Why Jarislowsky Fraser?

Portfolio management team

QUARTERLY COMMENTARIES

Bond markets posted slight declines on the back of improving prospects for the global economy. Within the context of the strong gains this year, the pullback was minor. It was driven by the rise in yields in the fourth quarter as a result of fading expectations for economic weakness due to oncoming signs of recovery and another interest rate cut by the U.S. Federal Reserve Bank. The improved economic outlook fed directly into the outperformance of corporate and provincial bonds. In addition, foreign demand for North American corporate bonds remains strong as yields are attractive relative to Japanese and European levels. Underlying fundamentals for corporate bonds continue to deteriorate as leverage increases. On its own, increased leverage is not necessarily negative as long as the increased debt is used to fund productive investments. However, the numbers suggest that much of the debt is being used to fund the buyback of stock, which is more of a financial engineering exercise than an investment in future production.

The latest rise in yields naturally brings into question how high they can go. We expect some further increases, but absent a significant rise in inflation, the increase should be relatively limited. Economic growth, while recovering, is not expected to be strong and North American yields are unlikely to deviate too far from much lower European and Japanese levels. In addition, the elevated debt levels of corporations and Canadian households limits the room for interest rates to increase as the pain from the higher rates will be felt much sooner than within an economy that is less indebted.

Canadian corporate bonds outperformed federal bonds in the fourth quarter; and consequently the portfolio’s overweight position in corporate bonds generated notable allocation performance. The portfolio’s strong relative performance in the fourth quarter was enhanced by corporate bond selection in the infrastructure and industrial sectors, as well as solid security selection in the provincial bond sector. With the rise in yields in the fourth quarter, the portfolio’s short duration position benefitted its relative performance.

Several of the companies in the equity portion of the portfolio performed strongly in the quarter, following good earnings results. Top contributors were SNC, Industrial Alliance and Stantec. Gildan and Unilever were top detractors to performance.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Income Fund 3 months 1.0%, 1 year 9.6%, 3 years 3.4%, 5 years 3.5%, 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

Looking back on 2019, the year started under a dark cloud, with fears that interest rates had risen too far, too fast, and a number of risks needing to be addressed politically, including U.S.-China trade tensions, the USMCA and Brexit, among others. The year finished with movement on all three fronts, as well as lower interest rates in most of the world’s major economies, which provided the stimulus for financial markets to generate strong returns for the fourth quarter and for 2019 as a whole.

On the economic front, growth could be characterized as “tepid”, with global real GDP growth tracking at 2.8% – the lowest pace in a decade. The US continues to lead the developed economies by a good margin, and will be helped by progress in trade negotiations with China, although policy uncertainty remains in place with Europe. In Canada, growth is trending at around +1.7% per annum, and there is nothing on the near term horizon that is likely to push that significantly higher. The Bank of Canada has refrained from cutting rates this year, preferring to more carefully assess the balance between external issues and domestic resilience; however, the markets are betting on at least one rate cut in 2020.

The fourth quarter saw very strong equity returns, which took many indexes to all-time highs. Positive catalysts in the quarter included tempering of Brexit uncertainty due to a significant majority in the UK election results, progress on the trade front with a U.S.-China “phase one” deal reached, and ongoing monetary accommodation from key central banks globally.

Notable in the Canadian Equity portfolio this quarter was the strong rebound of SNC, based on improved fundamentals regarding cash flows and margins, along with its strategic decision to gradually exit the construction business that has been responsible for disappointing earnings. Other top contributors were Stantec and Industrial Alliance. Stantec is well positioned to benefit from the tailwind of numerous engineering projects. The main detractors in the quarter were the absence of Canadian Pacific Railway and Shopify from the portfolio, as well as weakness from Gildan. In the Foreign Equities portfolio, top contributors to performance were UnitedHealth and Atlas Copco., and top detractors were Anheuser-Busch InBev and Unilever.

The fixed income portfolio outperformed the benchmark in the quarter and the year. Canadian corporate bonds outperformed federal bonds in the fourth quarter; and consequently the portfolio’s overweight position in corporate bonds generated notable allocation performance. The portfolio’s strong relative performance in the quarter was enhanced by corporate bond selection in the infrastructure and industrial sectors, as well as solid security selection in the provincial bond sector.   

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Balanced Fund 3 months 2.4%, 1 year 15.4%, 3 years 5.6%, 5 years 5.7%, 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

Looking back on 2019, the year started under a dark cloud, with fears that interest rates had risen too far, too fast, and a number of risks needing to be addressed politically, including U.S.-China trade tensions, the USMCA and Brexit, among others. The year finished with movement on all three fronts, as well as lower interest rates in most of the world’s major economies, which provided the stimulus for financial markets to generate strong returns for the fourth quarter and for 2019 as a whole.

On the economic front, growth could be characterized as “tepid”, with global real GDP growth tracking at 2.8% – the lowest pace in a decade. The US continues to lead the developed economies by a good margin, and will be helped by progress in trade negotiations with China, although policy uncertainty remains in place with Europe. In Canada, growth is trending at around +1.7% per annum, and there is nothing on the near term horizon that is likely to push that significantly higher. The Bank of Canada has refrained from cutting rates this year, preferring to more carefully assess the balance between external issues and domestic resilience; however, the markets are betting on at least one rate cut in 2020.

The fourth quarter saw very strong equity returns, which took many indexes to all-time highs. Positive catalysts in the quarter included tempering of Brexit uncertainty due to a significant majority in the UK election results, progress on the trade front with a U.S.-China “phase one” deal reached, and ongoing monetary accommodation from key central banks globally.

Notable in the quarter was the strong rebound of SNC, based on improved fundamentals regarding cash flows and margins, along with its strategic decision to gradually exit the construction business that has been responsible for disappointing earnings (because SNC was assuming responsibility for cost overruns). The recently announced legal settlement finally puts an end to that chapter, and enables management to focus on the future. Stantec was also a top contributor following a well-received and credible 3-year strategic plan. The company is now well positioned to benefit from the tailwind of numerous engineering projects (water, infrastructure etc.). Another solid contributor was Industrial Alliance as it executes on its strategy to grow more through acquisitions.

The main detractors in the quarter were the absence of Canadian Pacific Railway and Shopify from the portfolio, as well as weakness from Gildan.

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 3.5%, 1 year 20.4%, 3 years 6.1%, 5 years 6.4%, Since Inception 8.2%. 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.