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Portfolio management team

QUARTERLY COMMENTARIES

The Canadian bond market continued to be one of the better performers, eking out a minor gain in contrast to mild losses in the U.S. market. The contrast between the Bank of Canada’s cautious stance and the Fed’s methodical process of raising interest rates to a more neutral level contributed to the Canadian market’s outperformance. 

Economic prospects for Canada are notably weaker than for the U.S., and Canada faces heavily indebted household and corporate sectors, making it more vulnerable to higher interest rates. In addition, Canada does not have the benefits of significant tax cuts and fiscal spending that the U.S. is experiencing. Trade uncertainty is also somewhat of an overhang; however, we expect that a resolution that will not disadvantage Canada to any great extent will be announced in the near future. European bond markets were relatively strong, following leading economic indicators that suggest growth will slow down in the near term from the strong pace of late.

Equity markets reacted strongly during the first quarter, going from historically low levels of volatility in 2017 to a quarter that saw 23 trading days with market moves of greater than 1% in both directions. The S&P/TSX Composite fell by -4.5%, with the Energy sector leading the slide once again, despite the price of West Texas Intermediate crude rising by 7.5%. The U.S. fared better, but the S&P 500 still ended the quarter down by -0.8% (2.1% in CAD). International developed markets also fell, with the MSCI EAFE Net down -1.5% (1.3% in CAD. For Canadian investors, the impact of lower foreign markets were offset, for the most part, by a stronger U.S. dollar, which rose by 2.8% during the quarter. Bond markets benefitted from a flight to safety, with yields falling across the board. The FTSE TMX Canada Universe Bond rose by 0.1% during the quarter.

The Fund performed flat with its benchmark. Bond market returns were modest in the first quarter. Value-added was attributable to the portfolio’s underweight in provincial bonds as they underperformed both federal and corporate bonds. The portfolio also captured some additional performance by locking in higher yields as they peaked midway through the quarter. Detracting from performance was the continued flattening of the yield curve.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Income Fund - Series F (as of 03/31/18) 3 months -1.0%, 1 year 0.3%, 3 years 2.2%, 5 years 4.5%, Since Inception 5.2%. The NBI Jarislowsky Fraser Select Funds (the “Funds”) are managed by National Bank Securities Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with investments in the Funds. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of returns are based on the historical annual compounded total returns including changes in securities value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns.

Portfolio management team

QUARTERLY COMMENTARIES

Hindsight would tell us that the world’s equity markets were due for a pullback in the first quarter after more than 500 days without a decline of over 5%− amid the second longest bull market in history. However, despite somewhat inflated market multiples, the fundamentals of the global economy had not shown any real signs that the market was ready to turn even though geopolitical risks, along with other “externalities”, were already accounted for in a more cautious outlook for 2018. Ironically, while the geopolitical landscape has calmed, market volatility has sky-rocketed and there are suddenly concerns that inflation is on the rise and the global expansion is coming to an end. Equity markets reacted strongly during the first quarter, going from historically low levels of volatility in 2017 to a quarter that saw 23 trading days with market moves of greater than 1% in both directions.

Most equity markets ended March in negative territory, with global Technology stocks leading the market downwards late in the quarter following the controversy surrounding Facebook and its usage of personal data. The S&P/TSX Composite fell by -4.5%, with the Energy sector leading the slide once again, despite the price of West Texas Intermediate crude rising by 7.5%. The U.S. fared better, but the S&P 500 still ended the quarter down by -0.8% (2.1% in CAD). International developed markets also fell, with the MSCI EAFE Net down -1.5% (1.3% in CAD), however the MSCI Emerging Markets index was the lone bright spot, rising 1.5% (4.4% in CAD) led by Latin America. For Canadian investors, the impact of lower foreign markets were offset, for the most part, by a stronger U.S. dollar, which rose by 2.8% during the quarter. Bond markets benefitted from a flight to safety, with yields falling across the board. The FTSE TMX Canada Universe Bond rose by 0.1% during the quarter.

The portfolio was down slightly over the first quarter. Positive contributions came from from U.S., emerging markets and international equities, along with relatively good performance from the bond section, offset by weaker returns from Canadian equities. Much of the positive benefit from the allocation to non-Canadian equities came from U.S. dollar strength due to a flight to safety during the quarter.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Balanced Fund - Series F (as of 03/31/18) 3 months -1.7%, 1 year 0.5%, 3 years 3.4%, 5 years 6.8%, Since Inception 7.0%. The NBI Jarislowsky Fraser Select Funds (the “Funds”) are managed by National Bank Securities Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with investments in the Funds. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of returns are based on the historical annual compounded total returns including changes in securities value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns.

Portfolio management team

QUARTERLY COMMENTARIES

Hindsight would tell us that the world’s equity markets were due for a pullback in the first quarter after more than 500 days without a decline of over 5% − amid the second longest bull market in history. However, despite somewhat inflated market multiples, the fundamentals of the global economy had not shown any real signs that the market was ready to turn even though geopolitical risks, along with other “externalities”, were already accounted for in a more cautious outlook for 2018. Ironically, while the geopolitical landscape has calmed, market volatility has sky-rocketed and there are suddenly concerns that inflation is on the rise and the global expansion is coming to an end.

Equity markets reacted strongly during the first quarter, going from historically low levels of volatility in 2017 to a quarter that saw 23 trading days with market moves of greater than 1% in both directions. Most equity markets ended March in negative territory, with global Technology stocks leading the market downwards late in the quarter following the controversy surrounding Facebook and its usage of personal data. The S&P/TSX Composite fell by -4.5%, with the Energy sector leading the slide once again, despite the price of West Texas Intermediate crude rising by 7.5%. The U.S. fared better, but the S&P 500 still ended the quarter down by -0.8% (2.1% in CAD). International developed markets also fell, with the MSCI EAFE Net down -1.5% (1.3% in CAD).

Weakness was broad-based among sectors, except for Information Technology (+10%), likely reflecting the uncertainty around escalating global trade restrictions and potentially higher interest rates.

Enbridge (-16.3%) and Alimentation Couche-Tard (-11.9%), two of our key holdings, contributed negatively this quarter, with the former declining as a result of Canadian pipeline capacity issues and, to a lesser extent, due to the reduced attractiveness of their tax-favourable master limited partnership (MLP) structure in the U.S. Alimentation Couche-Tard produced disappointing quarterly results mainly due to the impact of lower fuel margins, which happens occasionally when oil prices increase rapidly. We view all of these issues as temporary.

This was more than offset by positive contributions from our positions in CCL Industries (+12.2%), CGI (+8.8%), Microsoft Corp. (+10.3%), as well as West Fraser Timber (+10.6%) which is currently benefitting from strong prices and momentum in North America housing.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Canadian Equity Fund - F Series (as of 03/31/18) 3 months -3.5%, 1 year -0.5%, 3 years 4.3%, 5 years 8.4%, Since Inception 7.8%. The NBI Jarislowsky Fraser Select Funds (the “Funds”) are managed by National Bank Securities Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with investments in the Funds. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of returns are based on the historical annual compounded total returns including changes in securities value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns.