Triasima Canadian Small Capitalization Equity Fund Commentary – Q3 2022


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 small capitalization equity market

The S&P/TSX SmallCap Index lost 2.5% this quarter.

The weakness was generalized, with nine out of eleven sectors pulling back. Interest sensitive sectors were the worst performers, led by Communication Services (-23%), Utilities (-14%) and Real Estate (-9%). 

The Information Technology sector (23%) was driven by strong quarterly results by Absolute Software and the acquisition at a large premium of Sierra Wireless. The Consumer Discretionary (2%), Consumer Staples (0%), and Health Care (0%) sectors were supported by their defensive constituents with stable operations.  

The Fund

The Triasima Canadian Small Capitalization Equity Fund had a -1.6% return this quarter. 

Overall, sector allocation was neutral to relative performance. Security selection contributed positively across many holdings, with the Energy securities providing the most added value. 

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

Positive impact

Negative impact

Uni-Select Inc.

Paramount Resources Ltd

Vermilion Energy Inc.

Wesdome Gold Mines Ltd

Definity Financial Corp.

Dream Unlimited Corp.

Pet Valu Holdings Ltd

Sierra Wireless Inc.*

Crew Energy Inc.

Polaris Renewable Energy Inc.

*Securities not held in the fund.

Some cash reserves were deployed over the quarter, mainly in the Information Technology, Consumer Discretionary, and Financials sectors. The latter two now have overweight positions relative to the benchmark. The Energy and Materials resources sectors still have large underweight positions. Overall, the Fund is maintaining a defensive structure at the sector level.

The Three-Pillar Approach ™

On the quantitative side, the Fund is slightly more expensive than the market, but has better profitability, revenue growth, earnings growth, and expectation metrics. Risk parameters are in-line. 

The Canadian equity small capitalization market seesawed, up then down, in the third quarter, but its longer-term trend remains negative. The quality-oriented stability and profitability factors outperformed. 

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

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