Good Things Come… - STYLUS Asset Management...the STYLUS Funds each quarter, we typically analyze...

Good Things Come…

2017 Q1 Market Review & Outlook2017 Q1 Market Review & Outlook

Our “2017 Outlook” Presentation(published in January 2017 and available on the STYLUS website)

focused on key factors which would drive North American

equity markets.

Market Outlook Themes: 2017

Canadian Equities• All sectors in Canada had expectations for positive earnings growth• Canadian stocks were reasonably priced• Positive trend in corporate profitability

Energy Sector• Energy stocks had the biggest expected earnings growth of any industry in

North America• Gap between global supply of oil and demand was expected to narrow• Upturn in oil prices expected to support Canadian economy

U.S. Equities• Valuations for U.S. stocks were high• Very strong corporate profitability• Positive earnings growth expected to sustain equity markets

Trump Factor• An ambitious, pro-growth agenda had equity investors feeling very optimistic• Sectors directly impacted by Trump’s plans expected to outperform (i.e.

Financials, Industrials, Energy)

STYLUS• In 2016, there was a disconnection between stocks with the best earnings and

those with the best price performance. In 2017, we expect to return to a more normal, earnings-focused investment environment.


In short, we expected good things in 2017 for North American equity markets

(with a caveat that patience is still a virtue!).

2.4%

5.1%

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1%

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3%

4%

5%

6%

S&P/TSX INDEX

S&P500 Index(CAD)

TSX & S&P 500 Index Returns: Q1 2017

The year did indeed get off to a good start …

Both the Canadian and U.S. equity markets produced strong first quarter returns.

Contribution by Sector: Q1 2017

Returns in the Canadian Index were widespread, as almost all sectors had a positive contribution to the S&P/TSX in Q1.-2%

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Contribution by Sector: Q1 2017

The U.S. market also had positive returns in almost every sector in Q1. The “FANG” stocks helped the Info Tech and Consumer sectors lead the way:Facebook +23.5%Amazon +18.2%Netflix +19.4%Google +7.5%

When we look at the performance of the STYLUS Funds each quarter, we

typically analyze the ‘style’ trend which differentiates their respective returns.

But in Q1, the difference in returns for our Canadian equity Funds was more of

a “stock story” …

STYLUS Canadian Fund Returns: Q1 2017

-0.9%

-2%

-1%

0%

1%

2%

Momentum

STYLUS Canadian Fund Returns: Q1 2017Without Energy stocks, the rest of the Momentum Fund returned 4.4% for the quarter, with strong contributions from Premium Brand Holdings and CRH Medical Corp.

Unfortunately, the performance of Momentum was hurt by its holdings within the Energy sector due to weakness in the commodity price.

Do we still have conviction in our energy stocks for 2017? Keep reading the presentation …

2.4%

0%

1%

2%

3%Growth


The biggest contributors to the Growth Fund’s 2.4% first quarter return all happened to be consumer-based stocks:

Dollarama

goeasy financial

Restaurant Brands

0.6%

0%

1%

Value with Income


• Intertape Polymer• Peyto Exploration

This marked the 7th consecutive quarter with a positive return for the Value with Income Fund. That’s a 20.8% total return over the last 21 months!

The Value with Income Fund produced a positive return in the first quarter, but was impacted by two stocks with unexpectedly weak earnings reports, which caused their share prices to fall significantly:

1.3%

0%

1%

2%

Q1

Wealth Protection Fund: Q1 2017

A great quarter for the Wealth Protection Fund.

It’s goal is to produce steady returns with low volatility (aka ‘a smoother journey’).

It was right on track in Q1.

U.S. Blended Equity Fund: 1st Quarter Return

4.5%

0%

1%

2%

3%

4%

5%

The U.S. Blended Equity Fund had a great start to 2017, as we had solid contributions from both the growth and value stocks within the Fund.


Now that we have 90 days “in the books” for 2017, let’s update our 2017 Market

Outlook themes ...

We expect to return to a more earnings-based investment

environment

2017 Outlook Theme #1

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2012 2013 2014 2015 2016 2017

What are Earnings Doing in Canada?

The positive trend in earnings growth for Canadian stocks continued in the first quarter.

Quarter Over Quarter Earnings Growth

Source: Morningstar

2013 2014 2015 2016 2017

The outlook hasn’t changed since the start of the year: every sector in Canada is expected to have positive earnings growth in 2017.

