The effects of the rise of interest rates in 2021 and 2022 continue permeating economies and are causing slowdowns. Real gross domestic product (GDP) among major advanced countries is predicted to grow by only 0.9% in 2024, down from the expected 1.6% in 2023. The strong labor market, which supported confidence and spending, has now been witnessing declining job openings.
Fortunately, inflation levels peaked 18 months ago already and have fallen since. Monetary policy tightening by central banks is winding down, with several opting to pause their rate hike efforts. In its latest meeting, the U.S. Federal Reserve signaled forthcoming cuts in 2024 for its benchmark rate.
The United States, supported by fiscal stimulus, continues to lead the global economy. Canada, meanwhile, was aided by significant immigration in 2023, but its GDP per capita receded.
Geopolitical risks persist. The Israel-Hamas conflict erupted this quarter while the war in Ukraine is nearing two years of age. Meanwhile, China faces challenges as it transitions from relying on exports from its manufacturing industrial base for economic growth to depending upon its internal services sector.
In contrast to third quarter, the fourth exhibited a downward shift in all yield curve maturities; especially notable for those 3 years and longer. The yield to maturity of the FTSE Canada Universe Bond Index (8.3%) dropped a large 1.0% this quarter, to reach 3.9%. The duration went back up to 7.3 years. The S&P/TSX Preferred Share Index (7.3%) also had a high fourth quarter return.
Performance for the benchmark’s equity indices were positive and clustered this quarter: S&P/TSX Composite Index (8.1%), S&P 500 Index (9.1%), and MSCI EAFE (8.0%).
The prevailing theme of the quarter was "risk-on", driven by weaker inflation, falling long-term interest rates, and perceptions of a dovish stance from the Federal Reserve and the Bank of Canada. Interest sensitive and growth sectors outperformed.
The Triasima Balanced Income Fund had a 6.9% return this quarter, versus 8.0% for its benchmark. The outcomes were 5.3% vs 11.8% respectively for the year.
Asset allocation was neutral to relative performance. The underperformance is due to the Canadian equities’ security selection. The Momentum, Quality, and Dividend factors that are favored for the Fund all underperformed.
With the interest rate uptrend tapering off, the Fund’s bond duration (7.3 years) was increased in recent months to match the Index’s at year-end. On the equity side, high dividend stocks benefitting from lower interest rates from the cyclical Energy and Industrials sectors were introduced. Examples include Peyto Exploration and Development, and Bank of Montreal.
Turnover led to a rise in the equity allocation, now at 63%, above the 60% benchmark weight. This came mostly from the cash reserve, bringing down the fixed income proportion to 36% at the end of the quarter. The current income yield of the Fund stands at 3.3%.
On the quantitative side, for the equities held by the Fund, volatility, valuation, and expectations parameters are superior to the equity benchmark. Conversely, the revenue growth metric is lower.
The past uptrend in interest rates turned sideways this quarter. As for the equity benchmark for the Fund, its trend remains sideways. The Risk factor outperformed in the quarter while Quality and Momentum underperformed.
The fundamental background to equities improved somewhat in the quarter, mainly due to the interest rates drop which more than offset the stagnant economies of Canada and the Eurozone and absence of profits growth. The stock market upsurge has borrowed from expected 2024 equity returns, which nonetheless remain above average and good.
The posted rate of return is a historical total rate of return compounded annually, except for periods of less than one year, which are not annualized. The rate of return shown takes into account fluctuations in unitholder value and the reinvestment of distributions. The posted rate of return does not take into account investment management fees and income taxes payable by the unitholder, which would have the effect of reducing the return. The Funds are not guaranteed, their value fluctuates, and past performance is not indicative of future results.
The benchmark for the Triasima Balanced Income Fund is composed of the following indexes: 5% FTSE Canada 91 Day T-Bill, 30% FTSE Canada Universe Bond, 5% S&P/TSX Preferred, 35% S&P/TSX Composite, 15% S&P 500 Net (CAD) AND 10% MSCI EAFE Net (CAD).
Data on the FTSE Canada 91 Day T-Bill, FTSE Canada Short Term Bond and FTSE Canada Universal Bond reference indices are provided by FTSE Global Debt Capital Markets Inc. (“FTSE”). Data on the S&P/TSX Income Trust, S&P/TSX Preferred Share, S&P/TSX Small Cap, and S&P/TSX Composite reference indices are provided by TSX Inc. (“TSX”). Data on the S&P 500® Index are provided by Standard & Poor’s Financial Services LLC (“S&P”). Data on the MSCI EAFE, All Country World, and World reference indices are provided by Morgan Stanley Capital International Inc. (“MSCI”). Lastly, the classification of securities according to the Global Industry Classification Standards (“GICS”) is provided jointly by MSCI and S&P. (FTSE, TSX, S&P, and MSCI are hereafter collectively referred to as “indices and data providers”.)
The indices and data providers have awarded limited licences to Triasima allowing it to use the above-mentioned indices and data in its portfolio statements. The information provided by the indices and data providers may not be redistributed, sold or used without the prior written consent of the indices providers concerned. The indices providers assume no liability with respect to the accuracy or completeness of these data or for any delay, interruption, or omission with regard thereto, and makes no warranty or declaration, either explicit or implicit, with regard to the results that might be obtained by using these data or as to the marketability or appropriateness of the data for a specific use.