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Christian Godin

Portfolio Manager Q2 Commentary

The S&P/TSX Composite Total Return Index increased by 2.6% in the second quarter. This adds to the first quarter gains for a YTD return of 16.2%. During Q2, the S&P 500 produced a 4.3% return for a YTD rate of 18.5% and the MSCI ACWI ex USA posted a 3.2%, leading to a 14% YTD total return.

Over the 2nd quarter, the FED has confirmed its dovish stance given that inflation and economic activity is under control. The Chinese economy growth has been decelerating resulting in the slowest GDP growth in the last 27 years. On the other hand, expectation for the Canadian growth rate has been on the rise. Reasons for this growth is the stronger than expected exports, better than expected labor market conditions, and higher than expected housing starts.

Our NQICA index returned 4.6% in Q2 and 16.5% YTD versus the S&P/TSX which returned 2.6% in Q2 and 16.2% YTD. The 1-year return for NQICA is 4.4% versus 3.9% for the S&P/TSX over that same period.

The worst performers in the index were Norbord (OSB), down 11%, and Great-West Lifeco down 5.6%. On the contrary, the best performer was Dollarama (DOL), up 29.4%, followed by CCL Industries (CCL.B), up 19%.

At the end of Q2, NQICA was under weighted in Energy (-13%) and Financials (-4%) and over weighted in Consumer Discretionary (15.5%) and Consumer Staples (4.3%).

The current rebalancing requirements are minimal and are entirely due to the model’s sector weights’ variation. The telecom sector weight increased, and the financial sector weight decreased due to the greater economic value added (EVA) created by Telecom versus Financials. Industrial Alliance (IAG), having the lowest SP Score of our financial holdings, was kicked out of the index. IAG was replaced by Telus (T) which is the highest scored telecom company not already in the model.

Portfolio Manager’s June comment For May Results

The S&P/TSX Total Return Index contracted by 3.1% in May that is less then both the S&P 500 (-6.35%) and the MSCI ACWI ex. USA (-5.26%). At May end, after a first declining month, the YTD S&P/TSX Total Return Index was up 13.4%.

Markets have been on a roller coaster as the probability of tariff wars are rising. On top of tariffs, US investors were increasingly concerned in regards to potential regulation of the American mega cap technology companies due to the monopolistic nature of their business models.

The best TSX sector in May was Information Technology, up 4.3%, as the largest players such as CSU OTEX, GIB.A and SHOP,) all posted good quarterly results. On the other hand, the worst sector was Health Care, down 13.8%, a sector in which INOC is not invested.

Looking more specifically at INOC, defensive stocks such as ATD and DOL outperformed nicely as investors were looking for a safe heaven away from the surrounding chaos. INOC’s best performer in May was CCL.B following better than expected results. The three weakest performers for the month were Norbord, Magna, and Linamar, their poor performance was driven by macro economics and politics but also in the case of Magna by management downward revision of this year financial results guidance.

Portfolio Manager Commentary – May 2019

The S&P / TSX total return Index increased by 3.2% in April, adding to the strong 1st quarter returns leading to a YTD return of 16.9%. This gives the Canadian market a very strong start so far in 2019 which has actually slightly outperformed the MSCI ACWI (13.4%) and slightly lagged the S&P 500 (18.3%). Most sectors of the Canadian market were positive contributors in April, with Informational Technology being the strongest and Materials being the weakest.

The Canadian central bank & the FED comments have remained highly constructive for the equity markets. Furthermore, the overall earnings are weak but not as much as was feared by the market. This explains why the market is holding its YTD gains.

YTD commodity prices, including energy and metals, have been stable which is crucial for the Canadian market. Finally, the current state of mind of the market is mainly shaped by US tariffs. In Canada more specifically, the real estate market remains steady despite worries about an over-extended cycle. The declining long-term interest rates in Canada are maintaining high valuations in the sector.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 5% in April, leading to a YTD positive return of 17%, slightly outperforming the market. Looking at contribution factors to the NQICA returns, the largest proportion of the gains was thanks to Magna International (MG) that rose by 14.6%. Following a similar trend are Dollarama (DOL) and Equitable Group (EQB) which rose by 13.0% and 12.8% respectively as the market was anticipating attractive earnings. On the contrary, Metro Inc. (MRU) was down 1.4% over the month and Great-West Lifeco (GWO) down 1.98% during the last 2 weeks of April following its addition to the portfolio.

April 2019 Portfolio Manager Commentary

The S&P/TSX Total Return Index increased by 13.3% in the first quarter. This gives the Canadian market a very strong start in 2019 which has actually slightly outperformed the MSCI Global (10.4%) and is performing in line with the S&P 500 (13.7%).

The stock markets are currently on the rise due to positive economic expectations. Over the past couple of weeks, the depth and longevity of constructive global perspectives have increased in importance following the most recent economic comments and political statements made by major central banks including that of China, Europe, and the United States.

This staggering global economic bull cycle over a longer horizon has a principal effect on the anticipations of investors in the stock market and it has clearly overcome the contradictions related to the softening of the short-term growth. Even though economic growth and corporate profits growth are presently lower than they were a year ago, their persistence and resilience over the long run are the key factors affecting investors’ psychology.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 0.6% in March, leading to a YTD positive return of 11.4%, slightly underperforming the market. Looking at contribution factors to the NQICA returns, the best performing stock up 11.16%, was Parkland Fuel Corporation (PKI). On the contrary, the worst performer was The North West Company (NWC), down 9.3% in March.

The most recent rebalancing required the sale of three titles, The North West Company, Parkland Fuel and CAE. They were replaced by Great-West Life Co, Norbord, and Open Text. North West Company saw its ROIC decrease because of an increase in assets without being offset by a corresponding increase in its NOPAT. The catalyst for the sale of Parkland Fuel was the rise in stock prices. The sale of CAE was due to the significant decline in economic value added (EVA) as determined by our quantitative model. Great-West Life Co experienced a substantial increase in NOPAT and that is why we decided to add it to the portfolio. Many cyclical commodity companies have had strong bullish profits for a while and our approach is to increase the sector weights in those cases. Norbord is a holding which entered the portfolio for this reason. Finally, the entry of Open Text is explained both by a high fundamental rating and by an attractive valuation.