Franklin Bissett Canadian Equity
Mandate commentary
Q2 2024
Highlights
① The mandate declined in the second quarter of 2024, in a broadly weaker Canadian equity market.
② U.S. equities driven by technology and telecoms sectors.
③ Consumer spending has plateaued, and economic growth has normalized.
Mandate overview
The mandate underperformed the S&P/TSX Composite Total Return Index by 30 basis points in the second quarter of 2024, declining by 0.83% compared to a 0.53% decline for the benchmark.
Effects of negative stock selection more than offset effects of positive sector allocation. Sector overweight positions in the outperforming utilities and consumer staples sectors added value. Negative stock selection and sector allocation in materials, and selection within the industrials and information technology sectors, weighed on performance.
From an absolute return standpoint, the most material positive contributors to the mandate’s performance were holdings within the consumer staples, consumer discretionary and materials sectors; this was more than offset by weak performance within the information technology, industrials and financials sectors.
Mandate: selection hurt performance
Performance contributors
Consumer staples: The mandate’s overweight position in the outperforming sector had the largest contribution from a sector allocation standpoint.
Shopify: The underweight position in this leading information technology company (-13.5%) was the top single stock contributor on a relative basis.
Performance detractors
Open Text: The overweight position in this information technology company (-18.7%) detracted the most from relative returns by a single holding.
TELUS International: The off-benchmark holding in this industrials company (-31.1%) was the second largest detractor by a single holding.
Total gross returns:
Total return |
QTD |
YTD |
1YR |
3YR |
5YR |
since INC. (NOV. 14, 2016) |
FRANKLIN BISSETT CANADIAN EQUITY |
-0.61% |
5.21% |
10.46% |
9.26% |
10.10% |
8.94% |
Mandate repositioning
Trading activity in the second quarter of 2024 was broad-based with buying centered around more attractively priced defensive/interest-rate sensitives as well as out-of-favour cyclical and growth names. The portfolio management team added to the materials sector and interest-rate sensitive holdings in communication services and utilities, which have been steadily growing in prominence in the portfolio. Transactions also included trimming select holdings on strength, including a few defensive/less interest-rate sensitive holdings.
On June 30, 2024, the mandate’s largest sector allocations were financials, industrials, energy, consumer staples and utilities. Relative to the S&P/TSX Composite Index Total Return, the mandate has a notably overweight exposure to the traditionally more defensive/non-cyclical utilities and consumer staples. Its largest underweight exposures are to the typically value/cyclical financials, energy and materials sectors. The mandate continues to have no exposure to the health care sector.
Market overview: AI pushed equity growth while central banks started to pivot
The second quarter continued to be dominated by the growing influence of artificial intelligence, with investors focused on opportunities in AI-enabled businesses and hardware. Additionally, there was a notable shift in monetary policy as some central banks adjusted their interest-rate policies as inflation risks receded.
In Canada, year-over-year inflation dropped to 2.9%, while in the U.S. it fell to 3.3%. Both indicators are trending downward and remain range bound. The Bank of Canada was the first among central banks in the G7 to cut its overnight lending rate, which we view not as a divergence in monetary policy, but rather as a precursor to the U.S. Federal Reserve eventually following suit. The European Union also cut rates modestly, while the Bank of England held rates as-is, for now. In our view, Canada and Europe have an increased risk of an economic slowdown, while U.S. and emerging market (EM) economic conditions appear to be improving. Canadian and international equities may be weighed down by slower economic growth and potentially weaker earnings growth, with limited valuation upside
Market outlook: global economic conditions remain favourable
We believe interest rates at central banks have peaked, with Canada and the European Union lowering rates ahead of the U.S. Federal Reserve. The economic outlook shows signs of levelling out compared to three months ago, as unemployment ticked higher and consumer spending plateaued. The summer months may bring heightened headline risk surrounding the U.S. presidential election, but seasonality and historical data suggest equity markets are typically positive heading into the fall.
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