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Portfolio management team

QUARTERLY COMMENTARIES

Interest rates were range bound during the quarter as the market wrestled with upward pressure from improving growth and inflation prospects, pitted against extremely bearish positioning that contributed to a lack of sellers. Ultimately, it resulted in a respectable 1.24% return for the FTSE TMX benchmark in the quarter. Corporate bonds continued to outperform government bonds, although the pace of outperformance seems to have exhausted itself for now. The 10-year Government of Canada bond yield finished at 1.63% while the 10-year U.S.Treasury was at 2.39%.The Fed raised its target interest rate by 0.25% (to 1%) for the third time since December 2015, given an improved outlook for the economy. Low real interest rates partly reflect central banks’ effort to stimulate the economy. We expect that the major central banks are past the peak of their incremental stimulus for developed economies; therefore, as their efforts wind down, we expect real interest rates to rise in the short term.

The NBI JF Select Income Fund rose 1.6% in the first quarter, slightly ahead of the benchmark return of 1.5%. Our overweight allocation to corporate bonds contributed positively to  performance while the Government of Canada Real Return bonds underperformed as oil prices sagged. As well, both the equity and preferred share allocations contributed positively to overall performance in the quarter and one year period ending March 31, 2017. Canadian credit markets picked up where 2016 left off, with strong volumes on both the primary and secondary front. Broadly speaking, valuations are stretched and we capitalized on robust secondary flows to crystallize some gains and reduce risk in the portfolios. On the relative value front, we completed our exit of the positions in bank-subordinated debt (mainly Bank of Nova Scotia and TD Bank) as we felt it was trading richly when compared to more senior paper and did not foresee any catalyst for further meaningful spread compression. The energy and utilities space also saw some strong performers, and we trimmed holdings of both TransCanada Pipelines and Westcoast Energy, purchasing similar term Federal government bonds. Provincial credits have had a good run in recent quarters, and we sold some Province of Ontario and British Columbia issues in favour of similar term but higher-rated Canada Housing Trust 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 1.8%, 1 year 7.1%, 3 years 5.1%, 5 years 6.2%, Since Inception 5.9%. 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 months since the election of President Trump and his inauguration have been very good for the world’s stock markets. Undoubtedly his administration’s pro-business focus, along with promises of lower taxes and infrastructure spending have been well received, despite the struggles faced in the implementation.

On the economic front the numbers have been fairly strong. In Canada, fourth quarter real GDP growth handily surpassed expectations, coming in at an annualized rate of 2.6%. In the U.S., record high consumer confidence and strong job growth suggest that the Federal Reserve’s (the “Fed”) path towards “normalized” interest rates is appropriate. In Europe, despite the U.K.’s actions towards a complete “Brexit”, the outlook for growth is improving and therefore the need for further stimulus is under review. All in all, the expectation for global economic growth in 2017 is a modest but healthy 3.4%, according to the IMF.

The above resulted in mostly above average market returns during the first quarter. The S&P/TSX was one of the weaker performing benchmarks, generating a return of 2.4% for the quarter. A pull back in the price of oil was the main detractor. In the U.S., the S&P 500 jumped 6.1% (in USD), while international developed markets, as measured by the MSCI EAFE Net Index, rose by 7.4% (in USD), helped by very strong performance from most European markets. Japan’s Nikkei fell by 1.0% (in JPY). The best performing markets were generally those in developing countries, with the MSCI Emerging Markets Index gaining 11.1% (in USD). The Canadian dollar gained 0.56% versus the U.S. dollar, finishing at US$0.7498, thus slightly reducing USD returns when converted back to Canadian dollars. On the bond side, the market rebounded after a poor fourth quarter, with the FTSE TMX Bond Universe generating a return of 1.2%. The 10-year Government of Canada bond yield finished at 1.63% while the 10-year U.S. Treasury was at 2.39%.

Both institutional investors and households are carrying equity weights that are well above long-term averages, and this has historically been a good predictor of long-term returns. Despite somewhat elevated valuations, we continue to believe that there is still the potential for more upside in global equity markets.

