Short Term Floating Rate Notes

Contributed by Canso Investment Counsel Ltd.

The Short Term Floating Rate Bond portfolio (the “portfolio”) returned 2.7% in the quarter and outperformed the benchmark by 1.8% over the same time frame. The portfolio is significantly invested in corporate issues that have tightened since their wide spreads in March, at the height of the COVID-19 pandemic. Outperformance is attributed to spread tightening in the BMO, RBC and TD covered bonds as well as VW Credit Canada. For the one year period, the portfolio returned 2.4% and since inception, the 2.1% return represents 0.6% of outperformance.

In secondary trading, the portfolio added positions in a BMO NHA MBS, Enbridge, Royal Bank of Scotland and Verizon. To raise proceeds against these purchases, the portfolio sold Canadian bank notes. In addition, the portfolio tendered a large position in a Lloyds Bank PLC floating rate note through direct negotiations between the issuer and Canso.

Opportunistic buying saw the portfolio further increase its allocation to BBB rated securities. The weight in BBB rated securities rose 8% to end the quarter at 24.4%. Despite this shift, the portfolio yield fell during the quarter due to tightening credit spreads. Duration remained unchanged at 0.1 years due to the floating rate nature of the portfolio.

Canso Corporate Value Bond

Contributed by Canso Investment Counsel Ltd.

The portfolio returned between 12.1% to 12.8% for the quarter, exceeding the benchmark by between 4% to 4.7%. Since March 23rd U.S. investment grade and high yield spreads rallied 2.41% and 4.43%  respectively. Holdings in Avis, Boeing, Cenovus Energy, Continental Resources, Ford Credit, Hertz, Occidental Petroleum and Suncor Energy performed well. Detractors included Black Press, BZ Holdings and Postmedia.

Canso took advantage of wider credit spreads in March, April and May marking one of the busiest transactional periods in Canso history. Initially the portfolio sold high quality NHA MBS, then BMO, RBC and TD bank paper, and Lloyd's Bank floaters back to the issuer. Proceeds were redeployed to investment grade and high yield issues, the majority in the USD market, at wider spreads. Significant additions included Avis, Boeing, Hertz, Spirit and oil and gas names including Cenovus, Continental Resources, Occidental Petroleum and a Suncor CAD new issue. We added to Bombardier on weakness and participated in airline new secured issues for Air Canada and American Airlines.

As a result of opportunistic purchases in a market where investors were compensated for the risk of holding lower quality credit, non-investment grade holdings increased to between 63.2% and 65.2%. The portfolio took advantage of wider credit spreads by selling high quality NHA MBS and bank paper. Floating rate holdings fell and foreign issuer and foreign currency holdings increased. Duration increased as wider spreads more than compensated for the risk of owning longer term fixed rate securities.

Canso Investment Grade Bonds

Contributed by Canso Investment Counsel Ltd.

The Canso Investment Grade Bond portfolio (the “portfolio”) returned between 10.1%-10.6% in the quarter, which was well ahead of the 8.1% return for the benchmark, as investment grade bonds rallied off March lows. Longer duration bonds were strong performers as they benefited the most from spread tightening and falling benchmark yields. Canso was very active in the quarter and took advantage of many opportunities that presented themselves. Opportunistic purchases of TransCanada, Suncor, Boeing and Hertz ABS have all performed well.

Opportunities in new issues and secondary markets drove higher than normal levels of portfolio turnover. In certain cases, holding periods were short as credit markets rapidly recovered from the wides in March. In the U.S. market, the more significant purchases were in Broadcom, Boeing, and some Hertz ABS issues. In the Canadian market, we purchased new issues of Suncor Energy, TransCanada Pipelines and Highway 407. Sells included some recent purchases including Exxon Mobil, Oracle, Coca-Cola, UPS and Target. We also sold down positions in Royal Bank of Canada and Cogeco as well as negotiated the sale of the Lloyds Bank floating rate issue back to the issuer. Finally, the PSPIB-RE Summit amortizer matured.

The weight in BBB rated issuers increased over the quarter (with the exception of the allocation to the Compass Balanced Growth Portfolio) as we found attractive value opportunities in names like TransCanada, Suncor and Boeing. Despite this shift, the portfolio yield fell due to tightening credit spreads. Portfolio duration fell as we took sales of many longer duration USD issues purchased in March. Much of the proceeds were reinvested in mid term issues that offered better relative value. The reduction in foreign issuers was primarily attributable to the Lloyds Bank floating rate issue being tendered.

Mawer Canadian Large-cap Stocks

Contributed by Mawer Investment Management Ltd.

