Triasima Canadian All Capitalization Equity Fund Commentary – Q3 2022

2022-10-15

The economy

Elevated inflation is the dominant macroeconomic theme currently. It is the result of former easy monetary policies, a tight labour market and lingering pandemic disruptions to supply chains.

Central bankers have become steadfast in their desire to quell high inflation levels and are increasing overnight interest rates. Short and mid-term rates have risen alongside, and yield curves have become inverted in Canada and the United States.

Economic growth is hindered by this high inflation and the rising rates. Households suffer from falling real disposable income while companies face higher costs and diminishing demand. They are now demonstrating prudence in their forward guidance. The economic slowdown has spread out and many countries probably are already in recession.

The tight labour market is beginning to lead to higher unit labour costs. The positive employment situation lags economic conditions, however, and may soon begin to reverse. Key signs include routine layoffs and hire freezes. The continued rise in the labour participation rate in the United States point to households having depleted their pandemic savings. 

The Russia-Ukraine conflict carries on. Its main effects are heightened geopolitical uncertainty and high energy costs in Europe. Meanwhile, the COVID pandemic has receded in the background, with a residual impact on some services industries.

The Canadian equity market

The S&P/TSX Composite Index lost 1.4% this quarter.

Sector returns were clustered, ranging from negative single digits for the interest-sensitive sectors to low positive single digits for the consumer and industrial sectors, the latter being driven by the more defensive securities within them.

The Information Technology, Communication Services, Utilities, and Real Estate sectors, all of them interest-sensitive, had an average decline of 5.8%.

The Fund

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

Sector allocation was neutral to relative performance while security selection was positive. The underweight allocation to Industrials detracted some value. Security selection in the Energy sector was the largest single contributor.

Main security contributors to relative performance :

  Positive impact

  Negative impact

Uni-Select Inc.

Waste Connections Inc.*

Tourmaline Oil Corp.

ECN Capital Corp.

Birchcliff Energy Ltd

Dream Unlimited Corp.

Suncor Energy Inc.*

Trican Well Service Ltd

Absolute Software Corp.

Canadian Pacific Railway Ltd

*Securities not held in the fund.

The portfolio rotation begun last quarter continued with cyclical and interest-sensitive holdings reduced in favor of defensive ones. The Financials and Materials sectors were reduced while defensive Consumer securities and the cash reserve were added to. 

The Three-Pillar Approach™

On the quantitative side, the Fund has better profitability, profits growth and expectations parameters than the benchmark. Other metrics, including the beta coefficient, are in-line. 

The Canadian equity market seesawed, up then down, in the third quarter, but its longer-term trend remains negative. The quality-oriented profitability factor outperformed. Underperforming factors were value and profits variability due to slowing economic growth, and dividend because of rising interest rates. 

The fundamental background to Canadian equities deteriorated further in the third quarter. Elevated inflation and higher rates are leading to downward revisions to expected corporate profits. The outlook is still poor in the short term.

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