Asset allocation was a positive contributor, with the overweight in both U.S. and international equities adding value. The underweight in bonds also helped as, despite the reasonable performance of the bond component, equities handily outperformed. On the negative side, the strong rally in the U.S. market made it difficult for our portfolio of higher quality, more conservative stocks to outperform.

Disclosures:

Source of data: Jarislowsky, Fraser Limited, MSCI Inc., S&P Financial Services LLC., TSX Inc., PC Bond Analytics, Global Industry Classification Standard (GICS) by MSCI and Standard and Poor’s, Wilshire Atlas Analytics, Bloomberg, RBC Capital Markets, Morningstar Research Inc., as at March 31, 2017.

This document is provided for information purposes only, it is not intended to convey investment, legal, tax or individually tailored investment advice. All opinions and estimates contained in this report constitute Jarislowsky, Fraser Limited’s judgment as of the time of writing and are provided in good faith. All data, facts and opinions presented in this document may change without notification.

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Balanced Fund 3 months 2.2%, 1 year 10.5%, 3 years 6.9%, 5 years 8.9%, Since Inception 8.0%. 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

The months since the election of President Trump and his inauguration have been very good for the world’s stock markets. Undoubtedly his administration’s pro-business focus, along with promises of lower taxes and infrastructure spending have been well received, despite the struggles faced in the implementation. Thus far, the risks associated with the administration’s isolationist/protectionist view seem to have been ignored, as many of the markets that are likely to be negatively affected have, in fact, performed well.

On the economic front the numbers have been fairly strong. In Canada, fourth quarter real GDP growth handily surpassed expectations, coming in at an annualized rate of 2.6%. In the U.S., record high consumer confidence and strong job growth suggest that the Federal Reserve’s (the “Fed”) path towards “normalized” interest rates is appropriate. In Europe, despite the U.K.’s actions towards a complete “Brexit”, the outlook for growth is improving and therefore the need for further stimulus is under review. All in all, the expectation for global economic growth in 2017 is a modest but healthy 3.4%, according to the IMF.

The above resulted in mostly above average market returns during the first quarter. The S&P/TSX was one of the weaker performing indices, generating a return of 2.4% for the quarter. A pull back in the price of oil was the main detractor. The Canadian dollar gained 0.56% versus the U.S. dollar during the quarter, finishing at US$0.7498.

The NBI JF Select Canadian Equity Fund generated a return of 1.5%, slightly lagging the return of the S&P/TSX Composite (2.4%). Overall stock selection was positive and it was therefore the underweight in the Materials sector (+6.2%) that was responsible for most of the underperformance. Once again, the majority of this was caused by the portfolio’s lack of exposure to gold producers. Energy (−5.7%) was the poorest performing sector, as the price of oil fell, and our holdings in the sector varied in performance.

Over the twelve months ended March 31, 2017, the portfolio lagged the benchmark in a very strong, commodity-driven market. This was primarily the result of our overweight in Consumer Staples and our focus on larger, more integrated names in the Energy sector. The portfolio returned 14.0% while the S&P/TSX Composite returned 18.6%.

Disclosures:

Source of data: Jarislowsky, Fraser Limited, MSCI Inc., S&P Financial Services LLC., TSX Inc., PC Bond Analytics, Global Industry Classification Standard (GICS) by MSCI and Standard and Poor’s ,Wilshire Atlas Analytics, Bloomberg, RBC Capital Markets, Morningstar Research Inc., as at March 31, 2017.

This document is provided for information purposes only, it is not intended to convey investment, legal, tax or individually tailored investment advice. All opinions and estimates contained in this report constitute Jarislowsky, Fraser Limited’s judgment as of the time of writing and are provided in good faith. All data, facts and opinions presented in this document may change without notification.

Returns of the F Series may vary mainly because of the different fees and expenses: NBI Jarislowsky Fraser Select Canadian Equity Fund 3 months 1.8%, 1 year 15.3%, 3 years 7.8%, 5 years 11.1%, Since Inception 9.1%. 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.

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.