The performance of the Canadian Equity Fund over the first half of 2020 has remained consistent with our expectations given our investment approach. While the portfolio protected capital during the first quarter’s downturn, the strong market rebound in the second quarter expectedly led to the Fund participating with a +11.7% return but ultimately lagging the S&P/TSX Composite Index return of 17.0%. Our focus of investing in wealth-creating companies run by excellent management teams has historically fared well in times of market turmoil, however we fully appreciate that the same portfolio may lag during times of sharp recovery. We believe our approach to building resilient portfolios will add value over longer time periods.

The portfolio’s underperformance was largely due to its lack of direct exposure to precious metals for most of the quarter. Aggressive stimulus efforts have led to expectations of a future inflationary environment ultimately allowing assets considered to be an inflation-hedge, such as gold, to rally. The strong performance of precious metals led to the materials sector posting a +42% return for the quarter. In Q2, participation in the bounce-back was broad as most securities we held delivered positive returns. Shopify continued to benefit from the e-commerce tailwind and briefly became the largest holding in the index over the second quarter. High-quality technology businesses such as contact centre management software provider Enghouse and diversified software company Constellation continued to be well-rewarded. Furthermore, unlike other financial holdings which have struggled in the recent environment, TMX Group has benefitted from the volatility of markets.

Yet, many of the steadier businesses that provided ballast to the portfolio in March had lacklustre returns in Q2. Examples include telecommunications company Rogers, food retailer Loblaw Companies and data aggregator Thomson Reuters. While underwhelming, none of these were catastrophic. But in an environment in which markets had such a strong rally, these decidedly more “boring” businesses didn’t keep pace and weighed on the relative return of the portfolio.

Despite the market’s strong rebound in the second quarter and much more bullish sentiment relative to March, we’ve been comfortable with the adjustments we made earlier in the year. In other words, activity within the portfolio in Q2 has been modest and directionally consistent with the activity in Q1. We continued with broad-based reduction within financials. Bank of Nova Scotia and Bank of Montreal were further trimmed, as were Manulife Financial and IA Financial Corp. Inc. A modest reduction in Brookfield Asset Management (BAM) was made. We remain comfortable with BAM’s assets and management, but its weight in the portfolio as well as sizable exposure to office properties and malls led to its reduction.

Cidel Canadian Total Return

Contributed by Cidel Asset Management Ltd.

The “Cidel Canadian Total Return Fund” (the “portfolio”) underperformed the Index by a relatively wide margin, gaining just 9.9% for the quarter. The underperformance stems primarily from two main factors: 1) the spectacular gains from non-dividend paying Shopify, which was up 119% in the quarter and accounts for nearly 5% of the Index, and 2) the lack of exposure to the high-flying gold and precious metals industry which was up roughly 53% during the quarter. On the positive side of the spectrum, the portfolio’s holdings in the Consumer Discretionary sector, particularly Canadian Tire and Restaurant Brands recovered more rapidly than the market (of course they also sold off harder than the market). Also, although the portfolio did not own Shopify, it’s largest Info-Tech holding, Enghouse Systems, gained 67.0% during the quarter on increased demand for its video conferencing software.

As mentioned above, there were two primary sources of underperformance relative to the benchmark in the second quarter: First, security selection in the Information Technology sector detracted roughly 1.44% of relative performance and being underweight the best performing sector in the Index detracted another 0.42%, for a total of 1.86% of relative underperformance. Despite a very strong return from the portfolio’s largest technology holding, Enghouse Systems (67% return during the quarter), this did not keep up with the spectacular 119% return for Shopify, which had an average weight in the Index over the quarter of 4.8% (and as of quarter end is 6.8% of the Index). Since the stock does not pay a dividend, and likely will not pay a dividend in the foreseeable future, we are forced to watch the stock from the sidelines. The relatively modest return for Open Text of just 17.7% in the quarter also contributed to the relative underperformance, but the stock also did not see the same level of declines as the Index in the first quarter.

Second, and more importantly, was the lack of exposure to the gold mining industry for much of the quarter. Together, the underweight in the Materials sector and security selection within the sector contributed roughly 3.20% of relative underperformance. This is a sector of the market that is notorious for misallocation of capital, and given the volatile nature of the business, sustainable growth of the dividend (with particular emphasis on “sustainable”) is difficult, if not impossible. On the positive side of the ledger, the relatively large positions in Parkland Corp and Pembina Pipelines helped to augment security selection in the Energy sector, despite some very strong gains amongst the E&P names in the Index. Also, the two holdings in the Consumer Discretionary sector, Canadian Tire and Restaurant Brands rebounded more strongly than the sector in the quarter. Two of the lowest-performing sectors in the Index for the quarter were Utilities and Financials. The portfolio’s underweight positions in these sectors also aided relative returns.

Cardinal Canadian Equity

Contributed by Cardinal Capital Management Ltd.

