Why Jarislowsky Fraser?

Portfolio management team

QUARTERLY COMMENTARIES

By the end of the second quarter, financial markets recouped the majority of the losses suffered in March, economic activity is nowhere near normal levels. Central banks did not offer any resistance and, if anything, were extremely careful to assure investors that they are willing and able to offset any setbacks in the economic recovery and financial markets —although they have repeatedly downplayed the potential for the latter. Fiscal policy efforts were more of a mixed bag as the inevitable political realities make additional stimulus more contentious, particularly with the upcoming U.S. national election. In our first quarter comments, we suggested that the recession would be “serious” and “with some caveats, we can say it will be short-lived”. Those caveats reflect the level of uncertainty that remains today. There are multiple unknowns, particularly as it relates to the intensity and path of the pandemic. At this point, one could argue that valuations have moved ahead of the economic recovery, but this is not unusual as markets discount the future. What is unusual is the clarity with which central banks, and in particular the US Federal Reserve, have reinforced their commitment to sustain the recovery, leading to more support for asset prices than in the past.

The corporate bond market rallied substantially in the second quarter on the back of actions by central bankers. In mid-April, the Bank of Canada announced its intention to introduce a $10-billion corporate bond purchase program to buy eligible Canadian investment grade corporate bonds in the secondary market. With this unprecedented direct support, corporate bond spreads rallied strongly—a situation that is not typical during a very weak economic environment. Canadian corporate bonds posted strong gains with their yields declining by 88 bps on average while 10-year federal government bond yields declined by only 24 bps. Likewise, in April, the U.S. Federal Reserve also announced its support for high-yield credit markets, leading to a significant rally in high-yield corporate bonds (rated below investment grade or BBB) despite the likelihood of a substantial rise in default rates.

The Bond portfolio outperformed its benchmark for the quarter. The main contributor was the overweight position in corporate bonds. We added to our exposure during the quarter. We had been building capacity to add credit risk over the last year, which proved advantageous in the recent sell-off. Security selection also contributed positively to performance. The detractor to performance continues to be our shorter duration, or interest rate exposure, as yields continued to decline. This quarter, the Canadian bond market rose 5.9% with corporate bonds producing an 8.1% return. The spread between corporate and government bond yields narrowed by 88 bps during the period. Essentially, the riskier the corporate bond, the better it performed. Notable contributors to performance in the equity portion of the portfolio were Restaurant Brands, Fanuc and Stantec. The main detractor to performance was Compass Group.

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 7.3%, 1 year 2.3%, 3 years 3.0%, 5 years 3.4%, Since Inception 4.8%. 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.

Portfolio management team

QUARTERLY COMMENTARIES

The second quarter provided an extremely sharp bounce back in equity markets, encouraged by unprecedented coordinated monetary and fiscal stimuli globally along with signs of improvement of the COVID-19 pandemic within certain regions.

From a sector standpoint, Information Technology continued to lead the way in most markets.  The combination of recurring cash flows, wide-ranging capital deployment opportunities in a more digitized world, and the potential for continued “work from home” recommendations propelled many shares to all-time highs. Consumer Discretionary was also notable, as prospects for a gradual reopening of the global economy buoyed hopes of the return to consumer spending. Materials also performed well in many markets, with gold companies notably continuing to contribute to Canadian index returns. Consumer Staples and Banks failed to keep up with the rebound. The U.S. market continued to be a strong performer, with the technology heavyweights propelling benchmarks forward despite ongoing social unrest and a resurgence of COVID-19 cases in many states. Australia and South Africa, also showed gains, as commodity prices rebounded from their lows and their respective currencies recovered.

The corporate bond market rallied substantially in the second quarter on the back of actions by central bankers. With this unprecedented direct support, corporate bond spreads rallied strongly—a situation that is not typical during a very weak economic environment. Canadian corporate bonds posted strong gains with their yields declining by 88 bps on average while 10-year federal government bond yields declined by only 24 bps. Likewise, in April, the U.S. Federal Reserve also announced its support for high-yield credit markets, leading to a significant rally in high-yield corporate bonds (rated below investment grade or BBB) despite the likelihood of a substantial rise in default rates.

It was a difficult quarter for the Canadian equity portfolio which underperformed the S&P/TSX Composite Index, largely due to a substantial rally in gold and other precious metals stocks, as well as our underweight position in Shopify, which more than doubled during the quarter and now stands as the largest stock in the index. Notable contributors to performance were Restaurant Brands and Shopify. The three main positive contributors to the portfolio year-to-date are the absence of Suncor and BMO, as well as our overweight position in Stantec. Top detractors are our underweight position in Shopify and absence of Barrick, as well as our overweight position in Gildan.

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 9,7%, 1 year 2,1%, 3 years 4,5%, 5 years 4,9%, Since Inception 6,7%. 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 second quarter provided an extremely sharp bounce back in equity markets, encouraged by unprecedented coordinated monetary and fiscal stimuli globally along with signs of improvement of the COVID-19 pandemic within certain regions.

From a sector standpoint, Information Technology continued to lead the way in most markets.  The combination of recurring cash flows, wide-ranging capital deployment opportunities in a more digitized world, and the potential for continued “work from home” recommendations propelled many shares to all-time highs. Consumer Discretionary was also notable, as prospects for a gradual reopening of the global economy buoyed hopes of the return to consumer spending. Materials also performed well in many markets, with gold companies notably continuing to contribute to Canadian index returns. Consumer Staples and Banks failed to keep up with the rebound. The U.S. market continued to be a strong performer, with the technology heavyweights propelling benchmarks forward despite ongoing social unrest and a resurgence of COVID-19 cases in many states. Australia and South Africa, also showed gains, as commodity prices rebounded from their lows and their respective currencies recovered.

The corporate bond market rallied substantially in the second quarter on the back of actions by central bankers. With this unprecedented direct support, corporate bond spreads rallied strongly—a situation that is not typical during a very weak economic environment. Canadian corporate bonds posted strong gains with their yields declining by 88 bps on average while 10-year federal government bond yields declined by only 24 bps. Likewise, in April, the U.S. Federal Reserve also announced its support for high-yield credit markets, leading to a significant rally in high-yield corporate bonds (rated below investment grade or BBB) despite the likelihood of a substantial rise in default rates.

It was a difficult quarter for the Canadian equity portfolio which underperformed the S&P/TSX Composite Index, largely due to a substantial rally in gold and other precious metals stocks, as well as our underweight position in Shopify, which more than doubled during the quarter and now stands as the largest stock in the index. Notable contributors to performance were Restaurant Brands and Shopify. The three main positive contributors to the portfolio year-to-date are the absence of Suncor and BMO, as well as our overweight position in Stantec. Top detractors are our underweight position in Shopify and absence of Barrick, as well as our overweight position in Gildan.

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 11,8%, 1 year -4,0%, 3 years 3,1%, 5 years 4,7%, 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.