February saw both fixed income and equity markets reprice, pulling back from a strong start to the year in January. Strong economic data and higher than expected inflation in the US cooled investor sentiment, sending yields higher. Similarly in Canada, persistently low unemployment coupled with stronger than expected core measures of inflation also sent yields back to where they were at the beginning of the year. Only the international equity pool, and by proxy the international holdings within the funds, saw positive performance on an absolute basis thanks to a weakening Canadian dollar. The Compass Portfolios and ATBIS Pools (the funds) added relative value in fixed income, Canadian equity and international equity, while being on par with US equities.

Below are index total returns in Canadian dollar terms for February, and year-to-date respectively:

While the market was looking forward to seeing inflation fall further, the US Consumer Price Index (CPI) actually came in a little higher than expected, rising 6.1% year-over-year. The Personal Consumption Expenditures Price Index (PCE), an alternative measure of US inflation,  was also higher than expected, being boosted by increased shelter costs. 

After seeing positive returns in January, fixed income in the US and Canada alike gave back some gains during February, as yields increased with inflation persisting more than the market was hoping. Yields overall in Canada increased roughly 0.35%, back to levels seen at the beginning of the year, with the broad bond market² falling 2.0%. Despite the lost ground, bonds overall measured by the same index are still up 1.0% on a year-to-date basis. Spreads also narrowed during the month, with corporate bonds outperforming their government counterparts across all maturities, pointing to strength in corporate bonds that is attributable to more than just duration. Despite the aggressive pace of rate hikes over the past year, high yield spreads as a barometer of risk appetite in the market continue to trade around long-term averages. 

The fixed income holdings within the fund as represented by the ATBIS Fixed Income Pool, outperformed during the month, falling 0.7% vs the index’s 2.0% loss, thanks to a higher than index corporate weight and a lower duration. The trend of improving quality continued with adds to government-backed bonds over the month. The Pool is up 1.75% year-to-date, and combined holdings representative of fixed income holdings across the funds, continue to have a yield of about 6.25%. 

For Canadian equities, energy and materials (specifically precious metals) were the worst performing sectors down 4%, and 9% respectively in Canada—these are both sectors where the funds hold either less relative weight or less cyclical names. Relative outperformance in both of these sectors made the largest contributions towards the fund’s Canadian equities, outperforming the TSX by 2.2% over February. Crude prices continue to hover around $75-80, as reported crude inventories by the US Department of Energy have been moving upwards this year for the first time since early 2021. 

In the US, the small and mid-cap holdings in the funds, which continue to trade at very good values, outperformed, whereas the Mawer US holdings underperformed for the month. Despite the drop in February, US equities within the funds as a whole are still up about 3% for the year. Over the month, Visa and Mastercard, which are both relatively large holdings in the portfolios, lost ground to other tech peers such as Apple and Nvidia. Names that did well and contributed positively to performance were JP Morgan and the exchange CME group, gaining 4.7% and 7.3% for the month, respectively in CAD terms.

The international holdings outperformed the EAFE Index by about 1%, which was flat on a Canadian dollar basis. Both Mawer global small cap and International are up on the index on a relative basis. Some of the names doing well for the month were the two energy companies added in 2022 (Shell and Equinor). Industrials, an area that lagged relatively within the portfolios last year, has rebounded so far in 2023 and added relative performance in February.