Performance of the portfolio lagged in the second quarter gaining 9.93% for the quarter. Two primary factors for trailing the index were: not having exposure to Information Technology, or more specifically, Shopify, which was up 122% in the quarter and not having exposure to Materials, which was up 42% due to renewed interest in gold in these uncertain economic times. Excluding these two sectors would have resulted in portfolio performance in-line with the index. Given our value style of investing and emphasis on dividend paying stocks, owning these two sectors is challenging. With Shopify, the valuation was already expensive and throughout the quarter, the valuation expanded taking it from expensive to extremely expensive. With the Material sector, we rarely invest in this sector as the long term value added of owning this sector is minimal with higher than average volatility.

The Financial, Consumer Discretionary and Real Estate sectors were added to in the quarter. Opportunities were available following the bottom of the market to continue to purchase some good undervalued stocks in these sectors. Additions were primarily the banks in the Financial sector, Canadian Tire Corp. in the Consumer Discretionary sector, and Boardwalk and Granite REITs in the Real Estate sector. While the environment has certainly changed with respect to retail and office real estate in particular, we felt that the market reaction was overdone for some high quality REITs in areas like multi-family residential and industrial properties. People still need a place to live and industrial properties, particularly those with warehouses in their portfolio, continue to do well. Rent collection remained close to 100% for Boardwalk and Granite in their last quarter.

The overall Energy sector weighting fell during the quarter as part of a continuing effort to lower the exposure to exploration and production companies while increasing the pipeline exposure. The oil outlook remains quite uncertain with the risk of demand declining again if some regions decide to reverse course and shut down non-essential businesses again. Other smaller decreases were made to the Communication Services and Utilities sectors. As these sectors had held up well in the downturn, their weightings were slightly reduced and reallocated to the Financial, Consumer Discretionary and Real Estate sectors where there is better long-term value.

Mawer Canadian Small-cap Stocks

Contributed by Mawer Investment Management Ltd.

The Mawer New Canada Fund advanced +26.1% in the second quarter, lagging the S&P/TSX Small Cap Index return of +38.5%. Since its inception, our Canadian small cap strategy’s behaviour has been largely consistent with our expectations and our investment philosophy. So far, 2020 has been no exception. Our focus on competitively advantaged companies result in revenues that tend to drop less in recessions, leading to downside protection in market downturns, such as the first quarter of this year. As well, these competitively advantaged companies tend to create greater wealth than the average company in the index, leading to higher long-term compounding wealth. Where this strategy falters are in those short periods when markets are exceptionally exuberant that a worse outcome did not occur. Then, distressed companies skyrocket in value as an economic recovery makes bankruptcy more remote. We were pleasantly surprised by how much our portfolio relatively kept up, losing a little over 12% in relative value.

In Q2, participation in the bounce-back was broad as most securities we held delivered positive returns. High-quality businesses with effective management teams and significant growth runways such as contact centre management software provider Enghouse and collision repair shop operator Boyd continued to be well-rewarded. Businesses that deductively benefit from the crisis such as laptop security company Absolute Software, supply chain software company Kinaxis, and healthcare logistics company Andlauer, also saw their stocks perform strongly. On the other hand, the reverse is true for companies impacted by the pandemic's negative effects, such as MTY, as restaurants and other consumer-facing businesses have been shut down. For MTY, the narrative has changed massively since the lockdowns in mid-March from a capital-light franchisor with a proven growth-by-acquisition strategy, to an indebted restaurateur facing same store sales declines and possible franchisee closures. We still like the business’ prospects long-term but reduced our position in the quarter.

On a relative basis, the strength in precious metals and our lack of exposure to these companies coupled with the portfolio’s cash drag were the largest detractors to our relative return. The bounce in higher beta companies did also hurt relative performance, though offset by a surprising number of our companies that were beneficiaries of the economic dislocation.

Activity within the portfolio in Q2 was relatively quieter and mostly directionally consistent with the activity in Q1. Notably,  we trimmed top-weighted holding Enghouse given its strong performance caused the position size to continually bump up against our self-imposed single-security limit of 6%. We continued to reduce restauranteur MTY as we felt further information on how MTY's business model was handling the shutdowns showed a slightly worse situation than we initially anticipated.We continued to add to existing holdings with more defensive characteristics that trade at attractive valuations. Examples include heating oil and natural gas liquids tank manufacturer TerraVest, Knight Therapeutics, Colliers International, and WPT. Finally, we continued to emphasize companies with internet- or software-based businesses, especially those embedded in their customers’ processes.

Mawer US Equity

Contributed by Mawer Investment Management Ltd.

Over the past decade, the Mawer U.S. Equity Fund’s behaviour has been largely consistent with our expectations and investment philosophy. So far, 2020 has been no exception. A focus on wealth-creating companies run by excellent management teams resulted in downside protection relative to the benchmark during the first quarter’s drawdown, as it did in prior down-markets such as 2011 and 2018. By contrast, the portfolio’s advance of +13.7% during the most recent quarter was trailing the S&P 500 Index return of +15.4% The trade-off to a portfolio that has tended to preserve capital historically is that it may not fully keep up during periods of strongly rising markets.

