Why Jarislowsky Fraser?

Portfolio management team

QUARTERLY COMMENTARIES

Bond market returns were modest as the rise in interest rates offset much of the interest income. The FTSE/TMX Universe index gained 0.5% while the bond portfolio slightly lagged. Most of the underperformance was attributable to the fund’s overweight in corporate bonds and, in particular, mid-term maturities which underperformed long-term maturities. In the last month of the quarter we established a shorter maturity profile than the index and yields subsequently declined, which also detracted from relative performance. The higher yield of the portfolio helped performance as did security selection with its overweight in the outperforming Province of Alberta bonds.

After a weak first quarter, many of the world’s equity markets rebounded in the second quarter, overcoming earlier fears of rising inflation and higher interest rates. While the U.S. Federal Reserve (the Fed), did increase rates by 0.25% in June, the Bank of Canada, European Central Bank and the Bank of England all passed, but continued to indicate that further rate increases may be expected later in 2018 or in early 2019. The U.S. dollar rallied strongly against most currencies, including the euro and the Canadian dollar and this has had important implications for the world’s equity markets.

The implementation of tariffs by the U.S. and retaliatory tariffs imposed by its trading partners remain a high concern. The end game of this fracas is hard to predict, although an all- out trade war is unlikely to produce any clear winner. The risk is that negative sentiment begins to spread and affect stock markets more broadly.

Activity in credit markets was brisk in the second quarter, especially on the new issuance front. The portfolio manager participated in a select group of new issues, including the inaugural debt issues from Keyera Corp. Corporate wise, additions included new issues from BP Capital Markets via a 7-year maple issue, as well as deposit notes from CIBC and TD.  The new issue Green bonds from CPPIB Capital Inc. as well as the Province of Quebec were added.

Within the equity component of the fund, positive contributors to performance included Canadian National Railway, WSP Global and Microsoft Corp.

Disclosures:

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Income Fund 3 months 1.6%, 1 year 2.3%, 3 years 3.4%, 5 years 5.1%, 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 3 months 3.3%, 1 year 4.2%, 3 years 5.2%, 5 years 7.5%, 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

After a weak first quarter, many of the world’s equity markets rebounded in the second quarter, overcoming earlier fears of rising inflation and higher interest rates. While the U.S. Federal Reserve (the Fed), did increase rates by 0.25% in June, the Bank of Canada, European Central Bank and the Bank of England all passed, but continued to indicate that further rate increases may be expected later in 2018 or in early 2019. The U.S. dollar rallied strongly against most currencies, including the euro and the Canadian dollar and this has had important implications for the world’s equity markets.

The implementation of tariffs by the U.S. and retaliatory tariffs imposed by its trading partners remain a high concern. The end game of this fracas is hard to predict, although an all- out trade war is unlikely to produce any clear winner. The risk is that negative sentiment begins to spread and affect stock markets more broadly.

With its relatively higher weight in Energy stocks, the S&P/TSX was a major beneficiary of rising oil prices, with a gain of 6.8% in the second quarter. The S&P 500 rose by 3.4% in local currency (+5.5% in C$) while the MSCI EAFE Net and the MSCI EM Net index fell –1.2% (+0.7% in C$) and −7.9% (–6.2% in C$), respectively.

The S&P/TSX rebounded strongly in the second quarter with a gain of 6.8%, leading returns year-to-date into positive territory. The best returning sectors were Energy (+15.7%) and Information Technology (+11.0%), driven by higher oil prices and some notable price appreciation, such as of CGI. On a year-to-date basis, Information Technology has also been the strongest performing sector, gaining 22.3% (vs. 1.9% for the index).

The main contributors to performance against the benchmark during the quarter were Canadian Natural Resources Limited, driven largely by higher oil prices and solid execution, and Enbridge which rebounded following a difficult start to the year, with positive regulatory developments on Line 3 as well as expected asset sales being the main catalysts.

The portfolio is currently overweight Information Technology, Consumer Staples, Health Care and Industrials while being underweight Materials, Energy and Utilities.

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 5.5%, 1 year 7.2%, 3 years 7.1%, 5 years 9.3%, Since Inception 8.3%. 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.