Both global equity and fixed income markets declined significantly in 2022, as central banks across the world raised interest rates to tame soaring inflation. As core inflation rates peaked, expectations of future interest rake hikes softened, leading to a bottoming of global stocks and bonds in October of 2022.
The rebound from October’s lows was moderated by increasing uncertainty around future inflation, interest rate increases or decreases, and the timing and severity of a potential recession. Pembroke maintains a balanced approach to asset allocation with the goal of reducing volatility through effective diversification.
Global Balanced Fund
The Pembroke Global Balanced Fund invests primarily in Pembroke-managed active equity funds, externally managed active equity and fixed income funds, and externally managed passive funds (exchange-traded funds [ETFs]). The Fund has a custom-blended 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. The Fund also has the flexibility to invest in publicly traded real assets, such as gold. The Fund is diversified by asset classes, regions, sectors, styles (value versus growth, or large capitalization equity versus small capitalization equity), managers, and approaches (active versus passive).
The Fund generated positive returns in the first quarter of 2023, on an absolute basis as well as relative to its benchmark. Over the period, the strategy experienced positive contribution from all asset classes and almost all the underlying funds. The outperformance relative to the benchmark was driven by positive attribution from all geographic equity allocations, as well as the gold bullion holding (iShares Gold Bullion ETF [“CGL.C”]). The strong results were partially hindered by the Fund’s fixed income allocation, which modestly underperformed its benchmark over the period.
The primary contributors to the Global Balanced Fund’s outperformance in the quarter were the two actively managed large cap growth equity funds, the Pembroke Canadian All Cap Fund and the Guardian Capital Global Equity Fund. Outperformance of the two funds came mainly from positive stock selection. Additionally, the price of gold rallied during the quarter over signs that the interest rate-hiking cycle of central banks is starting to impact the economy.
Despite positive contribution on an absolute basis, the Fund’s bond holdings underperformed the benchmark in the first quarter due to the manager maintaining a shorter average duration than the index during a period of declining interest rates. At the end of March 2023, the Fund’s bond strategies accounted for about 22.5% of the Global Balanced Fund holdings. Cash and the gold bullion ETF accounted for about 2.4% and 4.5% of the Fund’s holdings, respectively.
Over the course of the twelve-month period ending March 31, 2023, the Fund rebounded from its lows to end the period in slightly positive territory and ahead of the benchmark, which was down over the same period. The fixed income and gold allocations contributed to absolute returns, while the equity allocation was a small detractor. On a relative basis, each asset class outperformed the benchmark.
The primary contributor of the Fund’s absolute and relative performance during the past twelve months was the gold allocation. Gold outperformed both equity and fixed income asset classes throughout the period. The primary detractor was its tilt toward small cap growth equity strategies. Growth stock prices are sensitive to rising interest rates, as the present value of future earnings streams is reduced by rising yields. The passive exchange-traded fund equity strategies, with broad index exposure including value stocks, generally outperformed the Fund’s active small cap equity strategies.
The Fund remains diversified by asset classes, regions, sectors and styles. Since the outlook for the global economy includes concerns about a recession and persistent inflation, equity valuations have come down materially. The Fund’s equity and bond managers continue to actively search for new opportunities.
Canadian Balanced Fund
In the past twelve months, the Pembroke Canadian Balanced Fund posted modestly negative absolute returns, while outperforming its benchmark. The equity portion of the portfolio, represented by the holdings of the Pembroke Dividend Growth Fund (see the article on the Canadian strategies), posted flat results during the period, amidst a weak equity market environment. As for the fixed income portion of the Fund, represented by the Pembroke Canadian Bond Fund (see the article on the fixed income strategies), it suffered losses over the twelve-month period, as surging inflationary pressures forced interest rates higher and bond prices lower.
Income in the Fund is generated from a combination of dividends and interest. The equity portion of the Fund has a current annualized gross yield of 3.5%, while the fixed income segment of the Fund is primarily invested in securities rated “A+” to “AAA” that, on average, have a collective yield to maturity of 4.4%, and an adjusted portfolio duration of 6.1 years. Minor changes to the asset mix were made through the year, with approximately 28% of the portfolio invested in fixed– income securities on March 31, 2023.
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, U.S., and international developed and emerging equity markets. The intent of the managers is to maintain diversification by region, by market capitalization 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.
The Fund generated positive returns in the first quarter of 2023 on both an absolute basis and relative to its custom benchmark, which was also up in the quarter. Over the period, the strategy experienced positive contribution across the board from all the underlying funds. The outperformance relative to the benchmark was driven by positive attribution from Canadian, U.S. and international equity allocations. However, it was partially offset by the cash allocation.
The primary contributors to the Global Equity Fund’s outperformance in the quarter were the two actively managed large cap growth funds, the Pembroke Canadian All Cap Fund (see the article on the Canadian strategies) and the Guardian Capital Global Equity Fund. Outperformance of the two funds came mainly from positive stock selection.
Over the course of the twelve-month period ending March 31, 2023, the Fund rebounded from its lows to end the period close to flat and ahead of its benchmark. The U.S. and international equity allocations contributed to absolute returns, while the Canadian equity allocation was a detractor. On a relative basis, all three allocations outperformed their respective components of the custom benchmark.
The Pembroke Global Equity Pooled Fund invests in passive exchange-traded funds to achieve exposure to certain large capitalization liquid equity markets. At the end of the period, the Fund held four equity market ETFs: the iShares Core S&P500 ETF, the iShares S&P/TSX 60 Index ETF, the iShares Core MSCI EAFE ETF, and the iShares Core Emerging Markets ETF.
In total, the Fund’s allocation to passively managed ETFs was approximately 28% at the end of March 2023. By region, about 36% of the Fund was allocated to Canada, 36% to the U.S., 12% to Europe, 2% to Japan and 14% to other regions. By sector, the Fund’s top exposures include the Industrials, Information Technology, Financials, and Consumer Discretionary sectors.
Other Articles Of Interest
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.