How did the markets perform in this quarter and how might this impact your investments? Get information and expert opinions from CDSPI’s fund managers, including market outlooks, fund performance details, their investment strategies, and more. For an up-to-date look at the full list of our investment funds and their performance, visit our funds page. For more information on privately managed portfolios through Cumberland Private Wealth, click here.
Emerging Markets Equity Strategy Notes
While volatility increased across several emerging markets in the third quarter – much of it driven by developments within China – we believe in the potential benefits that can be derived from an appropriate allocation to developing companies within a well-diversified portfolio. The possibility of both a multi-year upcycle in a number of these cyclical businesses, and a normalization of economic activity overall, further enhances our belief in the potential for emerging markets companies that are held within our strategy.
Capital Group’s Quarterly Fund Commentaries
U.S. equities advanced to start the quarter but stumbled in September as investors weighed the prospects of a recovering consumer against concerns over rising inflation and interest rates as well as a fraught political environment. Further insights attached.
CI’s Quarterly Fund Commentaries
We believe that peak growth and earnings, as well as peak monetary and fiscal stimulus, may be behind us, which means that peak returns may also be in the past. However, peak COVID-19 delta infections are likely also in the past, and we believe the peak of supply chain disruptions has also passed. We believe that growth and earnings is slowing but still positive and should be above-trend through 2022. Accommodative monetary policy withdrawal is expected to be gradual and well telegraphed, but we believe that easy financial conditions should persist. Potential risks we will continue to monitor include the possibility of a policy error from China that could slow domestic growth more than expected, rising energy prices pushing inflation up, and lower-than-expected third-quarter corporate results.
Cumberland’s Third Quarter Market Update
Each quarter, the investment management team at Cumberland Private Wealth share their key market and economic observations and portfolio updates across global equity and fixed income markets.
Fiera Capital’s Third Quarter Commentaries
The global economy lost some steam in the third quarter as the resurgent pandemic dampened the recovery. Still, the global economy remains on solid ground, allowing policymakers to begin reining in their ultra-accommodative monetary stimulus. Please read through the following commentaries to learn more about Fiera’s positioning, performance and outlook.
Invesco’s 2021 Quarterly Fund Commentaries
Developed global equity markets were flat to slightly positive in the third quarter of 2021 amid concerns about rising inflation, supply disruptions and the economic growth rate. In the team’s view, consensus investor sentiment appears to be that inflationary pressures are transitory and should normalize in a post-pandemic recovery. The investment team has a more cautious view and believes inflationary trends may be more intractable. The team believes that it may be prudent to now hold high-quality equities that sell required products and services, have strong market positions and durable competitive advantages that allow them to pass on higher costs to customers. These traits are characteristic of the investments the team targets for the Portfolio.
US Small Cap
The current debate in the market is whether the elevated inflation we are experiencing today is transitory or not. The team continues to anticipate that economies will accelerate as they reopen but that any accompanying rise in inflation will be largely temporary. Given the expectation of a strong economic recovery, the team believe the environment will favor value over growth, and industrials, materials and financials over defensive sectors in the short term. The team will maintain their valuation discipline and focus on companies with skilled management teams that are executing better than their peers. These companies tend to have higher profit margins and returns on invested capital, rising market shares and consistently strong pricing power (important in an inflationary environment).
The global economy continues to deliver growth and recovery; however, modest headwinds including the delta variant, inflation concerns, waning stimulus and supply chain disruptions, are currently restricting growth below potential. Listed real estate delivered a quarter of volatile performance aligned with trends in the wider markets. The Portfolio shows overweight exposure to companies aligned with the cyclical recovery (e.g. senior housing, lodging and shopping centres) as well as overweight positioning to long-term structural growth sectors (e.g. single-family residential and industrial). Companies with defensive income profiles (e.g. triple-net lease and medical office) or secular headwinds (e.g. retail) remain underweight.
While the Canadian equity market pulled back in September to end the quarter relatively flat, the momentum to push to new highs remain. In the team’s view, caution is warranted today given an enthusiasm for equities along with examples of elevated valuations that the team feels are disconnected from fundamentals. However, the team remains comfortable with how the Fund is positioned in large part because the Portfolio’s holdings look very different than the overall market. The Fund is a concentrated portfolio of select quality businesses that, on average, trade at a discount to the market.
Over the quarter, European equities experienced muted and mixed returns after a strong first half of 2021. The Fund continued to outperform the market with strong security selection. The rotation into cyclical stocks in Europe on growing expectations of an economic rebound has fueled high valuations of economically sensitive stocks. In many cases, these cyclical stocks are very low through the cycle growers and are trading at similar valuations to high growth businesses. We are seeing a short-term buildup of inventories (all the way through the product cycle from raw materials to finished goods) that we believe reflects more about uncertainties about tariffs and pandemic lockdowns than broad, sustainable demand growth. We look forward to continuing to take advantage of this rotation and add high-quality ideas in Europe that we previously considered too expensive.
PH&N’s Quarterly Fund Review
Global equities continued to march higher in the third quarter as extraordinary monetary and fiscal support, soaring corporate profits, and investor confidence propelled most major indexes to record highs before retracing some gains over the course of September. In global fixed income markets, bond yields initially fell in the first half of the third quarter amid slowing growth and the expectation that central banks would maintain accommodative monetary policies. More recently, however, global bond yields pushed higher, reflecting some concern about how transitory recent rates of inflation may be and a more hawkish U.S. Federal reserve. Our Balanced strategy finished the quarter ahead of its blended benchmark, with contribution coming from both equity and fixed income components.
Bond Fund & Core Plus Bond Fund
In the Canadian fixed income market, the yield of the FTSE Canada Universe Bond Index finished the quarter at 1.8%, 0.1% higher than where it began. Yields trended modestly lower at the beginning of the quarter and remained there for most of the quarter before abruptly reversing course in late September, primarily in response to the U.S. Federal Reserve signalling that it would begin tapering its quantitative easing program later this year. In terms of credit, provincial bonds outperformed corporate bonds. Active positioning within interest rate anticipation and credit and liquidity strategies, resulted in the fund finishing the quarter ahead of the benchmark. Overall, the fund’s risk budget remained focused on credit and liquidity strategies over interest rate anticipation, and we continued to upgrade the credit quality of our portfolio.
Dividend Income Fund
The Canadian equity market reached new highs in the third quarter but ultimately finished the period close to flat. The Information Technology sector, now one of the largest in the S&P/TSX by market capitalization, experienced a meaningful reversal over the quarter. Following strength earlier in the period, it was negatively influenced by inflationary concerns and the prospect of rising rates, which have a disproportionate effect on tech companies, as they derive much of their value from discounted future cash flows. Our dividend strategy posted a modest positive return over the quarter, outperforming the Canadian equity market. The fund’s positioning in Info Tech was additive to relative returns. Not owning Canadian e-commerce champion Shopify – which doesn’t pay a dividend – was the top individual contributor to relative performance.
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