Balanced Strategies

One of the main reasons to own diversified portfolios of stocks, bonds and real assets over the long term is that the assets are not perfectly correlated. When one asset declines, an asset with less than perfect correlation may decline less, and an asset with a negative correlation may even rise. The first six months of 2022 were a period when most publicly traded asset classes declined—the exceptions being many publicly traded energy and primary agricultural commodities.

In Pembroke’s balanced portfolios, all asset classes including gold bullion declined, and all investment strategies delivered absolute negative returns. That is not to say that diversification did not help balanced fund investors during the period, but rather to say that despite the diversification, absolute returns in Pembroke’s Global Balanced Fund and Canadian Balanced Fund were negative.

The widespread decline in global asset values during the first six months of the year followed the sharp increase in global consumer prices, and the subsequent interest rate increases by central bankers. 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.

Currencies were also impacted by the higher costs of food, fuel and other primary goods. The Japanese yen, the euro and other currencies of importing countries declined during the period. As we go to print, the euro and the US dollar are trading at parity for the first time since 2002.

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, and externally managed passive funds (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 (value versus growth, or large capitalization equity versus small capitalization equity), by managers and by approach (active vs. passive).

Over the twelve months ending June 30, 2022, the fund reported a negative absolute return. Relative returns against the custom benchmark, which also declined, were negative despite positive relative performance of the fixed income holdings and the gold bullion.

Over this one-year period, global equity performance was generally negative and varied, with several demarcation lines. First, markets in those countries that are net exporters of food, fuel and other primary commodities (Australia and Canada) outperformed markets in those countries and regions that are net importers (Japan and much of Europe). Second, equity style was a dividing line with growth indices underperforming value indices. Finally, countries and regions that are geographically closer to the Russia/Ukraine conflict zone (such as Sweden and Finland) also underperformed broad indices .

Against this backdrop, the Global Balanced Fund’s Canadian equity allocation was a relatively strong performer. The passive exchange-traded fund (ETF) equity strategies generally outperformed the fund’s active equity strategies which are tilted toward growth. Finally, the fund’s international equity strategy turned in the weakest performance with headwinds coming from all three demarcation lines: significant exposure to natural gas and food-importing regions like Japan and Europe, exposure to the growth style, and significant overweight exposure to Sweden.

The strategy’s bond holdings generally benefitted from their lower duration, achieved with increasing allocations to floating rate notes, and higher yields (see the article Fixed Income Strategies). Over the trailing one-year period, the strategy’s holding in the iShares Gold Bullion ETF (“CGL.C”) gained in absolute terms.

The strategy ended the period with an approximately 50% weight to Canadian assets, 30% weight to US assets, and approximately 20% invested in other regions. Approximately 68% of the strategy was invested in equities, approximately 28% in fixed income and cash, and 4% in real assets (the iShares Gold Bullion ETF).

About 75% of the fund was invested during the period in active equity and fixed income strategies, and the remaining 25% in passive strategies. The passive strategies add diversification into larger global companies and also balance the fund’s growth tilt by introducing exposure to broad indices, which include value stocks.

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 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.

Over the twelve months ending June 30, 2022, the strategy reported a negative relative return compared with its custom benchmark (64% MSCI All Country World Index and 36% S&P TSX Composite Index), which also declined.

Over this one-year period, global equity performance was generally negative and varied, with several demarcation lines. First, markets in those countries that are net exporters of food, fuel and other primary commodities (Australia and Canada) outperformed markets in those countries and regions that are net importers (Japan and much of Europe). Second, equity style was a dividing line with growth indices underperforming value indices. Finally, countries and regions that are geographically closer to the Russia/Ukraine conflict zone (such as Sweden and Finland) also underperformed broad indices .

Against this backdrop, the Global Equity Fund’s Canadian equity allocation was a relatively strong performer. The passive exchange-traded fund (ETF) equity strategies generally outperformed the fund’s active equity strategies which are tilted toward growth. Finally, the fund’s international equity strategy turned in the weakest performance with headwinds coming from all three demarcation lines: significant exposure to natural gas and food-importing regions like Japan and Europe, exposure to the growth style, and significant overweight exposure to Sweden.

The Pembroke Global Equity Pooled Fund invests in passive exchange-traded funds (ETFs) to achieve exposure in certain large capitalization liquid equity markets. During the twelve-month period ended June 30, 2022, 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 approximately 28%. In addition to the iShares S&P TSX 60 Index ETF, the Pembroke Global Equity Pooled Fund also achieves Canadian large capitalization 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 11% to Europe, over 2% to Japan, and nearly 14% to other regions. By sector, the Fund’s top exposures include the industrials, information technology, financials and consumer discretionary sectors.

Canadian Balanced Fund

Over the twelve months ended June 30, 2022, the Pembroke Canadian Balanced Fund declined and underperformed its custom benchmark (comprised of 60% S&P TSX Composite Index, 35% FTSE Canada Universe Bond Index, and 5% in the FTSE TMX 91-Day Canadian Treasury Bill Total Return Index), which also declined. The equity portion of the portfolio, represented by the holdings of the Pembroke Dividend Growth Fund (see the article Canadian Equity Strategies), underperformed the S&P TSX Composite Index during the period due primarily to the allocation effect of an underweight position in energy and an overweight position in information technology.

These negative allocation effects offset strong stock selection in information technology, industrials and materials. However, the effect of stock selection during the period was negative in communication services, consumer staples and real estate. During the period, two of the fund’s holdings were acquired in takeovers.

The fixed income portion of the fund, represented by the Pembroke Canadian Bond Fund (see the article Fixed Income Strategies), declined in absolute terms during 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 3.5%, 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 4.1% and an adjusted portfolio duration of 5.1 years. The fixed income portion of the fund is maintaining its defensive positioning and increased weight in high-quality liquid bonds.

 

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