Canso Corporate Value Mandate

Contributed by: Canso Investment Counsel Ltd.

The portfolio returned 0.5% in the quarter, 0.3% ahead of the Benchmark Index. Mid-term and long-term bonds held firm in Canada while short-term bonds were negatively impacted by rising rates in the front-end. Despite having a significant overweight to short-term bonds, the portfolio was able to outperform the Index due to security selection and a large weight in floating rate notes. Bonds issued by Bombardier, Delta Airlines and Spirit Aerosystems outperformed in the period, lifting the portfolio higher. Floating rate notes have been defensive in a rising rate environment and benefit over time from increasing coupon rates.

For the one year period, the portfolio returned -6.4% and over five years the 6.7% return was 5.4% ahead of the Index. Since inception, the 8.6% return represents 4.5% of added value.

Canso Investment Grade Mandate

Contributed by: Canso Investment Counsel Ltd.

The portfolio returned 0.0% in the quarter, 0.2% behind the benchmark. Year-to-date the -11.0% return is 0.2% behind the benchmark. Shorter than benchmark duration was a benefit offset by weakness in AT1 holdings. The 1.9% five year return is 0.8% ahead of the benchmark. 

Since inception, the value added is 1.0% per annum.

Cardinal Canadian Equity Mandate

Contributed by: Cardinal Capital Management Inc.

The portfolio posted a negative return of 1.28% in the quarter, modestly better than the S&P/TSX Total Return Composite return of negative 1.41%. Year-to-date, One Year and Two Year performance continue to show impressive gains over the benchmark returns. 

In the quarter, the portfolio led in the Consumer Staples and Materials sectors (Exhibit 2). Strong gains from Saputo (+17.9%), following a positive earnings release, and Alimentation Couche-Tard (+11.2%) drove the performance of the Consumer Staples sector while CCL Industries (+10.5%) and Nutrien (+13.0%) contributed to the Materials Sector.

The Energy, Real Estate and Utilities sectors lagged their respective benchmarks. The drop in the price of oil impacted the holdings in the Energy sector, including the stable, conservative pipeline holdings while the rising interest rate environment affected the performance of the Real Estate and Utilities holdings. Despite these concerns, the business fundamentals remain strong.

The portfolio currently does not have exposure to the Communication Services, Information Technology and Health Care sectors, all of which had negative returns for the benchmark in the quarter.

Cidel Canadian Total Return Mandate

Contributed by Cidel Asset Management Inc.

The Fund posted a negative return of 1.9% in the third quarter underperforming the S&P/TSX Index’s decline of 1.4%. We remind investors that this is an incredibly short period to measure performance. Nevertheless, the reason for the underperformance compared to the S&P/TSX Index was due to negative security selection. Positive sector allocation was a partial offset to the underperformance.

The weakness in security selection was concentrated in the Energy and Information Technology sectors with strong security selection in Industrials providing a partial offset. Within the Energy sector the holdings in Parkland (-14%) and TC Energy (-15%) underperformed the sector return of -5.2%. Parkland continues to underperform and investor reaction to its results continues to puzzle us. TC Energy’s weak performance was the result of the announcement that came in the quarter of another $1.9 billion equity contribution would be required to complete the Coastal GasLink project due to cost overruns. The timing of a $1.9 billion equity issuance shortly thereafter, arguably to fund Mexican growth projects, only reinforced the disappointment about the Coastal GasLink project.

From a sector allocation perspective, the overweight in the outperforming Industrials sector had the largest positive impact. As a reminder, stocks in these sectors that performed well were either weak performers heading into the quarter (Boyd Group) or were higher quality businesses with pricing power (Waste Connections). Boyd benefited from a potential inflection point in inflationary pressures on margins, while Waste Connections proved its resiliency in a high inflationary environment.

Mawer Canadian Equity Mandate

Contributed by Mawer Investment Management Ltd.

The Mawer Canadian Equity Fund (the “Fund”) returned -0.77% before management fees in the third quarter resulting in relative outperformance against the S&P/TSX Composite Index’s -1.41%.

