Bristol Gate U.S. Dividend Growth Equity
① The Bristol Gate U.S. Dividend Growth Equity strategy comfortably outperformed the S&P 500 Index during the quarter and significantly outperformed the dividend-paying universe in 2023.
② The fourth quarter sent stocks and bonds prices higher.
③ The earnings outlook is improving, as forward-looking indicators turn positive.
In an environment of tepid growth and the relative return headwind from not owning six of the “Magnificent 7” stocks (due to no dividend payments or subpar dividend growth), the portfolio’s companies have distinguished themselves through their operating results.
In 2023 the portfolio’s collection of high-dividend growth businesses grew earnings much faster than the market and experienced significantly less multiple expansion. Multiple expansion accounted for less than a third of the portfolio’s return for the year versus virtually all the market’s return. If the portfolio’s holdings just continue operating as they have, it should result in a fine outcome for investors in the coming year. The broad market, on the other hand, must deliver a significant increase in earnings to justify the multiple expansion it was awarded in 2023.
Mandate: Outperformed the S&P 500 Index.
Both an overweight exposure to and stock selection in the industrials sector, stock selection in information technology and no exposure to energy contributed to the portfolio’s outperformance.
On an absolute basis, Broadcom, American Tower and Cintas were amongst the best performers in the quarter.
Stock selection in the consumer discretionary sector, and both an overweight exposure to and stock selection in materials, detracted from returns in the quarter.
On an absolute basis, Corteva, Activision Blizzard and UnitedHealth Group were among the weakest performers.
Total gross returns:
Since INC. (NOV. 14, 2016)
BRISTOL GATE U.S. DIVIDEND GROWTH EQUITY
With the cash received from Microsoft’s acquisition of Activision Blizzard in October, the portfolio management team initiated a new position in Carrier Global Corporation at a 4.5% weight and increased the portfolio’s positions in Thermo Fisher Scientific, Sherwin-Williams and Lowe’s back to target weight.
Carrier is a leading global provider of heating, ventilation and air conditioning (HVAC) and refrigeration solutions. The portfolio management team believes the business is positioned to deliver attractive dividend growth supported by solid underlying fundamentals.
HVAC is an attractive industry, historically growing at two times the rate of industrial production, fuelled by long-term sustainability megatrends and a growing global middle class. The industry generates a significant portion of its revenues from repair and replacement activities, buffering sales relative to other industrial segments during periods of economic weakness. Lastly, Carrier is trading at a meaningful discount to its HVAC peers, a valuation gap portfolio management team expects to close as it becomes more of a pure play HVAC company after exiting certain non-HVAC businesses.
Market Overview: The last quarter of 2023 set a positive tone for the new year.
The fourth quarter saw a rally in most asset classes and sectors. Yields went down, sending both stocks and bonds higher. The markets aggressively priced in an economic “soft-landing”, which impacted valuations across the board. U.S. stocks began the quarter with a forward price-to-earnings (P/E) ratio in the mid-17s, but ended close to 20, a significant increase.
Bond yields went up a lot during the year, yet the fourth quarter's rally sent the US 10-year Treasury yield down to 3.87% (the exact same level at which it ended in 2022).
Canadian equities finished the year strongly, with the S&P/TSX Composite Index increasing by 7.25% (and ending the year up 8.12%). Information technology led the rally, with returns of 23.9% for the quarter, while energy was the only sector to decline.
Market Outlook: Economic indicators point towards U.S. recovery.
Central banks in Canada, Europe and the U.S. are expected to lower interest rates at some point in 2024. Signs show the manufacturing and earnings slump is fading, and the era of high inflation and interest rates is coming to an end. There are more indicators pointing to a U.S. recovery rather than a recession.
The earnings outlook is now brighter, as previous economic soft spots recede, and forward-looking indicators turn positive. Valuations shifted in the fourth quarter of 2023 to reflect this improved outlook. This means that some early-year volatility is possible, as the markets digest the latest macro-economic data and determine if their optimism was warranted or exaggerated.
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