Why Jarislowsky Fraser?

Portfolio management team

QUARTERLY COMMENTARIES

During the quarter, the Canadian bond market increased 0.6%, registering a more modest return for the quarter but a solid 8.7% gain for the year.  Corporate and provincial bonds continued to outperform their federal counterparts. The improving economic prospects raised risk appetites, as did the negative real yields on the highest quality bonds around the world. In general, interest rates rose in the quarter although the increases were concentrated in longer maturities as central banks continue to anchor short rates at very low levels. Within the corporate sector, the strongest returns came from past laggards, as shown by the outperformance of energy and real estate companies. The more defensive names trailed the broader market, in particular corporate bonds of utility and telecommunications companies.

The NBI Select Income Fund outperformed its respective benchmark for the quarter, and ended the year with a strong performance relative to the benchmark. The higher allocation to corporate and provincial bonds was the major contributor to the strong value-add. Individual security selection and the allocation to Real Return bonds also contributed positively to the relative performance, as did the slightly smaller exposure to interest rate risk.

Disclosures:

The Bank of Nova Scotia (BNS) is the parent company of Jarislowsky, Fraser Limited.  BNS securities held in the portfolio are related securities. Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Income Fund 3 months 2.4%, 1 year 3.6%, 3 years 4.0%, 5 years 4.2%, 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

Balanced portfolios continued to perform well in the fourth quarter, driven by strong equity market returns. Relative outperformance was mainly due to the overweight in stocks and performance from the Canadian and US equity sections.

Our top contributors this quarter were CAE (+81%), Gildan (+36%) and Magna (+49%), all of which were caught in the economic throes of the pandemic. CAE benefitted from improved sentiment given the COVID-19 vaccine announcements, and government help toward many airlines in the world. Gildan continued to progress strongly from its lows, producing a much better than expected recent quarter that showed sales and company fundamentals were firmly improving and trending strongly. The company seems to be taking market share with heavy promotions and access to new retail and e-commerce sales channels, as corporate promotional spend, travel and events are still under pressure. Magna is benefitting from a recovery in global vehicle production that is ramping up more quickly than expected following Q2 shutdowns, as OEMs (original equipment manufacturers) rebuild inventories.

During the quarter, the Canadian bond market increased 0.6%, registering a more modest return for the quarter but a solid 8.7% gain for the year.  Corporate and provincial bonds continued to outperform their federal counterparts. The improving economic prospects raised risk appetites, as did the negative real yields on the highest quality bonds around the world. In general, interest rates rose in the quarter although the increases were concentrated in longer maturities as central banks continue to anchor short rates at very low levels. Within the corporate sector, the strongest returns came from past laggards, as shown by the outperformance of energy and real estate companies. The more defensive names trailed the broader market, in particular corporate bonds of utility and telecommunications companies.

For the calendar year, portfolio returns verged on the extraordinary, especially given the lows reached in March. All of the asset classes performed well, although the substantial weight in the poor performing Energy sector in Canada meant that the Canadian market lagged. Strong absolute performance from the US section, along with excellent relative and absolute returns from the international developed markets portfolio also added substantial value. Finally, bond market returns continue to exceed expectations, nearly reaching double digits for the year, driven by falling (and even negative) yields.

Disclosures:

The Bank of Nova Scotia (BNS) is the parent company of Jarislowsky, Fraser Limited.  BNS securities held in the portfolio are related securities. Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Balanced Fund 3 months 3,7%, 1 year 4,7%, 3 years 5,9%, 5 years 6,1%, Since Inception 6,9%. 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 Canadian equity portfolio outperformed the S&P/TSX Composite Index in the fourth quarter, attributable largely to a contraction in gold stocks and a rebound in stocks that were significantly impacted by the pandemic, many in which we increased our positions over the course of the year. The decline in gold stocks (-15.5%) was likely attributable to the price of gold retreating from its yearly high following approval of COVID-19 vaccines. While we know that other factors affect the price of gold, such as the US dollar and inflation expectations, we continue to believe that the price of gold is unsustainable at these levels if the vaccines are effective at eventually eliminating the pandemic.

Our top contributors this quarter were CAE (+81%), Gildan (+36%) and Magna (+49%), all of which were caught in the economic throes of the pandemic. CAE benefitted from improved sentiment given the COVID-19 vaccine announcements, and government help toward many airlines in the world. Gildan continued to progress strongly from its lows, producing a much better than expected recent quarter that showed sales and company fundamentals were firmly improving and trending strongly. The company seems to be taking market share with heavy promotions and access to new retail and e-commerce sales channels, as corporate promotional spend, travel and events are still under pressure. Magna is benefitting from a recovery in global vehicle production that is ramping up more quickly than expected following Q2 shutdowns, as OEMs (original equipment manufacturers) rebuild inventories.

Contributing negatively to relative performance this quarter was our absence in oil & gas producers and specifically CNQ (+45%) and Suncor (+33%), which rebounded strongly. The vaccines and the improved environment have increased oil demand; however, inventories will remain very high for quite a while, and we do not see the global industry dynamics improving enough to justify a sustainably higher price of oil. Our absence in Royal Bank (+13%) also detracted our relative performance, as many Financials (+16.7%) rebounded with the improved outlook for the Canadian economy.

On an annual basis, our portfolio came up slightly short of the benchmark index. This was attributable to the strong performance of Materials, where the companies we hold could not match the rapid progression of pure Material stocks, most of which are gold stocks. Our underweight position in Shopify was another headwind, as it almost tripled in one year and is now the largest stock in the S&P/TSX. Significant contributors to performance for the 2020 calendar year included the underweight in Energy, followed by specific stocks that we added to, such as Magna, CAE, and WSP.

Disclosures:

The Bank of Nova Scotia (BNS) is the parent company of Jarislowsky, Fraser Limited.  BNS securities held in the portfolio are related securities. 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 0.0%, 3 years 4.4%, 5 years 6.6%, 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.