Companies that contributed to the relative strength of the portfolio include convenience store operator Alimentation Couche-Tard that reported strong results in the face of heightened inflationary conditions and fuel prices. Dairy processor Saputo also performed relatively well as the company posted higher revenues driven by a combination of positive pricing initiatives, productivity improvements, and cost containment strategies that helped to mitigate the impact of inflationary pressures. Additionally, fertilizer producer and distributor Nutrien saw its shares advance as the company remains well-positioned to benefit from global potash supply disruptions, elevated crop and fertilizer prices, and higher international natural gas prices.

Companies that detracted from relative performance included names held within the Energy and Industrial sectors. As an example, Suncor Energy declined over the quarter despite reporting a surge in profits from higher crude oil prices, as sanctions against major energy producer Russia have worsened supply issues. Caterpillar dealer Finning International's shares also tumbled throughout the quarter as global demand uncertainty was evident, although the company did post higher revenues and earnings across all operating segments driven by strength across end-markets. Bank of Nova Scotia saw some bearishness as the bank's global banking and capital markets segments experienced challenges due to global market turmoil.

For the one-year period ending September 30th, the portfolio provided relative downside protection by outperforming the benchmark by +1.72% (before management fees) despite returning -3.67% as markets declined.

Mawer Canadian Small-Cap Mandate

Contributed by Mawer Investment Management Ltd.

The portfolio returned -2.0% over the third quarter, outperforming the S&P/TSX Small Cap Index by 0.5%. While tamer compared to the second quarter of 2022, the Canadian Small Cap market continued with its drawdown over the third quarter.

The quarter’s top individual performers exemplify the importance of a long-term focus. Companies whose share prices pulled back in the recent past due to shorter-term fears and issues, fared better as these factors resolved.

• Element Fleet Management, which struggled last year due to a semi-conductor shortage and less miles driven due to COVID-19, had a second consecutive quarter of strong performance. The company’s backlog in deliveries have begun to ease given the improvement in semiconductor chip supply.
• Operator of auto-collision repair shops, Boyd Group, was also a notable performer for the quarter. The company experienced higher labour inflation and while there was a lag, the company has displayed its pricing power by passing on much of these increased costs.
• Some companies such as Stella-Jones and Converge Technologies were indiscriminately punished by the market and have since rebounded.

All told, these companies and others in the portfolio will inevitably see their stocks impacted by shorter-term market noise, but we remain focused on their long-term wealth creation potential.

Negatively impacting portfolio performance have been holdings tied to the real estate market. The stock price of Dye & Durham, provider of legal software and data, has suffered due to its exposure to the weakening Canadian housing market and the market’s reticence to invest in companies with growth-by-acquisition strategies which can lead to complex financial statements. Other holdings such as commercial real estate broker Colliers International Group and operator of residential apartments Mainstreet Equity also saw their stock prices decline.

Mawer US Equity

Contributed by Mawer Investment Management Ltd.

The Mawer U.S. Equity Fund (the “Fund”) returned 0.11%, before management fees, resulting in relative underperformance against the benchmark which returned 1.32% during the third quarter.

Components of the portfolio that showed strength during the quarter were:

• Electronic and fiber optic connector producer Amphenol saw its profits rise in the quarter driven by double-digit sales growth across all of its segments despite facing continued inflationary pressures and supply chain disruptions.
• Amazon rose on a positive third quarter revenue forecast despite posting earnings that were below expectations during the quarter. Despite continued inflationary pressures in fuel, energy, and transportation costs, the company is making progress on their more controllable costs particularly improving the productivity of their fulfillment network.
• Elsewhere, insurance broker Arthur Gallagher saw its shares rise on higher revenues and sees a strong labor market favorably impacting their human resource and benefits consulting business and claims management operations.

Areas of weakness for the portfolio during the quarter were:

• Laboratory instrument company Waters Corporation declined as the company saw its sales grow only marginally, but sees strong momentum and customer demand with double digit growth across several of its product lines.
• Google parent company Alphabet experienced some share price weakness as the company posted lower than expected revenue and earnings during the quarter. Revenue growth slowed in the quarter from the previous year when the company was benefitting from the post-pandemic reopening as consumer spending was on the rise.

Over the one year period ending September 30th the portfolio slightly underperformed the benchmark. We continue to focus on businesses that are enduring, that have the ability to exercise pricing power through the value propositions they provide to their customers, and that are run by able and honest managers. The portfolio remains intentionally tilted toward higher-quality companies with more recurring business models.

