July 2024
During the first half of 2024, mega-cap stocks continued their strong run from last year, with nearly half of the MSCI All Country World Index (ACWI) returns and 60% of the S&P500 Index returns coming from the “Magnificent Seven,” making it a challenging environment for active equity managers to outperform the benchmark.
Excluding the largest mega-cap stocks, small caps and large caps performed broadly in line, with high single-digit returns, and growth stocks outperformed value stocks. In the fixed income space, bond prices are slightly down year-to-date, with yields rising in the first half of 2024 as expectations for interest rate cuts were pushed into the future.
Canadian Balanced Strategy
Pembroke’s Canadian balanced strategy delivered slightly positive returns in the second quarter, with contributions from both the equity and fixed income parts of the portfolio. While returns in recent years have been more heavily weighted towards equity investments, a falling interest rate environment could allow bond investments to contribute more in the future. The strategy’s balanced and diversified asset allocation approach reduces volatility for investors with more conservative risk tolerance profiles or short-term liquidity needs.
The balanced strategy generates income from a combination of dividends and interest. The equity portion has a current gross annualized yield of 3.7%, while the fixed income portion, which is primarily invested in securities rated A+ or higher, has an average yield to maturity of 4.6% and an adjusted portfolio duration of 6.7 years. Only minor changes were made to the asset mix of the strategy since the beginning of the year.
Global Balanced Strategy
Pembroke’s Global Balanced strategy invests primarily in Pembroke-managed active equity funds, externally managed active equity and fixed income funds and externally managed passive funds (Exchange Traded Funds or ETFs). The strategy has a custom benchmark with the following three allocations: 30% FTSE Canadian Universe Bond Index, 45% MSCI All Country World Index (ACWI) and 25% S&P/TSX Composite Index.
The objective of the strategy is to provide long-term capital appreciation and income through a diversified exposure to global equities and bonds. The strategy also has the flexibility to invest in publicly traded real assets such as gold. It is diversified by asset class, region, sector, style (value versus growth, and large capitalization versus small capitalization), manager and approach (active versus passive).
The strategy generated positive absolute returns in the second quarter of 2024, while underperforming its benchmark, which rose slightly more. Over the period, the strategy had positive absolute returns from equities, fixed income and the gold allocation. The underperformance relative to the benchmark was driven by the strategy’s equity allocation. However, this was partially offset by the fixed income and gold allocations, which outperformed their respective benchmark components.
The strategy’s bond holdings outperformed the benchmark in the second quarter, as the manager maintained a shorter average duration than the index during a period of rising yields. At the end of June 2024, the strategy’s bond allocation represented approximately 22.9% of the portfolio. The cash and gold bullion ETF allocations were approximately 1.7% and 4.2% of the portfolio respectively.
Over the 12-month period that ended on June 30, 2024, the strategy rebounded from its lows of the previous year to end significantly higher. However, it underperformed its benchmark, which rose slightly more over the same period. All of the strategy’s asset classes and underlying funds contributed to absolute returns. On a relative basis, Canadian equities, fixed income and the gold allocation outperformed, while US and international equities underperformed their respective benchmark component.
The strategy remains diversified across asset class, region, sector and style. Its equity and fixed income managers continue to actively seek new opportunities.
Other Articles Of Interest
Disclaimer
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.
