Bristol Gate U.S. Dividend Growth Equity
Mandate commentary
Q2 2024
Highlights
① The market continues to be very narrow in 2024, as the S&P 500 return continues to primarily be fuelled by a small number of stocks behind a tailwind of significant investments being made in artificial intelligence (AI).
② U.S. equities driven by technology and telecoms sectors.
③ Consumer spending has plateaued, and economic growth has normalized.
Mandate overview
The U.S. Equity strategy continues to perform well in relation to its investable universe of dividend paying stocks with an emphasis on the fastest dividend growers. There was relative underperformance in the quarter and this year against the broad-based benchmark through the first half of the year, primarily as a result of being in an environment where the top 10 performers in the S&P 500 Index Total Return $ CAD contributed over 70% of the index’s year to date total return.
Mandate: underperformed the S&P 500 Index
Performance contributors
On a relative basis, stock selection in the health care sector, and no exposure to consumer staples and energy, were among the primary contributors to performance.
Broadcom, Applied Materials and McKesson were amongst the largest contributors to performance on an absolute basis.
Performance detractors
On a relative basis, stock selection in the information technology sector, and the overweight positions and stock selection in materials and financials, were among the primary detractors.
In addition to not owning Nvidia (which doesn’t meet our criteria for high dividend growth), Sherwin Williams, Lowe’s and MSCI were amongst the largest detractors on an absolute basis.
Total gross returns:
Total return |
QTD |
YTD |
1YR |
3YR |
5YR |
Since INC. (NOV. 14, 2016) |
BRISTOL GATE U.S. DIVIDEND GROWTH EQUITY |
-0.22% |
6.38% |
18.80% |
7.22% |
11.46% |
13.45% |
Mandate repositioning
During the quarter, the portfolio’s investments in Allegion plc and Roper Technologies Inc. were sold, both primarily due to lower dividend growth.
The portfolio management team initiated new investments in GE Aerospace (GE) and Old Dominion Freight Line Inc (ODFL). The team is confident that both companies will increase their dividends at high rates in the near term.
New addition GE is a market leader in aerospace engines, an oligopolistic industry with high barriers to entry. The business generates strong services revenue and has an improving financial profile.
The other new addition, ODFL, is the second largest North American less-than-truckload carrier, servicing a growing and consolidating market, and is a best-in-class operator with an industry-leading operating ratio with a strong history of returning capital to shareholders.
As per the quarterly rebalancing process, the portfolio management team reduced investments in Applied Materials Inc., Cintas Inc. and Broadcom Inc. The proceeds were reinvested in MSCI Inc., Corteva Inc., Zoetis Inc. and UnitedHealth Group.
Market overview: AI pushed equity growth while central banks started to pivot
The second quarter continued to be dominated by the growing influence of artificial intelligence, with investors focused on opportunities in AI-enabled businesses and hardware. Additionally, there was a notable shift in monetary policy as some central banks adjusted their interest-rate policies as inflation risks receded.
In Canada, year-over-year inflation dropped to 2.9%, while in the U.S. it fell to 3.3%. Both indicators are trending downward and remain range bound. The Bank of Canada was the first among central banks in the G7 to cut its overnight lending rate, which we view not as a divergence in monetary policy, but rather as a precursor to the U.S. Federal Reserve eventually following suit. The European Union also cut rates modestly, while the Bank of England held rates as-is, for now. In our view, Canada and Europe have an increased risk of an economic slowdown, while U.S. and emerging market (EM) economic conditions appear to be improving. Canadian and international equities may be weighed down by slower economic growth and potentially weaker earnings growth, with limited valuation upside
Market outlook: global economic conditions remain favourable
We believe interest rates at central banks have peaked, with Canada and the European Union lowering rates ahead of the U.S. Federal Reserve. The economic outlook shows signs of levelling out compared to three months ago, as unemployment ticked higher and consumer spending plateaued. The summer months may bring heightened headline risk surrounding the U.S. presidential election, but seasonality and historical data suggest equity markets are typically positive heading into the fall.
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