Mawer International Equity

Contributed by Mawer Investment Management Ltd.

With the backdrop of a more uncertain economic environment, the Fund was unable to escape a negative return during the third quarter. Notably, semiconductor manufacturer TSMC fell as it faces a less robust outlook in demand for its products, while China’s Alibaba and Tencent traded lower given a slowing domestic economy, greater competition, and the longer duration profile of their cash flows. Finally, those companies that have reported margin pressures have been punished (e.g., health-related companies Eurofins Scientific and Recordati).

That said, the Fund meaningfully outperformed its benchmark in Q3 as “boring” worked. Top holdings such as insurance broker Aon, reference data provider Wolters Kluwer, and recurring consumables distributor Bunzl posted steady increases in revenues and operating profits reflecting the stability of their businesses.

Other companies whose stock prices had been hit hard earlier in the year bounced as their businesses proved more resilient than the market feared. Construction equipment rental company Ashtead’s most recent results demonstrated how quickly they have been able to pass along cost of goods sold (COGS) inflation. Ashtead has a leading position in a fragmented market which requires its smaller peers to pass inflation along rapidly or become unprofitable. The year-to-date phenomenon of COGS inflation above operating expense inflation has translated into margin expansion and the opportunity for Ashtead to gain market share.

Elsewhere, a relative lack of exposure to banks in the UK, Europe, and China helped. Instead, financial holdings such as Deutsche Boerse continue to benefit from higher interest rates and volatility, leading to more hedging transactions and higher income on their float, whereas Singaporean bank DBS, whose lending book is tilted toward floating rate loans tied to the U.S. Fed Funds rate, has enjoyed the associated higher net interest margins.

Finally, it should be noted that all of the companies named above have significant U.S. exposure, despite being headquartered elsewhere. Bunzl and Ashtead, for example, derive most of their revenues from the U.S., while DBS has clearly benefitted from the Fed’s interest rate hikes. Overall, the businesses in the Fund tend to have more U.S. dollar exposure than the broader benchmark, and this has been an additional tailwind to performance given the strength of the greenback.

Mawer Global Small-Cap

Contributed by Mawer Investment Management Ltd.

The Mawer Global Small Cap Equity Fund (the “Fund”) returned -3.3%, before management fees, resulting in 4.2% of relative underperformance against the benchmark during the quarter.

The underperformance came mostly from our overweight position in Europe (including the United Kingdom) at the expense of an underweight position in the United States.

The strength of U.S. companies this quarter can be seen by looking at the top contributors to our performance where 4 of the top-5 are either U.S. companies or companies deriving most of their revenues in the U.S.

Notable contributors include 4imprint, a direct marketer of customized promotional merchandise, which posted better than expected revenues and profits. The company attributed the strong growth to the brand building initiatives they have been carrying out over the last three years finally starting to pay off in the form of higher customer growth and market share gains. We also saw the payoff of management's long-time focus on culture as they indicated that despite the tight labour market, they have not yet run into issues attracting or retaining talent. Winmark Corporation, a franchisor of retail concepts that specialize in second-hand goods, was another positive contributor posting better than expected results on the back of continued store count and sales per store growth.

Rising input costs due to inflation and macro concerns around the economy were two other themes that affected our portfolio. Our largest detractor this quarter was motor vehicle insurer Sabre Insurance. The stock declined following an announcement to increase reserves set aside for claims as both repairs and injury costs are rising in the UK. Our research suggests that while Sabre has been taking the lead in raising premiums ahead of inflation, the industry more generally has been slower to follow. We believe that over time these costs should get passed through to customers as auto insurance is non-discretionary and less profitable competitors are unlikely to write loss-making policies indefinitely. A number of our IT value added resellers and consultants, such as Atea, Softcat and KnowIT, lagged mostly due to worries around future IT spending slowing down.

Weakening consumer sentiment affecting discretionary spending, combined with delays in passing on increasing input costs through higher prices has also affected companies such as Italian small appliance manufacturer De’Longhi. Despite current headwinds, the company has maintained their long-term investments in brand, marketing, and product innovation. Although this will affect margins in the near-term, we view the decision to be wealth-creating in the long term.