Triasima Balanced Income Fund Commentary – Q2 2022


The economy

COVID-19’s influence on economic activity has become largely immaterial by now. Notwithstanding, some impact was recently felt in China due to their zero-COVID policy shutdowns.

Inflation rose further in advanced countries to levels unexpected to most observers. A key reason for the elevated inflation is the rise in household wealth over the past two years and the consequent surge on spending for goods. Other causes include the tight labour market and lingering supply chain disruptions. 

Central bankers stayed the course too long with their easy monetary policies and must now catch up by aggressively raising short-term interest rates. Mid- and long-term rates also rose further in the quarter.

The war in Ukraine carries on, limiting supply and causing prices to rise for energy in Europe and for foodstuff at large.

Growth in most countries is slowing due to the inflation headwinds and declining real disposable income. Some advanced countries started showing signs of recession late this quarter

The markets

Propelled by inflation and by increases in the overnight rate by the Bank of Canada, the Canadian yield curve shifted up in parallel fashion this quarter, by about 1%. The yield curve is flat for maturities one year and longer, indicating rising expectations of a recession. 

The FTSE Canada Universe Bond Index’s (-5.7%) yield to maturity rose by 0.9% to 3.9% this quarter. The TSX Preferred Share Index (-7.5%) also posted a loss. 

All equity indices from the benchmark had negative returns this quarter. The MSCI EAFE (-11.8%) lead the S&P/TSX Composite Index (-13.1%), and the S&P 500 (-13.6%). The main causes are high inflation and rising interest rates leading to fear of falling profits. So far, the market drop has only been caused by an earnings multiples compression, since earnings estimates for 2022 are still rising.

The Fund

The Triasima Balanced Income Fund had a -8.1% return this quarter, versus -9.8% for its benchmark. 

Overall, asset allocation was neutral to value added this quarter. The bond underweight detracted value but this was offset by this asset class’s security selection. Security selection added value, and this came mostly from the American and Canadian equities.

With economies deteriorating, corporate bonds were reduced, and Federals added to. Bonds are underweighted, but the overall fixed income to equity ratio is in line with the benchmark. At quarter end, the Fund’s bond duration (5.5 years) is shorter than the FTSE Canada Universe Bond Index’s (7.4 years).  

Equity sales somewhat exceeded purchases this quarter, with the portfolio tilting away from cyclical and towards defensive sectors. The short-term reserve rose as a result. 

The current income yield of the Fund has been climbing steadily this year, and now stands at 3.2%. 

The Three-Pillar Approach™

On the quantitative side, for equities only, risk and valuation parameters are in-line with the Fund’s equity benchmark. Profits growth and expectations are better, while profitability levels and revenue growth are worse.  

The downward equity market trend accelerated in the second quarter for all equity markets making up the benchmark. Defensive factors such as dividends, value, and profitability outperformed the growth, earnings variability, and price volatility factors.

The fundamental background to equities deteriorated further in the second quarter due to elevated inflation and rising interest rates. A slowing economy and lower expected corporate earnings point to poor outlooks in the short term and for 2022.

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