notably, within Industrials and Information Technology, while the holding of Alphabet and not holding some of the top performers within Communication Services like Facebook and Walt Disney, slightly detracted from relative performance. Additionally, a slight overweight to Financials and lack of exposure to Energy further boosted relative performance.

From a security level perspective, global markets company CME Group, wholesale car auction company KAR Auction Services and data analytics and risk assessment firm Verisk Analytics were the top contributors. CME continues to experience the benefits from their acquisition of NEX, with their revenue increasing approximately 6% with higher average daily volumes on their exchanges due to the acquisition. KAR managed above average returns over the quarter, although posting weak financial results. Further, KAR finalized the spin-off of its salvage business to be named IAA Inc. during the quarter. IAA has been a leader in total loss claim solutions, and damaged and salvage vehicle auctions in North America and the United Kingdom. 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.

On the negative side, one of the last quarter’s top contributors, Waters Corporation was the largest detractor, followed closely by Alphabet and Verizon. Waters released earnings that were deemed below expectations due to a new policy enacted in China to centralize purchasing of generic medicines. Additionally, management retuned their full-year guidance to a lower level. Growing regulatory scrutiny from governments and regulators regarding antitrust concerns has put some strain on Alphabet’s share price as the Department of Justice is preparing to launch a fresh antitrust probe. Verizon reported revenues and earnings that were well perceived after customers started to upgrade to their unlimited plans. However, volumes remained flat in an environment where investors appear to reward growth more handsomely.

Mawer International Equity

Contributed by Mawer Investment Management Ltd.

The Mawer International Equity Benchmark (the “Benchmark”) posted a 0.73% return during the quarter. Lower interest rates for longer remained the dominant theme of 2019 so far, likely a major contributing factor to a sharp decline in major sovereign bond yields and a rally in equity markets. Risks remain including a slowdown in global economic growth and trade tensions between the U.S. and China. Most notably, the U.S. Federal Reserve seemed to confirm the market’s expectation that they could consider rate cuts later this year. The translation effect of a strong Canadian dollar led to tempered returns for most foreign asset classes over the quarter. Benchmark performance was led by Industrials and Financials while the Real Estate and Energy sectors were the bottom performing. Geographically, the top performing region was Europe Ex. U.K. while Asia Pacific Ex. Japan was the bottom performing region over the quarter. All performance values are provided in Canadian Dollar terms (unless otherwise stated).

The Mawer International Equity Fund (the “Fund”) gained 3.06% during the quarter (before management fees), outperforming the Benchmark by 2.33%. The Fund’s relative performance was driven by positive security selection in Industrials and Financials. Industrials was the largest contributor to Fund performance as many of the Fund’s strong performers from Q1 continued into Q2 including Spirax-Sarco Engineering PLC and IWG Plc. In our assessment, IWG Plc benefited from the sale of its Japanese business in what was viewed as an attractive deal. Other notable strong performers in Industrials included RELX PLC and Intertek Group plc. Relative performance in Financials benefited with strong performance from our largest holding Aon plc. Meanwhile, negative security selection in Consumer Staples slightly detracted from an overall positive security selection as Glanbia Plc and Seven & I Holdings Co., Ltd underperformed during the quarter. Positive sector allocation contributed to relative performance due to an overweight in Industrials, the benchmark’s best performing sector over the quarter. From a geographic perspective, positive security selection in the United Kingdom was the driver of relative performance as this region benefited from 3 of the funds top 5 contributors.

Top contributors over the quarter included Aon plc, Sika AG and Spirax-Sarco Engineering PLC. Aon was again the Fund’s top performer over the quarter as the company reported good overall organic growth despite some FX headwinds. The specialty chemicals and materials company Sika AG, in our assessment had a good start to 2019 with Q1 sales higher and acquisitions added value. Spirax-Sarco Engineering PLC’s past performance earned them a position in the FTSE 100 index, to which we attribute some recent unusually strong share performance. We trimmed our position at what we believe is an attractive price.

Meanwhile, the largest detractors during the quarter included Bunzl plc, Glanbia Plc and Seven & I Holdings Co., Ltd. Bunzl plc reported slowing organic growth in Q1 2019, in our assessment investors reacted to this rare miss for Bunzl, contributing to the negative performance over the quarter. Glanbia Plc saw a drop in its branded whey business' volumes, part of the fall was attributed to seasonality, nevertheless the market reacted negatively to this surprise drop. In our assessment, Japan’s largest convenience store chain operator Seven & I Holdings Co., Ltd continues to feel the impact of Japan’s declining population which is resulting in scarce labor and rising wages for lower wage employees, without a corresponding increase in product prices.

Mawer Global Small Cap Equity

Contributed by Mawer Investment Management Ltd.

The Mawer Global Small Cap Equity Benchmark (the “Benchmark”) posted a -0.5% return during the quarter. Lower interest rates for longer remained the dominant theme of 2019 so far, propelling global equity markets higher since the beginning of the year, and despite the prevailing narrative of a slowdown in global economic growth and trade tensions between the U.S. and China. Most notably, the U.S. Federal Reserve seemed to confirm investor’s expectation that they could consider rate cuts later this year, causing bond yields to fall and gold to rally. Despite these tailwinds, the Benchmark couldn’t follow-up on the blistering pace it set in the first quarter of 2019, weighed down by continued weakness within the Energy sector and a stronger Canadian dollar. On the positive side, Utilities and Industrials managed positive returns. Geographically, regions were mixed, with Latin America leading the way and Asia Pacific ex. Japan the worst performer. All performance values are provided in Canadian dollar terms unless otherwise stated.

The Mawer Global Small Cap Equity Fund (the “Fund”) gained 4.5% during the period, before management fees, outperforming the Benchmark by 5.0%. The Fund’s relative performance was driven by security selection – most notably the outperformance of the Fund’s holdings within Information Technology, with Bechtle AG leading the gains in the sector. Positive allocation further boosted relative performance resulting from the Fund’s underweight to Energy, the worst performing sector. Geographically, Europe ex. U.K. was a significant source of outperformance as the Fund’s significant overweight to the third best region drove relative performance. Additionally, the Fund’s European holdings outperformed those of the benchmark.

The top contributors during the period were Addtech AB, Bechtle AG and Softcat. Addtech is a Nordic-based conglomerate of industrial component manufacturing and distribution companies, selling high-tech products and solutions to customers globally. The company has been reporting growth figures that exceed the long-term trends in the industry, bolstered by recent acquisitions. Management has further indicated that they see opportunities for additional acquisitions and that demand seems to remain strong in most of their business segments. Bechtle is a German value-added reseller and IT service provider. The company reported strong earnings results and above average organic growth, the company’s acquisition of French based Inmac added additional inorganic growth. Softcat is a U.K. based value- added reseller of IT software and hardware. Management’s excellent track record of execution continued in Q2 with management raising guidance for the year. This continued execution and improved guidance helped support the share price

Meanwhile, XP Power, Aramex and HiQ International detracted from performance the most. XP Power is a provider of power converters and supplies. The company reported first quarter results that were weaker than expected, including organic contraction on the back of weakness in the semi-conductor industry. Aramex is an asset light parcel carrier and freight forwarder based in the United Arab Emirates. The company reported results that were below expectations which impacted the share price. Scandinavian-based IT consultant, HiQ, reported quarterly results that were at the low-end of market expectations. Management has indicated a slowing in new business demand in the IT sector, particularly with its public sector customers.