Triasima Balanced Income Fund Commentary – Q4 2023


The economy

The effects of the rise of interest rates in 2021 and 2022 continue permeating economies and are causing slowdowns. Real gross domestic product (GDP) among major advanced countries is predicted to grow by only 0.9% in 2024, down from the expected 1.6% in 2023. The strong labor market, which supported confidence and spending, has now been witnessing declining job openings.

Fortunately, inflation levels peaked 18 months ago already and have fallen since. Monetary policy tightening by central banks is winding down, with several opting to pause their rate hike efforts. In its latest meeting, the U.S. Federal Reserve signaled forthcoming cuts in 2024 for its benchmark rate.

The United States, supported by fiscal stimulus, continues to lead the global economy. Canada, meanwhile, was aided by significant immigration in 2023, but its GDP per capita receded. 

Geopolitical risks persist. The Israel-Hamas conflict erupted this quarter while the war in Ukraine is nearing two years of age.  Meanwhile, China faces challenges as it transitions from relying on exports from its manufacturing industrial base for economic growth to depending upon its internal services sector.

The markets

In contrast to third quarter, the fourth exhibited a downward shift in all yield curve maturities; especially notable for those 3 years and longer. The yield to maturity of the FTSE Canada Universe Bond Index (8.3%) dropped a large 1.0% this quarter, to reach 3.9%. The duration went back up to 7.3 years. The S&P/TSX Preferred Share Index (7.3%) also had a high fourth quarter return.

Performance for the benchmark’s equity indices were positive and clustered this quarter: S&P/TSX Composite Index (8.1%), S&P 500 Index (9.1%), and MSCI EAFE (8.0%).

The prevailing theme of the quarter was "risk-on", driven by weaker inflation, falling long-term interest rates, and perceptions of a dovish stance from the Federal Reserve and the Bank of Canada. Interest sensitive and growth sectors outperformed.

The Fund

The Triasima Balanced Income Fund had a 6.9% return this quarter, versus 8.0% for its benchmark. The outcomes were 5.3% vs 11.8% respectively for the year.

Asset allocation was neutral to relative performance. The underperformance is due to the Canadian equities’ security selection. The Momentum, Quality, and Dividend factors that are favored for the Fund all underperformed.

With the interest rate uptrend tapering off, the Fund’s bond duration (7.3 years) was increased in recent months to match the Index’s at year-end. On the equity side, high dividend stocks benefitting from lower interest rates from the cyclical Energy and Industrials sectors were introduced. Examples include Peyto Exploration and Development, and Bank of Montreal.

Turnover led to a rise in the equity allocation, now at 63%, above the 60% benchmark weight. This came mostly from the cash reserve, bringing down the fixed income proportion to 36% at the end of the quarter. The current income yield of the Fund stands at 3.3%. 

The Three-Pillar Approach™

On the quantitative side, for the equities held by the Fund, volatility, valuation, and expectations parameters are superior to the equity benchmark. Conversely, the revenue growth metric is lower. 

The past uptrend in interest rates turned sideways this quarter. As for the equity benchmark for the Fund, its trend remains sideways. The Risk factor outperformed in the quarter while Quality and Momentum underperformed.

The fundamental background to equities improved somewhat in the quarter, mainly due to the interest rates drop which more than offset the stagnant economies of Canada and the Eurozone and absence of profits growth. The stock market upsurge has borrowed from expected 2024 equity returns, which nonetheless remain above average and good.