Triasima Canadian Small Capitalization Equity 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.  

The Canadian small capitalization equity market

The S&P/TSX SmallCap Index had a 6.0% return this quarter and 4.8% for 2023. 

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. Previously out-of-favor sectors outperformed: Information Technology (+25%), Financials (+15%), both sensitive to interest rates changes, and Consumer Staples (+21%). 

The worst sectors were Energy (-10%) and Utilities (-5%). Oil prices were pressured down by concerns over lower demand while supply Is adequate, with American shale oil production standing at record levels. Utilities continue to struggle as the relatively high interest rate environment is still pressuring profitability.

The Fund

The Triasima Canadian Small Capitalization Equity Fund had a 5.5% return this quarter and -5.5% for 2023. 
The small quarterly underperformance is due to security selection, mainly from the large and very cyclical Materials sector. The overweight position in Information Technology and the security selection in Energy and Financials added value. 

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

  Positive impact

  Negative impact

Hammond Power Solutions

Eldorado Gold Corp.

Bird Construction Inc.

Paramount Resources Ltd

Goeasy Ltd

Kelt Exploration Ltd

Lumine Group Inc.

Headwater Exploration Inc.

Birchcliff Energy Ltd*

Bitfarms Ltd*

*Securities not held in the fund.

 A large portion of the elevated cash reserve was deployed across several industries. The Information Technology sector saw the largest increase.

The Three-Pillar Approach ™

On the quantitative side, relative to its benchmark, the Fund has higher Profitability, faster Revenue and Profits growth, higher profitability, better Expectations and lower Valuation. Volatility parameters are in-line with its benchmark. 

The Canadian small capitalization equity market had been in a seesawing downward trend in 2023, and the fourth quarter surge has upgraded the assessment to sideways. 

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