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Source: Morningstar

What are Earnings Doing in Canada?2017 Year Over Year Expected Earnings Growth

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2012 2013 2014 2015 2016 2017

What are Earnings Doing in the U.S.?

After a surprisingly weak year of earnings growth in 2016, the expected earnings for the first quarter of 2017 shows the resiliency of corporate America.

Source: Morningstar


2013 2014 2015 2016 2017

2017 Median Earnings Growth by Sector in U.S.

Growth-oriented sectors (Energy & Technology) are expected to have the best 2017 earnings growth in the U.S., compared to much lower expectations for stocks in defensive sectors (Utilities and Telco).

0%

10%

20%

30%

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50%

Source: Morningstar

2017 Year Over Year Expected Earnings Growth

Do economic conditions in Canada & U.S.A. look favourable for corporate earnings

expectations to come true?

Canadian Macro Economic Fundamentals: Summary

Canada has added 191,000 jobs over last 6

months versus initial expectations of -42,000

Investment in infrastructure has been slow but expected

to be a positive factor in 2017

InfrastructureEmployment ManufacturingMonthly data has been a positive surprise in 6 of the last 7 months; Sales up 4.2% year over year.

Surprise! Canada’s GDP growth leads the G7

US Macro Economic Fundamentals: Summary

Average 175,00 new jobs added per month over last 6 months; unemployment

rate at 4.7%

Employment

Housing starts remain strong (1.2 million units per year) and

continue to trend upward

Housing

For the last 5 quarters, the Manufacturing Index is

above 50 (which indicates expansion)

Manufacturing

U.S. GDP revised higher for 2017


Strong economic data supports equities in three simple ways:

1) Helps consumer confidence (i.e. people will continue to spend)

2) Helps investor confidence (i.e. people will keep their money invested)

3) Supports expectations of future earnings growth

What are the key risks to this positive economic trend in North America?

Macro Economic Fundamentals: Risks

Trump protectionist policies impacting Canadian exports to US

Trade

Oil

Housing

US Dollar

Interest Rates

Delay on Trump Policy Implementation

Legislation to curtail heated housing markets in Vancouver and Toronto could negatively affect Canadians’ wealth

U.S. production remains high, putting downward pressure on oil prices

A strong USD makes it challenging for American manufacturers to export their goods

Optimism for continued economic growth is based on “promises” but no changes have been implemented yet

Rising rates are a sign of a strong economy, but they also have a potential negative trickle effect globally

We expect the energy sector to remain a major driving force in

Canadian equities in 2017

2017 Outlook Theme #2

Natural gas prices fell 14%Oil prices fell 6%

The energy story took a step back in the first quarter …

Energy Update: Q1 2017

$1

$2

$3

$4

Price of Natural Gas

$30

$35

$40

$45

$50

$55

$60

Price of WTI Crude (USD)

2016 2017 2016 2017

Oil Falls

What caused the weakness in oil prices in Q1?

Energy Update: Q1 2017Ongoing concerns of large U.S. oil inventories and the Americans ramping up production again too quickly.

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US Rig Count

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US Crude Inventory

Rig counts have steadily increased since mid-2016.

Inventory levels haven’t shown any significant decrease so far in 2017.

It wasn’t just that oil prices fell that caused energy stocks to retreat in the first quarter.

Investor sentiment had become too exuberant –the Energy Index had simply gone up too fast.


Did Investors Get Too Excited About Energy Stocks?

Energy stocks were overbought: the performance of the energy index in the most recent recovery was way ahead of the last 3 periods.

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1997-1999 2000 - 2002 2008 - Early 2009 Mid 2016 - Jan 2016

TSX Energy Index:Index % Return 12 Months After A Fall In Oil Prices


As always, let’s turn the analysis in the energy sector back to earnings…

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2012 2013 2014 2015 2016 2017

What Are Earnings Doing in Canada for Energy Stocks?

When Fiscal Q1 earnings are reported in April & May, they are expected to show that earnings growth is very strong for energy companies.

2013 2014 2015 2016 2017

Fore

cast

Source: Morningstar


Energy Outlook in Canada is Positive

• The imbalance between global production and consumption is closing

• Median analyst estimates forecast oil prices increasing to $60 a barrel by year end

• Saudi Arabia (and their OPEC brethren) are committed to cutting output Remember, Saudi Arabia plans to take their major oil company

public in 2018, so higher oil prices would help provide a stronger valuation and raise more cash!

