Balanced Strategies

Over the past twelve months, global equity and bond market performance has been shaped by powerful financial and geopolitical events. Coming out of the early waves of the pandemic in 2021, growth appeared to be recovering, employment was strong, consumer prices were recovering, and corporate earnings appeared to also be recovering. Efforts to overcome lingering supply chain disruptions in the latter part of 2021 were thwarted by new virus variants and the invasion of Ukraine in 2022.

By the end of the first quarter of 2022, prices for key agricultural and industrial commodities were surging to new highs. Monetary authorities responded and monetary policy is becoming more restrictive. Restrictive monetary policy impacted both bond and stock markets negatively in the first quarter. The prices of longer duration bonds and longer duration equities (companies whose present value is significantly influenced by the discounting of distant-year earnings) were especially impacted by sharply rising interest rates.

Global Balanced Fund

The Pembroke Global Balanced Fund is a fund of funds that invests primarily in Pembroke-managed active equity funds, externally managed active equity and fixed income funds, externally managed passive funds, and exchange-traded-funds (ETFs). The Fund has a custom benchmark, with the following three allocations: 30% FTSE Canadian Universe Bond Index, 45% MSCI All-Country World Index, and 25% S&P TSX Composite Index.

The objective of the Fund is to generate long-term capital appreciation and income by maintaining diversified exposure to global equities and bonds, with flexibility to invest in publicly traded real assets like gold. The Fund is diversified by asset class, by region, by style (for example, value versus growth, or large cap equity versus small cap equity), by managers, and by active and passive approaches.

In theory, when some of these assets, regions and styles are gaining, others are expected to decline or at least to gain by less. In practice, that has been the Fund’s experience. The Fund’s audited performance record began on April 8, 2019, and it thus achieved its three-year track record just after the end of the first quarter of 2022. Over the three-year period, the strategy has generally underperformed strongly rising equity markets, and generally outperformed sharply declining equity markets, capturing much of the equity market return with lower volatility than a pure equity portfolio.

Over the twelve months ending March 31, 2021, the Fund reported a positive absolute return, despite weakness in recent months. Relative returns against the custom benchmark were negative despite strong relative performance of the fixed income holdings.

During the first quarter of 2022, both equity and bond markets declined, and both the Pembroke Global Balanced Fund and its custom benchmark declined. Over this period, the Fund did not keep pace with its benchmark. The strategy’s actively managed, growth-oriented equity holdings generally underperformed their respective equity benchmarks, while the strategy’s bond holdings generally outperformed the FTSE Canadian Universe Bond Index.

The underperformance of the actively managed equity strategies was in part due to a rotation out of highly valued growth stocks into value stocks (see the articles on the individual Pembroke strategies for details). As for the strategy’s bond holdings, they generally benefitted from lower duration during a period of sharply rising interest rates (see the article Fixed Income Strategies). The strategy’s holding in the iShares Gold Bullion ETF (CGL.C) gained during the period.

Global Equity Pooled Fund

The Pembroke Global Equity Fund is a Pooled Fund. This is a prospectus-exempt product that is only available to investors who meet the definition of an “accredited investor” under securities legislation.

The Pembroke Global Equity Pooled Fund is a diversified global equity strategy with exposure to Canadian, US, and international developed and emerging equity markets. The intent of the managers is to maintain diversification by region, by market cap size, by managers, and by passive and active strategies. The strategy is benchmarked against a custom index comprised of a 64% weight in the MSCI All Country World Index (ACWI), and a 36% weight in the S&P TSX Composite Index.

Over the twelve months ending March 31, 2021, the Fund reported a positive absolute return despite declines in recent months. Relative returns against the custom benchmark were negative and were impacted by generally weak relative returns from the strategy’s active growth strategies.

During the last quarter, the Fund declined in absolute terms and trailed its benchmark, which also declined. The top-performing holdings were the iShares S&P TSX 60 INDEX ETF and the Pembroke Dividend Growth Pooled Fund (see the article Canadian Equity Strategies), both of which benefitted from the relative strength of Canadian equity markets during the period. The bottom performing holdings were the Pembroke International Growth Fund (see the article International Equity Strategies), and the Pembroke US Growth Pooled Fund (see the article US Equity Strategies).

The Fund’s top actively managed holdings over the last quarter included the Guardian Capital Fundamental Global Equity strategy, the Pembroke Dividend Growth Pooled Fund, the Pembroke US Growth Pooled Fund, and the Pembroke International Growth Pooled Fund. 

Like the Pembroke Global Balanced Fund, the Pembroke Global Equity Pooled Fund invests in passive exchange-traded funds (ETFs) to achieve exposure in large cap liquid equity markets. During the quarter, the Fund held four equity market ETFs, including the iShares Core S&P500 ETF, the iShares S&P/TSX 60 Index ETF, the iShares Core MSCI EAFE ETF, and the iShares Emerging Markets ETF.

In total, the Fund’s allocation to passively managed ETFs was just over 28%. In addition to the iShares S&P TSX 60 Index ETF, the Pembroke Global Equity Pooled Fund also achieves Canadian large cap exposure through its holding in the Pembroke Canadian All Cap Pooled Fund (see the article Canadian Equity Strategies). 

By region, about 38% of the Fund was allocated to Canada during the quarter, about 35% to the US, nearly 12% to Europe, over 2% to Japan, and about 13% to other regions. By sector, the Fund’s top exposures include the industrials, information technology, financials and consumer discretionary sectors. 

Canadian Balanced Fund

Pembroke’s balanced portfolio, the Pembroke Canadian Balanced Fund, posted modestly positive returns in the past twelve months. The equity portion of the portfolio, represented by the holdings of the Pembroke Dividend Growth Fund (see the article Canadian Equity Strategies), posted gains during the period, in a volatile but constructive environment for stocks. As for the fixed income portion of the Fund, represented by the Pembroke Canadian Bond Fund (see the article Fixed Income Strategies), it suffered losses in the twelve-month period, as mounting inflation expectations drove interest rates higher, and bond prices lower.

Income in the Canadian Balanced Fund is generated from a combination of dividends and interest. The equity portion of the Fund has a current annualized gross yield of 2.9%, while the fixed income segment of the Fund is primarily invested in securities rated “A+” that, on average, have a collective yield to maturity of 3.2%, and an adjusted portfolio duration of 5.6 years. Minor changes to the asset mix of Pembroke’s balanced mandates were made through the year, with approximately 30% of the portfolio invested in fixed-income securities on March 31, 2022.

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