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:

*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. 

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.