Triasima Canadian Small Capitalization Equity Fund Commentary – Q3 2024

The economy

The United States posted commendable growth over the recent months, while the Canadian, Eurozone and Japanese economies continue to lack the same dynamism. Meanwhile, the labor market further normalized towards equilibrium from the previously tight conditions of the post-pandemic years.

With inflation back to reasonable levels and worried about the evolution of the labor market, the Federal Reserve initiated a monetary easing cycle in September with a 50-basis points overnight rate cut: two years after its last hike. It joined the Bank of Canada and the European Central Bank which began their easing cycle earlier last June. Further reductions are expected from central bankers to normalize short-term rates and flatten yield curves below the 3-year maturities. 

Canada’s economic weakness has become more broad-based, with real GDP per capita declining by a cumulative 3.9% since its peak in 2022. It is the first time that this has occurred outside of a recession. 

As for China, it is struggling. The country introduced a series of stimulus measures amounting to approximately 3% of GDP. Their impact should be muted since this country faces a host of issues such as depressed household spending or a declining population.  

The corporate world remains in good shape, with rising revenues and strong earnings 

The Canadian small capitalization equity market

The S&P/TSX SmallCap Index had an 8.4% return this quarter. Performance was strong across the board, with only two out of eleven sectors posting negative returns.

The rate sensitive Communication Services (+24%) and Real Estate (+23%) sectors performed the best. Falling interest rates helped propel these sectors. Lower borrowing costs and relatively more attractive dividend yields lead to higher valuations. 

Conversely, the cyclical Energy sector (-8%) lagged the most over concerns about a global economic slowdown.

The Fund

The Triasima Canadian Small Capitalization Equity Fund had an 11.3% return this quarter. 
Security selection accounted for outperformance, generated within the Energy and Materials sectors. Sector allocation detracted value. This was caused by the cash allocation, and the underweights in the Real Estate and Materials sectors. 

The table presents the top and bottom contributors to the relative performance:

*Securities not held in the fund.

The most important change in the structure of the Fund at the sector level is the increase in the weight of the Materials sector, from underweight to market weight. Precious metal miners were added to the portfolio as they are recording margin expansion on the back of record gold prices.

The Three-Pillar Approach ™

On the quantitative side, the Fund has higher revenue and earnings growth than its benchmark, and better profitability and expectations metrics. Valuation parameters indicate the Fund is more expensive. 

The Canadian small capitalization equity market began its current recovery phase in October 2023. Despite some hesitations in recent months, this trend looks set to continue. The small cap market is, however, still well below its April 2022 all-time high. 

The fundamental background to Canadian small capitalization equities was unchanged in the quarter. Canada’s poor economic performance is offset by growth in the United States, as well as declining interest rates and low inflation. The expected equity return for the remainder of 2024 is above average.

Legal notices

The posted rate of return is a historical total rate of return compounded annually, except for periods of less than one year, which are not annualized. The rate of return shown takes into account fluctuations in unitholder value and the reinvestment of distributions. The posted rate of return does not take into account investment management fees and income taxes payable by the unitholder, which would have the effect of reducing the return. The Funds are not guaranteed, their value fluctuates, and past performance is not indicative of future results.

Data on the FTSE Canada 91 Day T-Bill, FTSE Canada Short Term Bond and FTSE Canada Universal Bond reference indices are provided by FTSE Global Debt Capital Markets Inc.  (“FTSE”). Data on the S&P/TSX Income Trust, S&P/TSX Preferred Share, S&P/TSX Small Cap, and S&P/TSX Composite reference indices are provided by TSX Inc. (“TSX”). Data on the S&P 500® Index are provided by Standard & Poor’s Financial Services LLC (“S&P”). Data on the MSCI EAFE, All Country World, and World reference indices are provided by Morgan Stanley Capital International Inc. (“MSCI”). Lastly, the classification of securities according to the Global Industry Classification Standards (“GICS”) is provided jointly by MSCI and S&P. (FTSE, TSX, S&P, and MSCI are hereafter collectively referred to as “indices and data providers”.) 

The indices and data providers have awarded limited licences to Triasima allowing it to use the above-mentioned indices and data in its portfolio statements. The information provided by the indices and data providers may not be redistributed, sold or used without the prior written consent of the indices providers concerned. The indices providers assume no liability with respect to the accuracy or completeness of these data or for any delay, interruption, or omission with regard thereto, and makes no warranty or declaration, either explicit or implicit, with regard to the results that might be obtained by using these data or as to the marketability or appropriateness of the data for a specific use.