Why Jarislowsky Fraser?

Portfolio management team

QUARTERLY COMMENTARIES

 The Canadian bond market posted one of its weakest quarters in recent years, declining -1.0% as global interest rates rose in response to decent economic growth and continued central bank interest rate increases in Canada and the US.

After lagging the US Federal Reserve in its program to normalize interest rates, the Bank of Canada raised its target interest rate by 0.25% to 1.5%, matching the Federal Reserve’s 0.25% increase. The European Central Bank (ECB) is likely keen to also move rates higher as it remains stuck in negative territory (-0.4%). It has already announced that it will phase out its asset purchase program by yearend. The Bank of Japan has allowed more flexibility around its yield control target and as a result its ten-year government bond yield rose from 0.02% to 0.12%. All together it is clear that central banks are unwinding the unprecedented liquidity expansion of the past decade.

The bond fund outperformed the FTSE/TMX Universe return with most of the outperformance attributed to the shorter duration of the portfolio which reduced its downside to the increase in interest rates experienced during the quarter. Our overweight in corporate credit and in particular, senior Canadian bank deposit notes, was also a positive contributor to performance.

Canadian and U.S. 10-year government yields rose approximately 0.3% in the quarter. Corporate bonds recovered some of their underperformance earlier in the year. Their performance was consistent with the improved growth scenario and some late in the quarter stability in the emerging markets. Issuance remains robust with year-to-date levels likely to be close to record highs. Quality is weak, as you would expect late in the credit cycle, with loan covenants in particular favouring the borrower over the lender.

The equities portion of the portfolio benefitted from a solid progression from Financial Services, and foreign stocks in Consumer Staples, Information Technology and Health Care.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Income Fund 3 months -0.2%, 1 year 2.6%, 3 years 3.8%, 5 years 4.8%, Since Inception 5.0%. 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

In the third quarter, the U.S. continued to lead the developed world with strong equity market results. Higher inflation and fears around the impact of tariffs and trade were overshadowed by solid economic growth, low unemployment, improved productivity and above-consensus corporate earnings. The U.S. Federal Reserve (Fed) increased the fed funds rate in June, and economic data continued to support additional tightening. This hawkish dynamic sustained the upward momentum in the U.S. dollar, and consequently has put several emerging market currencies under pressure. The acute weakness of the Turkish lira, in particular, affected sentiment on a number of European banks that have small but manageable exposures. In Canada, quarterly results were muted given the weakness in the oil price and the instability over the Trans Mountain pipeline.

Trade tension escalated between the U.S. and China during the quarter as President Trump announced in late September, additional tariffs ($200B) at an initial rate of 10%. China retaliated with its own set of measures, targeting primarily agricultural products. This ongoing gamesmanship as well as on-and-off trade talks between the negotiators is creating volatility in the markets in the short term, filtering into the broader global landscape.

In Europe, Italian budget negotiations are an area of focus, as the two populist parties try to agree on a budget for October. The markets are monitoring whether the two "Eurosceptic" coalition populist parties keep to their spending plans and increase the deficit, which concerns the European Union (EU) and increased tensions with its northern partners. Elections will likely be called in short order if the budget does not pass, which will add increased uncertainty.

The largest positive contributor to the Canadian equities outperformance came from our absence in gold stocks (some of which have declined by more than 25%) and the solid performance of Nutrien. Financials outperformance came from banks, a solid rebound from Intact and Thomson Reuters. Information Technology continued its positive trend driven by the appreciation of Open Text. In foreign equities, the Consumer Staples and Health Care sectors benefitted from solid performances by Walgreens and Roche respectively.

A key strength of the fixed income portfolio in the quarter was its shorter duration, which reduced its downside to the increase in interest rates experienced 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 3 months 0.7%, 1 year 5.3%, 3 years 6.1%, 5 years 7.0%, 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

In the third quarter, the U.S. continued to lead the developed world with strong equity market results. The U.S. Federal Reserve (Fed) increased the fed funds rate in June, and economic data continued to support additional tightening. In Canada, quarterly results were muted given the weakness in the oil price and the instability over the Trans Mountain pipeline.

Trade tension escalated between the U.S. and China during the quarter. On-and-off trade talks between the negotiators is creating volatility in the markets in the short term, filtering into the broader global landscape.

In Europe, Italian budget negotiations are an area of focus, as the two populist parties try to agree on a budget for October. The markets are monitoring whether the two "Eurosceptic" coalition populist parties keep to their spending plans and increase the deficit, which concerns the European Union (EU) and increased tensions with its northern partners.

Financials performed well in the Canadian equities portion of the Fund with solid progression from banks, a solid rebound from Intact, which produced excellent results following a couple of disappointing quarters, and Thomson Reuters. The Consumer Discretionary sector backed by good stock selection was a good second contributor, attributable to progression from Gildan and our absence from pricy Dollarama, which declined materially following two consecutive quarters of disappointing earnings. Sectors that declined during the quarter were Energy, due mainly to pipeline congestion affecting spreads between the Canadian and international price of oil, and Materials due to declining gold stocks, but Nutrien did show a solid performance.

In Q3, the Health Care sector was generally a strong performer in the foreign equities portion of the Fund, where Roche posted solid increases.

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 0.8%, 1 year 6.3%, 3 years 8.7%, 5 years 8.6%, 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.