Source: US Energy Information Administration

With a positive outlook for earnings for stocks in the sector, STYLUS will continue to hold onto our investments in Energy. There are three additional factors supporting oil prices:

Tax Reform

Bank deregulation

Infrastructure

Trade

2017 Outlook Theme #3: The Trump Agenda


Investors rushed into some sectors after the Trump election on speculation that those stocks would benefit most from his policies:

2016: November 8 – December 31

Financial Sector: 17%Industrials: 13%Energy: 12%S&P 500 Index: 11% (USD)


Reality sunk in during the first quarter that election promises don’t instantly bring earnings growth, and as a result, those same sectors all lagged the S&P500 Index:

Q1 2017: January – March

S&P 500 Index: 5.5% (USD)Industrials: 5%Financial Sector: 2%Energy: -7%


Just another example that investing on hope or promises isn’t a profitable approach.

=


STYLUS will wait until Trump’s policies/plans are more than just tweets or empty promises – we need confirmation of action. Only then we find, analyze

and invest in the appropriate stocks.

NORTH AMERICAN MARKET

FUNDAMENTALS

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Source: Morningstar

Average P/B = 1.62x

1.55x

What You Are Paying Versus What Are You GettingIt is important to look past all the noise & speculation and rely on the data: Canadian stocks are reasonably priced.

What are You PayingPrice to book ratio (P/B): A measure of the value investors attach to the net assets of companies.

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stock

Average Net ROE = 2.70%

What are You GettingReturn on equity (ROE) net of T-bill rate: Measures the profitability of Canadian companies above a risk-free rate of return.

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Earnings growth is helping drive up net profitability levels in Canada.

Source: Morningstar

What You Are Paying Versus What Are You Getting

Given what we have said about earnings, economic conditions, and market fundamentals, what do we currently hold in our Canadian Funds…

STYLUS Momentum Fund As at March 31, 2017

* New additions this quarter

EnergyCdn. Natural Resources*EnCana Corp.NuVista Energy Ltd.Raging River ExplorationSeven Generations EnergySuncor Energy Inc.Trican Well Service Ltd.*

FinancialsBank of MontrealManulife FinancialBank of Nova ScotiaTMX Group Ltd.

Information TechnologyAvigilon Corp.*Blackberry Ltd.*Enghouse Systems Ltd.*Open Text CorporationSierra Wireless, Inc.*

MaterialsHudBay Minerals Inc.Lundin Mining Corp.*Methanex Corp.*

Consumer DiscretionaryDollaramaRestaurant Brands Intl.

IndustrialsNew Flyer IndustriesWaste Connections

Real EstateFirstService Corp.*

Consumer StaplesPremium Brands Holdings

Health CareCRH Medical Corp.

Consumer DiscretionaryCanadian Tire Corp.*DollaramaMTY Food Group Inc.Restaurant Brands Intl.Uni-Select Inc.*

MaterialsCCL IndustriesMethanex Corp.*West Fraser Timber Co.Winpak Ltd.*

FinancialsBank of MontrealCIBCIndustrial AllianceRoyal Bank of Canada*

Consumer StaplesNorth West Company Inc.*Loblaw Companies Ltd.Premium Brands Holdings

EnergyNuVista EnergySeven Generations EnergyZCL Composites Inc.*

IndustrialsNew Flyer Industries Waste Connections

Real EstateColliers Int’l Group*FirstService Corp.*

STYLUS Growth Fund As at March 31, 2017


FinancialsBank of Montreal*CIBCFiera Capital Corp.Great-West Lifeco Inc.*Manulife FinancialNational Bank of CanadaRoyal Bank of CanadaToronto Dominion Bank

EnergyCdn. Natural Resources*Enbridge IncInter Pipeline Ltd.Peyto Expl. & Dev. Corp.Suncor Energy Inc.*TransCanada Corp.*

Consumer StaplesNorth West Company Inc.*Premium Brands HoldingsRogers Sugar

IndustrialsNew Flyer IndustriesWajax Corporation

UtilitiesCdn. Utilities Ltd.Valener

Real EstateCdn. Apartment Prop. REIT*Canadian REIT*

MaterialsMethanex Corp.*

Health CareExtendicare Inc.*

STYLUS Value with Income Fund As at March 31, 2017


FinancialsBank of MontrealCIBCFairfax FinancialGreat-West Lifeco Inc.*Industrial Alliance*Manulife Financial*National Bank of CanadaRoyal Bank of Canada

EnergyCenovus Energy Inc.*EnbridgeInter Pipeline Ltd.Suncor EnergyTransCanada Corp.*

Consumer DiscretionaryCanadian Tire Corp.*Dollarama*Restaurant Brands Intl.*

OtherOpen Text Corp.Rogers Communications

Consumer StaplesGeorge Weston Ltd.Maple Leaf Foods

IndustrialsWaste Connections Inc.

