Triasima Balanced Income Fund Commentary – Q2 2023


The economy

The gradual economic deceleration, mainly caused by the elevated interest rates, is persisting. Yet the strong labour market, with low unemployment levels and growing household income, has emerged as a crucial counterbalance. Consumer confidence remains buoyant, which supports robust consumer spending, further bolstered by record-high levels of consumer credit. Additionally, expansionary fiscal policies in the United States support the job market.

The services industries are currently playing a pivotal role in sustaining the global economy while the manufacturing sector faces challenges due to the slowdown. With the pandemic rebound still in play, and robust income, households are increasing their spending on services, particularly in areas such as tourism. 

Inflation remains on a downward trajectory but still exceeds most countries’ target. Continuing their war on inflation, central banks in developed countries, such as in Canada and the United States, are raising their benchmark short-term rates, but at a slower pace. 

China stands out as an exception amidst the global trend of monetary tightening. This country faces significant economic challenges including elevated youth unemployment, lackluster export markets and substantial financial leverage in its property sector.

The markets

Influenced by the Bank of Canada's steadfastness in raising its benchmark rate, the yield curve experienced an upward shift this quarter. The FTSE Canada Universe Bond Index (-0.7%) saw its yield to maturity rise by 0.4%, to reach 4.4%. The duration edged up to 7.4 years. The S&P/TSX Preferred Share Index (-2.1%) lagged the bond index.

The rise in the equity markets was concentrated in a few mega large cap American names from the information technology and communication services sectors that benefited from the excitement surrounding the potential applications of artificial intelligence. As such, the S&P 500 Index (6.3%) did well while the S&P/TSX Composite Index (1.1%) and MSCI EAFE (0.7%) were nearly unchanged.

The Fund

The Triasima Balanced Income Fund had a 1.1% return this quarter, versus 1.2% for its benchmark.

Security selection in American equities added relative value and compensated for the negative security selection impact from preferred shares and Canadian equities. The asset allocation attribution was neutral. 

The Fund’s bond duration (7.1 years) has been hovering around that of the Index this year. 

There was a small shift from Canadian equities toward the better performing American equities, mainly because of the partial sales of Royal Bank and National Bank holdings. The economic slowdown is hurting bank profitability.

The fixed income (cash reserve, bonds, and preferred shares) proportion was 37% at the end of the quarter, slightly below benchmark weight (40%) while equities ended the quarter with a weight of 63%. This breakdown has been stable this quarter.

The current income yield of the Fund stands at 3.6%. 

The Three-Pillar Approach™

On the quantitative side, for the equities held by the Fund, valuation, profitability, expectations, and revenues and profits growth parameters are superior to the equity benchmark. Risk metrics are in-line.

The interest rates trend is still up in Canada. As for the equity benchmark for the Fund, its trend is sideways. The Leverage factor outperformed while the Risk factor underperformed. 

The fundamental background to equities has largely stabilized despite the slow-motion economic slowdown. It has deteriorated somewhat further for the Canadian and International markets but has been stable for the American market. Overall, profitability expectations are still decreasing but a slower pace, helped by steadier long-term interest rates and falling inflation. The equity return outlook appears average for the remainder of 2023.

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