Triasima Canadian All Capitalization Equity Fund Commentary – Q1 2023


The economy

The gradual slowdown carried on during the first quarter with higher interest rates further permeating economies worldwide. Macroeconomic data deteriorated. For instance, in the United States, PMI™ levels are now below 50 for both service and manufacturing industries, indicating a contraction. The consensus forecasts a recession over the coming months. 

The key offset to the impact of high interest rates is the strong labour market. Wages are rising while inflation slows downs, buttressing real disposable income, and propping up consumer confidence. Spending is also supported by a general rise in consumer credit. 

Inflation peaked back in the summer of 2022 and has been fading since. Central banks, however, have stayed the course and increased their respective overnight rates. They are assuming it will take time to fully depress and keep inflation low. 

The same inflation is buoying nominal revenues for corporations. But sales volumes are mainly stagnant while unit labour costs, and other input costs, are rising. The result is declining profit margins and falling earnings expectations in 2023. 

Due to higher rates, a banking crisis erupted in the United States over issues of funding stability and asset-liability mismatch. 

The Canadian equity market

The S&P/TSX Composite Index had a 4.6% return this quarter, after a poor 2022. 

Interest rates fell beyond the one-year maturity and interest-sensitive sectors led the way, including Utilities (7%) and Information Technology (27%). Gold stocks (11%) benefited from a weaker U.S. dollar, lower interest rates, and a flight to safety following some regional bank failures in the United States. 

The worst-performing sector was Energy (-2%) due to a drop in oil prices. 

The Fund

The Triasima Canadian All Capitalization Equity Fund had a -0.5% return this quarter.

The cash drag (7% average reserve) and security selection across most sectors detracted relative performance. Energy and Technology holdings fared the worst. The poor relative outcome is largely the result of the aggressive nature of the first-quarter rally.

Main security contributors to relative performance :

  Positive impact

  Negative impact

Alamos Gold Inc.

Shopify Inc.*

Toronto-Dominion Bank

Absolute Software Corp.

Enbridge Inc.

Secure Energy Services Inc.

Boardwalk REIT

Trisura Group Ltd

Uni-Select Inc.

Shawcor Ltd

*Securities not held in the fund.

Most of the beginning of year cash reserve was deployed through additions to cyclical Financials and Industrials names, thus eliminating these two sectors’ large underweight. Energy holdings were reduced, and the sector shifted to a large underweight position. 

The Three-Pillar Approach™

On the quantitative side, the Fund has better profits growth and expectations parameters than the benchmark while valuation parameters are slightly worse. 

The Canadian equity seesawed this quarter and its trend is now sideways. The speculative Beta and Volatility factors strongly outperformed, and so did Growth due to falling interest rates. The Momentum factor, always overweight by Triasima, enormously underperformed.

The fundamental background to Canadian equities is stable. Profitability expectations are dropping but falling long-term interest rates and the return of low inflation are offsetting this. The outlook appears average for the remainder of 2023.