Why Jarislowsky Fraser?

Portfolio management team

QUARTERLY COMMENTARIES

Bond markets rebounded strongly from the negative third quarter, posting a return of 1.8% in Canada and 7.4% in the United States (both denominated in CAD). The U.S. Federal Reserve (Fed) and the Bank of Canada continued to raise the overnight rate to 2.5% and 1.75%, respectively. The impact of their interest rate hikes was overshadowed by the weaker financial market environment and the obvious change to the tone of the central bankers’ communications. The European Central Bank announced the previously telegraphed end to their asset purchase program but maintained the dovish tone by keeping the overnight rate at -0.4%.

The Fund underperformed the FTSE/TMX Universe Bond in the fourth quarter primarily as a result of two factors. The overweight position in corporate bonds negatively impacted relative performance driven by the material widening in Canadian corporate spreads. The Fund’s holdings in inflation-linked bonds also negatively contributed to its total return as Canadian inflation expectations declined markedly in the fourth quarter. The underweight position in provincial bonds relative to FTSE/TMX Universe benchmark positively contributed to the top-line return given the underperformance of provincial bonds relative to federal government bonds.

The 10-year Canadian  government  yield declined by approximately 0.46% in the quarter while the 2-year equivalent yield was only 0.35% lower, flattening the yield curve as equity markets sold off. Corporate bonds significantly underperformed federal government bonds globally as investor confidence was shaken by non-economic factors such as talk of trade wars, yield curve inversions, central bank policy missteps, oil price declines, and Chinese debt bubbles. The material government agency bond’s underperformance was at least partly due to the illiquidity in the corporate bond market. As bond funds tried to satisfy the high volume of redeeming requests, market bids backed away which exacerbated the downturn and forced some selling of the more liquid bonds and more specifically government agency and provincial bonds.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Income Fund 3 months -2.6%, 1 year -2.2%, 3 years 2.6%, 5 years 3.6%, Since Inception 5.5%. 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 final quarter of 2018 saw heightened volatility, erasing the gains in equity indices from the last three quarters. Despite relatively strong economic fundamentals, generally accommodative monetary policy and a corporate tax cut in the U.S., the world’s equity markets suffered their worst year since the global financial crisis. While the USMCA trade agreement will replace NAFTA, the trade dispute between the U.S. and China continues, and Brexit negotiations are ongoing. Both involve massive trade relationships that will be affected for years into the future. The world’s central banks, led by the Federal Reserve in the U.S. (Fed), are on the path towards interest rate normalization. However, there has been great uncertainty around how far they will go and how fast. As expected, the Fed announced the fourth increase of 2018 in mid-December, but lowered its projections for future hikes, estimating that there will be an additional two increases in 2019.

In Canada, the narrative continues to be focused on the Energy sector, an issue that became quite divisive late in the year. Differentials between Western Canadian Select and West Texas Intermediate crude reached all-time highs in November. Trade tensions and the strong U.S. dollar have been the source of great uncertainty in emerging markets. Any country that lives with a substantial deficit in its current account has been particularly affected because much of their debt tends to be USD-denominated.

Over the course of the fourth quarter, the world’s stock markets all declined.

The Fund was essentially flat against the benchmark in the fourth quarter. The Canadian equity portfolio performed relatively well this quarter due to our large overweight in Consumer Staples with exposure to Metro and Alimentation Couche-Tard, followed closely by Consumer Discretionary due to our absence in declining Dollarama and good performance from Gildan. The Financials and Energy sectors also contributed strongly due to our conservative positioning. In the foreign equities, despite a conservative sector positioning, our overweight positions in both Consumer Staples and Health Care were not enough to offset our absence from the Utilities and Real Estate sectors. Our less cyclical positioning in areas such as Materials, Industrials  and Energy helped to offset the negative absolute performance in those areas. Stocks which held up well were generally found in more defensive sectors and included names such as Roche and Unilever.

The fixed income portfolio underperformed the FTSE/TMX Universe Bond return in the quarter as a result of two factors. The overweight position in corporate bonds negatively impacted relative performance driven by the material widening in Canadian corporate spreads, and the portfolio’s holdings in inflation-linked bonds also negatively contributed to its total return as Canadian inflation expectations declined.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Balanced Fund 3 months -4.5%, 1 year -2.4%, 3 years 3.5%, 5 years 4.8%, Since Inception 6.2%. 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 final quarter of 2018 saw heightened volatility, erasing the gains in equity indices from the last few quarters. In many ways, 2018 was the antithesis of 2017; volatility returned with a vengeance, both in terms of day-to-day fluctuations and in the form of two “corrections” of greater than 10%.

Despite relatively strong economic fundamentals, generally accommodative monetary policy and a corporate tax cut in the U.S., the world’s equity markets suffered their worst year since the global financial crisis. While the USMCA trade agreement will replace NAFTA, the U.S./China trade  tensions continue, and Brexit negotiations are ongoing. The world’s central banks, led by the U.S. Federal Reserve are on the path towards interest rate normalization. The Fed announced the fourth increase of 2018 in mid-December, but lowered its projections for future hikes, estimating that there will be an additional two increases in 2019. In Canada, the narrative continues to be focused on the Energy sector, an issue that became quite divisive late in the year. Differentials between the price for Western Canadian Select and West Texas Intermediate crude reached all-time highs during November. Access to new markets is limited by a lack of pipeline capacity, and until that issue is addressed in some meaningful way, even the $1.6 billion in federal assistance announced in December can only be seen as a “band aid” solution. In addition, the closing of the GM plant in Oshawa may turn out to be the canary in the coal mine for auto manufacturing in Canada.

The Canadian equity portfolio outperformed the benchmark for the quarter. Contributing strongly to our outperformance this quarter was our large overweight in Consumer Staples with exposure to Metro and Alimentation Couche-Tard, followed closely by Consumer Discretionary due to our absence in declining Dollarama and good performance from Gildan. Financials and Energy sectors also contributed strongly due to our conservative positioning, where we are underweight in banks, overweight in Thomson Reuters and overweight in the pipelines at the expense of energy producers. This was partially offset by the negative contribution from Materials, mainly due to declining stock prices at Nutrien and CCL, two significant positions with favourable long-term return expectations, in our opinion. Our absence from Communication Services and Utilities also cost us a little during the quarter, due to the flight to safety, but we continue to believe there are better long-term risk/reward opportunities.

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 -8.0%, 1 year -5.5%, 3 years 4.8%, 5 years 4.9%, Since Inception 6.8%. 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.