In Q2, participation in the bounce-back was broad as most securities we held delivered positive returns. Capital-light business models that combine recurring revenues with reasonable balance sheets and avenues for growth continued to be well-rewarded. Microsoft stands out in this regard, but some of our financial holdings fit this mould too: insurance broker Marsh & McLennan and financial data provider S&P Global. Holdings with e-commerce tailwinds also paid off, in the form of fast-growing technology companies such as Amazon.

Yet, many of the steadier businesses that provided ballast to the portfolio in March had lacklustre returns in Q2. Health care company Johnson & Johnson; as well as telecommunications company Verizon and consumer goods supplier Hershey. While underwhelming, none of these were catastrophic. But in an environment in which markets had such a strong rally, these decidedly more “boring” businesses didn’t keep pace and weighed on the relative return of the portfolio. The only stock with a double-digit negative return over the period was bank Wells Fargo as reported lower revenues and earnings while also announcing a dividend reduction. Additionally, companies the Fund did not own, weighed on relative performance as Apple and Facebook’s stock prices rebounded significantly.

Mawer International Equity

Contributed by Mawer Investment Management Ltd.

Over the past decade, our international equity strategy’s behaviour has been largely consistent with our expectations and investment philosophy. So far, 2020 has been no exception. A focus on wealth-creating companies run by excellent management teams resulted in downside protection relative to the benchmark during the first quarter’s drawdown, as it did in prior down-markets such as 2011 and 2018. By contrast, the portfolio’s advance of +10.6% during the most recent quarter was just shy of the International Equity Benchmark’s return of +11.1%. The trade-off to a portfolio that has tended to preserve capital historically is that it may not fully keep up during periods of strongly rising markets.

In Q2, participation in the bounce-back was broad as the majority of securities we held delivered positive returns. Capital-light business models that combine recurring revenues with reasonable balance sheets continued to be well rewarded. The two exchange operators we own stand out in this regard – Deutsche Boerse and Japan Exchange –given their dominant market positions and that market volatility results in more trading through their platforms. Holdings with tailwinds emanating from increased online activity also paid off, in the form of Chinese gaming giants Tencent and NetEase, as well as Netherlands-based payments processor Adyen. And a few of our holdings that had been punished in the first quarter bounced back strongly as they demonstrated results that reinforced resilience, such as Bunzl, a distributor of recurring consumables such as gauze for hospitals and cutlery in grocery stores.

Yet, many of the steadier businesses that provided ballast to the portfolio in March had lackluster returns in Q2. Examples include Japanese staples TSURUHA, and Seven & I as well as health care companies Roche and Novartis. While underwhelming, none of these were catastrophic. But in an environment in which markets had such a strong rally, these decidedly more “boring” businesses didn’t keep pace and weighed on the relative return of the portfolio. The only stock with a double-digit negative return over the period was on-premise caterer Compass Group as it continues to face an uncertain future given that its clients include universities, stadiums, museums, and corporate offices.

Mawer Global Small-cap Equity

Contributed by Mawer Investment Management Ltd.

Over the past decade, the Mawer Global Small Cap Fund’s behaviour has been largely consistent with our expectations and investment philosophy. So far, 2020 has been no exception. A focus on wealth-creating companies run by excellent management teams resulted in downside protection relative to the benchmark during the first quarter’s drawdown, as it did in prior down-markets such as 2011 and 2018. By contrast, the portfolio’s advance of +16.7% during the most recent quarter lagged the Benchmark’s return of +19.5%. The trade-off to a portfolio that has tended to preserve capital historically is that it may not fully keep up during periods of strongly rising markets.

In Q2, participation in the bounce-back was broad as the majority of securities we held delivered positive returns. Capital-light business models that combine recurring revenues with reasonable balance sheets and avenues for growth continued to be well-rewarded. Italian small appliance manufacturer De’Longhi stands out by continuing to hold a net cash balance sheet, while benefiting from increased work-from-home trends. Holdings with e-commerce tailwinds also paid off, in the form of international express and logistics company Aramex and social-networking company New Work.

Yet, many of the steadier businesses that provided ballast to the portfolio in March had lacklustre returns in Q2. Examples include Japanese staples Kusuri No Aoki and Tsuruha. While underwhelming, none of these were catastrophic. But in an environment in which markets had such a strong rally, these decidedly more “boring” businesses didn’t keep pace and weighed on the relative return of the portfolio. The only two stocks with double-digit negative returns over the period were ticketing company CTS Eventim and exhibition event designer Pico Far East, as the COVID-19 pandemic has started to impact demand for both live music events and exhibition shows.