Franklin Bissett Canadian Equity
① The mandate rebounded sharply in the last quarter of 2023 on a broad strength in the Canadian equity market.
② The fourth quarter sent stocks and bonds prices higher.
③ The earnings outlook is improving, as forward-looking indicators turn positive.
During the fourth quarter, the mandate underperformed its benchmark, the S&P/TSX Composite Index Total Return, by 80 basis points. It experienced negative security selection and interaction and positive sector allocation. Security selection and interaction was most notably negatively impacted by individual holdings in the information technology, energy and industrials sectors, partially offset by strong selection in materials. Positive sector allocation was derived from underweight positioning in the underperforming energy and materials sectors. This was partially offset by the underweight position in the outperforming financials sector.
Assessing the mandate’s performance from an absolute return standpoint, the most significant positive contributors were holdings within the financials, utilities, industrials and information technology sectors. This was partially offset by weak performance within the energy sector.
Mandate: Cautious positioning detracted.
First Quantum Minerals – The lack of exposure to the large-capitalization metals company (-66%) contributed the most to relative returns by a single stock.
Open Text – The overweight position in the information technology company (+18%) contributed the second most to relative returns by a single holding.
Shopify – The lack of exposure to the information technology company (+39%) detracted the most from relative returns by a single stock.
ARC Resources – The overweight position in the energy company (-8%) detracted the second most from relative returns by a single holding.
Total gross returns:
since INC. (NOV. 14, 2016)
FRANKLIN BISSETT CANADIAN EQUITY
Trading activity in the fourth quarter of 2023 was steady and surgical as dislocations in equity markets presented some attractive opportunities. The portfolio management team further added to the defensive/non-cyclical exposures in the consumer staples and utilities sector. The portfolio management team also selectively added to attractive individual opportunities in more cyclical aspects of the portfolio, including the financials and energy sectors. Nevertheless, the portfolio management team maintains a focus on valuations, lower beta and exercise selectivity in pursuing "growth" opportunities. Transactions in the portfolio resulted in a drawdown in the cash position.
On December 31, 2023, the mandate’s largest sector allocations were the financials, industrials, energy and consumer staples. Relative to the S&P/TSX Composite Index, the mandate’s most notable overweight positions are in the traditionally more defensive/non-cyclical consumer staples and utilities sectors, as well as industrials. The mandate’s largest underweight positions are in the typically value/cyclical sectors of financials, materials and energy. The mandate continues to have no exposure to the health care sector.
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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