Triasima Canadian Small Capitalization Equity Fund Commentary – Q2 2023

2023-07-13

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 and leisure.  

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 Canadian small capitalization equity market

The S&P/TSX SmallCap Index had a -4.6% return in the second quarter of 2023. 

Weakness was broad based, with only three sectors posting positive returns: Information Technology (+7%), Consumer Discretionary (+2%), and Financials (+2%). The Technology sector was fueled by investors looking for growth amid a slowing economic backdrop. 

Conversely, Consumer Staples (-12%), Communication Services (-11%), and Materials (-11%) were the worst performers. For this last sector, gold prices weakened due to rising real interest rates. 

The Fund

The Triasima Canadian Small Capitalization Equity Fund had a -6.2% return this quarter. 

Security selection was detrimental to relative performance. Four sectors did poorly with holdings falling 7% or more on average. They were Materials, Consumer Discretionary, Financials, and Information Technology. The cash reserve and the overweight position in Industrials contributed positively to the relative performance.

The table presents the top and bottom contributors to the relative performance:

  Positive impact

  Negative impact

Collective Mining Ltd

Vecima Networks

ATS Corp

Critical Elements Corp.

Filo Mining Corp.

Aya Gold & Silver Corp

Canopy Growth Corporation*

Atex Resources Inc.

First Majestic Silver Corp*

Nuvei Corp.

*Securities not held in the fund.

Further additions were made in the Industrials sector, with the fund now having a large overweight stance. Those purchases were partly funded by sales in the Materials and Information Technology sectors.

The Three-Pillar Approach ™

On the quantitative side, the Fund has strong metrics. Valuation, profitability, expectations, and revenue and earnings growth parameters are all better than the benchmark. Risk parameters are in-line. 

The small capitalization Canadian equity market reversed course in February 2023 and its trend has been downward since. The Momentum, Profitability and Value factors all outperformed for the broader market in the quarter while the speculative Beta and price Volatility factors strongly underperformed. 

The fundamental background to Canadian equities has deteriorated somewhat due to the slow-motion economic slowdown. 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.