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Portfolio Manager’s November Comment For October Results

The S&P/TSX Total Return Index declined by 0.9% in October, the S&P 500 rose by 2.2% and the MSCI ACWI ex. USA rose by 3.5%. At October end, the YTD S&P/TSX Total Return Index was up 18.1% which was lower than the S&P500 23.2% increase but higher than the MSCI ACWI ex. USA return of 16.0%.

The market made new highs in October as trade disputes concerns were dissipating and Q3 financial results were coming in line to better than expected. At month’s end, the US 10-year treasury yields were firming up in both the US and Canadian markets. The best TSX sector in October was Materials up 2.9%, followed by Industrials, up 1%. On the contrary, the worst performing sector was Health Care principally due to the poor performance of the Cannabis sector.

Looking more specifically at INOC, the best performers in October were Norbord (+19.7%), the Canadian manufacturer of wood-based products and leading producer of Oriented Strand Board. The next best performer was Equitable Group (+9.2%), %), a Canadian bank with the bulk of its business involved in the residential mortgages sector.

The NASDAQ Inovestor Canadian Equity Index YTD and Yearly returns stood at 20.2% and 14.7, ahead of the S&P TSX TR corresponding figures of 18.1% and 13.2%.

The Inovestor strategy was rebalanced in October. We increased exposure to the Industrials with the addition of Ritchie Bros Auctioneers Inc. (RBA) and Evertz (ET). We also added Parkland Fuel Corporation (PKI) as their results are strengthening now that their strategic acquisitions are being successfully integrated.

We exited Bell Canada (BCE), Canadian Imperial Bank of Commerce (CM) and Linamar Corp (LNR). These were the holdings with the weakest economic value added (EVA) figures in their respective economic sector.

Portfolio Manager’s Q3 Commentary

The S&P/TSX Composite Total Return Index increased by 2.5% in the third quarter. This adds to this years’ gains for a YTD return of 19.1%. During Q3, the S&P500 produced a 1.2% return for a YTD rate of 18.7% and the MSCI ACWI ex USA posted a 1.1% return leading to a 16.6% YTD total return.

Over the 3rd quarter, most company results were inline or better than expected. Interest sensitive sectors such as Utilities and REITS performed the best due to lower long-term interest rates.

In addition, the FED confirmed its dovish stance by reflecting the FED meeting minutes that were perceived to be accommodating. The FED had hinted that they would be open to reduce rates further if economic slowdown was visible. As a result, the Financials sector had the strongest sector rally in the month of September compared to the rest of the market.

NQICA in Q3 returned 3.9% leading to a YTD return of 21.1% versus the S&P/TSX composite which returned 2.5% in Q3 and 19.1% YTD. The one-year return for NQICA is 8.2% in comparison to the S&P/TSX which generated 7.1%.

The worst performers in the NQICA in Q3 were Stella Jones (SJ) with a return of -17.8%, due to the departure of the CEO, and CCL Industries (CCL.B) with a -16.52% return, due to poor quarterly results and increased insider selling. On the other hand, the best performers were Equitable Group (EQB) up 43.46%, due to excellent quarterly results and improvement in the Canadian real estate statistics, and Metro Inc. (MRU) up 19.11% based on great earnings and a positive update on the integration o the Jean-Coutu acquisition.

Portfolio Manager’s September comment For August Results

The Canadian market has been the best performer in August due in part to a strong rally in previous metals (such as gold and silver) and a vigorous GDP of 3.6 versus 3.0 expected. On the other hand, the US GDP was weaker than expected at 2.0 versus 2.3. Global markets were also down as a result from fears of an economic slowdown: Brexit, Hong Kong unrests, inverted interest curve and tariff issues.

The S&P/TSX Total Return Index rose by 0.2% in August, the S&P 500 decreased by -1.8% and the MSCI World by -2.1%. At August end, the YTD S&P/TSX Total Return Index was up 17.1% which was higher than the S&P500 (16.7%) and higher than the MSCI World of 13.5%.

The best TSX sector in August was Information Technology up 7.7%, mainly due to the performance of Shopify, followed by Materials up 5.7%, with gold up 16.7% and silver up 15.4%. On the contrary, the worst performing sector was Health Care (-13%) principally due to the performance of the Cannabis sector.

Looking more specifically at INOC, the best performers in August were Metro Inc. (+9.43%), a Canadian food retailer in Quebec and Ontario, followed by Brookfield Infrastructure Partners (+8.21%), a publicly traded limited partnership involved in the acquisition and management of infrastructure assets globally. Both stocks rallied based on their defensive attributes and as of a result of the inversion of the yield curve.

On the contrary, the weakest contributor to INOC was Parex (PXT), which was down 9.62%, on weak energy prices. The other negative contributors were Linamar (LNR) and CCL Industries (CCL.B) due to disappointing results.

Portfolio Manager’s August comment For July Results

The S&P/TSX Total Return Index rose by 0.34% in July, the S&P 500 by 1.44% and the MSCI ACWI ex. USA declined by 1.18%. At July end, the YTD S&P/TSX Total Return Index was up 16.62% which was lower than the S&P500 (20.24%) but higher than the MSCI ACWI ex. USA of 12.65%.

The market met new highs in July before retracing some of that gain as trade disputes dampened and long-term treasury rates fell to historical lows. At month’s end, the US 10-year treasury yield crossed the 2% mark to the low side.

The best TSX sector in July was Consumer Discretionary up 3.4%, followed by Information Technology, up 3.2%. On the contrary, the worst performing sector was Health Care principally due to the performance of the Cannabis sector.

Looking more specifically at INOC, the best performers in July were Equitable Group (+27.01%), a Canadian bank with the majority of its business involved in the residential mortgages with prime and non prime, who reported better than expected figures for Q2 results. The next best performer was Parex Resources Inc. (+7.38%), an oil producer with assets in Colombia, whose gains were due to the rally in oil prices last month.

On the other hand, the weakest contributor to INOC was Stella Jones (SJ), which was down 12.89%. News in regard to the departure of the company’s long-standing CEO caused the market to react negatively. The other negative contributors were Norbord (OSB) and Linamar (LNR).

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 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.

Portfolio Manager Commentary – February 2019

Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of January up 8.1% offsetting in one month most of last year decline of 8.9%, making it one of the best month in the last 20 years. This upturn has been driven by several catalysts including a softening in the tone of last minutes of the FED, relatively strong results from earnings releases of large North American corporations, and the end of the US government shutdown. Meanwhile, prices of most key commodities including crude oil and gold were stronger in the month. Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose 8.1% for the same period, 60bps below the benchmark. Our sector allocation removed 110bps as our decision to underweight Energy and underweight Healthcare proved to be unfruitful in January. However, our stock selection contributed a positive 50bps as a several of our stocks outperformed.

INOC’s constituents were changed on January 18th

Ins:

  1. THE NORTH WEST COMPANY INC (NWC)
  2. PAREX RESOURCES INC (PXT)

 

Outs:

  1. NFI GROUP Inc. (NFI)
  2. WEST FRASER TIMBER CO. Ltd. (WFT)

Best,

The Inovestor Asset Management Team