Why Jarislowsky Fraser?

Portfolio management team

QUARTERLY COMMENTARIES

The bond market posted strong returns in the second quarter as yields continued their descent in response to evidence of weakness in the global economy and anticipation of central bank interest rate cuts. Within the central banks’ data dependency framework, we are not surprised that the Fed has shifted relatively quickly from a tightening to an easing bias. While economic momentum has moved meaningfully lower, driven by weakness in China, the Canadian economy has generally surprised to the upside. The pressure to lower interest rates is not as obvious in Canada when looking at the inflation and growth prospects for the economy, and it is a dubious proposition that households require more incentives for debt-fueled spending.

Corporate bonds outperformed government bonds in the second quarter as the rally continued. As with the first quarter, the driving force was central bankers’ shift to a more dovish policy stance, improving the pricing of all financial assets and, in particular, the more credit sensitive ones in the bond market. The yield curve further inverted as the 3-month Treasury bill yield was unchanged at 1.66% while the 10-year Government of Canada bond yield declined 14bps to 1.47%. Some of the inversion was a result of central bank intervention, however, this could still be seen as a signal of weaker economic growth to come.

The portfolio underperformed the benchmark in the second quarter. The portfolio’s shorter duration position relative to the duration of the benchmark index was a detraction from performance in the second quarter. Long bonds outperformed short- and mid-term bonds with the Canadian yield curve retracting some of the steepening experienced in the first quarter. Consequently, the more bulleted structure of the portfolio’s holdings was a detraction to performance in the quarter. The portfolio’s overweight position in corporate bonds was the key contributor to positive relative quarterly performance. Selected utility holdings did particularly well along with continued narrowing spread performance from financial corporate holdings.

Several of the companies in the equity portion of the portfolio performed very strongly in the quarter following good results. Top contributors were CCL, CAE and Industrial Alliance Financial Group. While top detractors to performance were ARC Resources, Saputo and SNC-Lavalin.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Income Fund 3 months 1.8%, 1 year 4.5%, 3 years 3.6%, 5 years 3.7%, Since Inception 5.1%. 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

The second quarter of the year continued to build on the positive momentum shown by financial markets in the previous quarter. The more dovish stance taken by the world’s key central banks implied that the next move in administered rates is likely to be downward. Confronted by weaker data, stubbornly low inflation and further risks to trade, the European Central Bank (ECB), the U.S. Federal Reserve (Fed) and the Bank of Canada all pointed towards further monetary stimulus. Relatively bad economic news, therefore, ended up being good news for the markets.

The one area of concern that remains is the apparent weakness in the manufacturing industry in the U.S., Germany, China and Japan. The fear is that this will lead to job losses and falling consumer confidence, which explains the reversal in central bank sentiment. The trade picture improved somewhat near the end of the quarter, with China and the U.S. at least agreeing to resume talks, although the possibility of the U.S. shifting focus to the eurozone may still be enough to induce volatility.

The Fund was relatively flat against the benchmark in the second quarter. The Canadian Equities portfolio performed reasonably well for the quarter. The main positive contributors were CCL, CGI, CAE, Manulife and TD Bank. CCL, the global labelling company, saw better growth rates during the period with fundamentals pointing to an improved outlook for 2020. TD Bank, the largest over-weighted bank, had better results than others in terms of growth, with contribution from the U.S., and improved credit quality. In the Foreign Equities portfolio, Microsoft, Mastercard, Boston Scientific, and RELX were top contributors to performance. RELX exhibited strong performance despite the broader economic trade related fears that permeated the markets.

The fixed income portfolio performed well against the benchmark The portfolio’s overweight position in corporate bonds was the key contributor to positive relative quarterly performance. Selected utility holdings did particularly well along with continued narrowing spread performance from financial corporate holdings.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Balanced Fund 3 months 2.9%, 1 year 7.2%, 3 years 6.7%, 5 years 5.6%, Since Inception 7.2%. 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

The second quarter of the year continued to build on the positive momentum shown by financial markets in the previous quarter. The more dovish stance taken by the world’s key central banks implied that the next move in administered rates is likely to be downward. Confronted by weaker data, stubbornly low inflation and further risks to trade, the European Central Bank (ECB), the U.S. Federal Reserve (Fed) and the Bank of Canada all pointed towards further monetary stimulus. Relatively bad economic news, therefore, ended up being good news for the markets.

The one area of concern that remains is the apparent weakness in the manufacturing industry in the U.S., Germany, China and Japan. The fear is that this will lead to job losses and falling consumer confidence, which explains the reversal in central bank sentiment. The trade picture improved somewhat near the end of the quarter, with China and the U.S. at least agreeing to resume talks, although the possibility of the U.S. shifting focus to the eurozone may still be enough to induce volatility.

The Canadian equity portfolio performed reasonably well for the quarter outperforming the benchmark over the same period. Several of the companies in the portfolio performed very strongly in the quarter following good results. Top contributors were CCL, CGI, Intact Financial Group, Industrial Alliance Financial Corporation, and TD Bank. CCL, the global labelling company, saw better growth rates during the period with fundamentals pointing to an improved outlook for 2020. TD Bank, the largest over-weighted bank, had better results than others in terms of growth, with contribution from the U.S., and improved credit quality.

SNC-Lavalin and Saputo were some main detractors to performance. Saputo’s underperformance was driven largely by swine fever lowering expectations of dry milk exports to China. SNC-Lavalin suffered as a result of investor capitulation following poor Q2 results announced on May 2nd. In June, the board announced management changes and a total reevaluation of all business lines. We expect this will lead to the contraction and/or elimination of part of its business that is causing much of the recent earnings volatility. SNC’s value is underpinned by world class concession investments that are growing and top-ranked global design company, Atkins, that was acquired in 2016. At these valuation levels, with no net debt following the sale of part of the Highway 407 ETR, we believe there could be material upside.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Canadian Equity Fund 3 months 2.7%, 1 year 6.5%, 3 years 8.5%, 5 years 5.9%, Since Inception 8.1%. 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.