Equities continued the recovery rally from previous quarter into the first quarter of 2023. Our equity and hedged equity strategies produced positive returns over the quarter.

The Bank of Canada, for its part, has definitively signaled that it intends to pause on its hiking path, citing it takes some months for the lagged effects of monetary policy to work through the economy.  This is perhaps a tacit acknowledgment that consumer debt burdens in Canada are a delicate consideration: rates too high and a potential recession could run longer / deeper than preferred.

The U.S. Federal Reserve has remained relatively stalwart in their hawkishness with only a relatively mild hint at a reduction in the magnitude of hikes, rather than an outright pause.  In Europe, the effects of the war in Ukraine, as well as other structural challenges have seen inflation rise to uncomfortable levels and as at period end, the European Central Bank (ECB) stands as a far more hawkish entity than anyone would have anticipated, among the major central banks.

The pace and magnitude of interest rate hikes globally have wreaked havoc on equity valuations.  Classic interest-rate (i.e. many “defensive” sectors) have borne the brunt, as well as higher-growth, higher valuation tech companies, where future discounted cashflow valuations have paid heed to a discount rate that is well higher in the period under review.  Nonetheless, as at period-end, valuations have repaired somewhat, given the potential for recession (or at least a protracted slowdown in growth).


Holdings that contributed to absolute performance:

ATS Corporation (ATS)

Executing within a growing automation market, ATS continues to post strong organic growth, record bookings, and meaningful margin improvement. Last quarter, bookings as a leading indicator hit a new record at C$979M, up 46% Y/Y, including 38% organic growth and representing a book-to-bill ratio of 1.5x. Under CEO Andrew Hider, we see this company continuing to benefit from onshoring tailwinds and specifically, leadership within Life Sciences and Electric Vehicles.


NVIDIA Corporation (NVIDIA)

NVIDIA‘s shares benefited from a new graphics processing unit (GPU) product cycle, which included the H100, whose price is double that of the prior generation model. Demand for the newer model has increased given more focus on computing power for generative artificial intelligence. NVIDIA’s gaming business has stabilized and is growing again sequentially.
 

Holdings that detracted from absolute performance:

Trisura Group Ltd. (Trisura)

Trisura had a dispute with a captive reinsurance counterparty which resulted in a C$80M write-down of reinsurance recoverable in the quarter. Notwithstanding this isolated incident, underlying results were the strongest in the company’s history.

The sell-off in the shares made sense given the impact to book value but we believe that this is a non-recurring item and the story has significant upside from here.


The Toronto-Dominion Bank (TD).

TD lagged its peer group over the quarter on the back of uncertainty around its acquisition of First Horizon Corporation (FHN) in the U.S. Additionally, with U.S. regional banks selling off on the back of the Silicon Valley Bank liquidity crisis, Canadian banks with high exposure to the U.S. banking market have come under incremental pressure. We believe TD has the most upside among the Canadian bank group once the FHN transaction closes and uncertainty is removed.

 
Small Cap Spotlight

We would like to highlight our position in Ag Growth International Inc. (AFN) – We have initiated a position in AFN following details of their new strategic plan under a new management team. AFN is a manufacturer and supplier of portable and stationary grain handling, storage and conditioning equipment for both commercial sized and smaller farms as well as food processing facilities. Historically they have grown predominantly through merger and acquisition that were largely financed through debt and equity issuances, and they now have a manufacturing footprint globally offering many products. This has led to relatively inefficient operations, as well as an over-levered balance sheet. Under new management the company has refined their strategy to focus on organic growth, expanding margins, and paying down debt which we believe should reap rewards for shareholders going forward. We believe the focus on paying down debt, reasonable valuation, and strong agriculture market backdrop provides solid upside opportunity.


Outlook and Opportunities

The challenges of slowing economic growth and ongoing optimistic policy responses from global central banks have been further highlighted by stress shown in the broader financial sector. As a result, markets have increased the probability of the U.S. Federal Reserve Board shifting from its optimistic tone. We view this as a potential positive for equity risk as we move into the remainder of 2023.

Within the equity strategies, we continue to favour quality compounders that exhibit positive change. Our thematic positioning remains consistent with prior periods in select commodities, such as copper. These allocations will likely provide inflationary hedges should elevated inflationary pressures re-emerge.

Finally, the equity strategies remain steadfastly dedicated to our core momentum-based investment discipline.