Triasima Canadian Small Capitalization Equity Fund Commentary – Q1 2022

2022-04-11

The economy

The COVID-19 pandemic’s impact on economic activity keeps receding while Canada and the other advanced countries are in the mature phase of the economic cycle.

High inflation levels have become entrenched, a consequence of monetary policies that have remained too easy for too long. Other significant causes are the supply chain disruptions, the tight labour market, past fiscal generosity from governments towards households, and the shift in consumption patterns away from services and into goods.

Stubborn inflation is pulling up interest rates all along the yield curve in advanced countries. Meanwhile, the Federal Reserve and the Bank of Canada have finally begun increasing their respective short-term benchmark rates.

Russia invaded Ukraine on February 24. Equity markets took this geopolitical crisis in stride, weakening only temporarily. The primary economic impact is inflationary since these two countries are large exporters of oil, natural gas, various metals, and agricultural products. 

The Canadian small capitalization equity market

The S&P/TSX Smallcap Index was up 8.4% this quarter.

The advance was led by sectors benefitting from rising inflation such as Energy, Materials and Real Estate. Conversely, the consumer and Information Technology sectors declined the most. 

The Energy sector (36%) benefited from skyrocketing natural gas and oil prices due to rising demand this late in the economic cycle and a limited capacity for supply increases. Many metals are also facing rising demand and reached record prices, which benefited the Materials sector (7%).

The Information Technology sector (-11%) fell since higher interest rates lower technology company valuations.

The Fund

The Triasima Canadian Small Capitalization Equity Fund had a 0.2% return this quarter.

Sector allocation retracted slightly the relative performance, with the Financials sector’s overweight standing out as a detractor. Most relative value was lost with security selection, and concentrated in the Energy, Industrials, Financials, and Information Technology sectors.

The table presents the top and bottom contributors to the relative performance:

Politive impact Negative impact

Crew Energy Inc.

Trisura Group Ltd

Whitecap Resources

Altus Group Ltd

Filo Mining Corp.

Telus International

Paramount Resources Ltd

Goeasy Ltd

Dream Unlimited Corp.

Hardwoods Distribution

 

Turnover focused on adding companies, primarily from the Energy and Materials sectors, that can thrive in an inflationary environment. The ones that are hurt by higher interest rates or that had benefitted from the pandemic, mainly from the Industrials, Financials, and Technology sectors were reduced.

Apart from a large cash position at quarter end, portfolio structure is aligned with the benchmark index, with no large sector weight deviation.

The Three-Pillar Approach ™

On the quantitative side, the Fund has better valuation, profitability, revenue growth, and expectations parameters than the benchmark index, while having inferior risk and profits growth metrics.

Unlike most countries, the market trend is positive in Canada due to the exposure to resources. The Value factor outperformed while the Growth factor lagged.

As expected, the fundamental background deteriorated further in the first quarter due to the persisting inflation and higher interest rates, although corporate profits are rising. The outlook for Canadian equities remains average for 2022.

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