Portfolio returns: Q2 2024
| Total Return | 1M | 3M | YTD | 1YR | 3YR | 5YR | 10YR | Since Inc. (October 30, 2023) |
Canadian Neutral Balanced Series I |
0.37 |
0.58 |
4.75 |
13.72 |
||||
Quartile rankings |
2 |
2 |
2 |
iProfile™ Enhanced Monthly Income Portfolio – Canadian Neutral Balanced Series I
Portfolio commentary
Q2 2024
Highlights
① The portfolio gained over the quarter, buoyed by a strong economic backdrop that supported both equity and bond returns.
② Positive Canadian bond returns were boosted by falling interest rates.
③ Strong foreign equity returns were dampened by poor Canadian equity performance.
Portfolio overview
The iProfile Enhanced Monthly Income Portfolio – Canadian Neutral Balanced, Series I, was up in the quarter. Of the six funds the portfolio invests in, five produced positive returns before fees.
With an allocation of 14%, the iProfile U.S. Equity Private Pool was the top contributor to returns. U.S. market returns were marked by outsized performance from a still-surging technology sector. The pool outperformed its benchmark, driven by stock selection in the information technology, health care and industrials sectors.
Mackenzie – IG Canadian Bond Pool, the heaviest-weighted pool in the portfolio at 38%, was the top returning fixed income pool in the portfolio. Canadian bonds benefited from a rise in bond prices as the Bank of Canada cut 25 bps from its lending rate in June. The pool also outperformed its benchmark, as an overweight allocation to corporate bonds and security selection within the financials and energy sectors added value. Short exposure to Japanese government bonds also augmented returns.
The iProfile Canadian Dividend and Income Equity Private Pool, with a 35% allocation, was the only detractor to returns. Canada was one of a handful of equity markets to post a negative return this quarter. With a quickly deteriorating job market, the Canadian economy has an argument for being the worst-performing economy in the first half of 2024. The pool also underperformed its benchmark as stock selection, particularly in the materials, health care and industrials sectors, drove returns lower.
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: diversify rather than de-risk
Though global equity markets appear expensive, the team believes that positive macroeconomic and technical factors outweigh stretched valuations. Solid corporate earnings growth, the likely end of rate hikes by the U.S. Federal Reserve (the Fed), low U.S. recession risk, economic rebound in Europe and China, and optimism from artificial intelligence (AI) themes contribute to this view.
Rather than derisk from “expensive” equities, the team advocates diversifying towards cheaper markets with positive economic catalysts, like Italy and Japan. Japanese companies are investing after years of hoarding cash and benefiting from AI and advanced manufacturing trends. Italian companies are seeing windfalls from the European Central Bank’s implicit backing of national debt and Italy’s recent continent-leading economic growth.
The team remains cautious on bonds in the near term, particularly U.S. government bonds. U.S. interest rates likely remain elevated as the Fed continues to monitor inflation and economic data before committing to any rate-reduction policy.
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