MaterialsCCL Industries inc.*

As at March 31, 2017STYLUS Wealth Protection Fund


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Long-term Average P/B =

2.20x

2.65x

What are You PayingPrice to book ratio (P/B): A measure of the value investors attach to the net assets of companies.

U.S. stocks continue to be very expensive –these valuations mean we have to be very careful not to overpay for any stocks in the STYLUS U.S. Blended Equity Fund.Source: Morningstar

What You Are Paying Versus What Are You Getting

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What are You GettingReturn on equity (ROE) net of T-bill rate: Measures the profitability of American companies net of the risk-free rate of return.

Retu

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n Eq

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of

med

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U.S

. st

ock

net

of 9

0-da

y T-

bill

rate

Average Net ROE = 8.85%

The gap between current and expected net ROE means we must closely monitor how those expectations change during the year.

Source: Morningstar

What You Are Paying Versus What Are You Getting11.3%

Expected net ROE for 2017

10.2% Current net ROE for 2017

How is STYLUS positioning the U.S. Blended Equity Fund in a

market where stocks are expensive but upside earnings growth opportunities remain?

How Are We Positioned?

Remember the U.S. Blended Equity Fund is a combination of two investment styles….


…Growth & Value

Value stocks in the portfolio offer lower valuations (i.e. defensive characteristics) while the Growth holdings provides exposure to the companies with superior reinvestment rate (i.e. internal growth).

S&P500 Value stocks in US Blended

Growth stocks in US Blended

US Blended Portfolio

Price/EarningsRatio 18.6x 14.7x 19.9x 16.8x

ReinvestmentRate 10.6% 14.0% 14.8% 14.4%

The Best of Both Worlds…


Lower Valuations

Better Growth

What does the “best of both worlds” U.S. Blended Equity Fund hold at the end of the First Quarter?

FinancialsDiscover Financial Srvs. GrpEvercore Partners Inc.Green Dot Corporation*LegacyTexas FinancialMarketAxess Hldgs.Oaktree Capital Group*PNC Fin. Services Group*

Consumer DiscretionaryBig 5 Sporting GoodsGeneral MotorsHome DepotLear CorporationOffice Depot Inc.Thor Industries Inc.

Information TechnologyApplied Materials Inc.Broadcom LimitedCDW CorporationMicrochip Tech. Inc.*

Health CareOraSure Technologies*BioTelemetry, Inc.

EnergyEOG Resources Inc.Pioneer Natural Resources

MaterialsOlin Corporation*Steel Dynamics Inc.*

Consumer StaplesSysco Corp.

U.S. Blended Equity Fund As at March 31, 2017


Good Things Come…

2017 Q1 Market Review & Outlook

As you have read in this quarterly review, North American corporate earnings, equity market

fundamentals & economic conditions are all favourable. Hence the title of this presentation:

Good Things Come…

2017 Q1 Market Review & Outlook

This title also corresponds to how the STYLUS disciplined investment process has held up so well through various market conditions, for even when

investor sentiment works against us in the short-term, we have always outperformed over each market cycle,

including the last 5 years …

Good Things Come…

13.1%11.8%

8.8%7.8%

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5 Year Annualized Returns: March 31, 2012 to March 31, 2017

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Announcements

Announcements: STYLUS Mid-Year Market Review

MARK YOUR CALENDARS NOW! We will be hosting Mid-Year Market review sessions at the STYLUS office between

Monday July 10 – Tuesday July 18

STYLUS Market Review Sessions

STYLUS Market Review Sessions

On May 23 & 27, STYLUS is hosting Money Management 101sessions for the “Next Generation” (young adults ages 18-35).

Announcements: Education Session

Topics: Types of Income Understanding Taxes Creating & Managing a Budget Planning for Big Purchases Debt Management Contributions to Investments

If you haven’t done so already, contact Fiona Robertson (email: [email protected]) to get your young adult children signed up for these informative sessions.

We Hope You Enjoyed Our Market Review!

If you have any questions about this presentation or if you would like to discuss

your individual investment goals and objectives, please contact us:

(416) 847-5900

Rick, Brennan, Julianna, Matteo, Mario & Fiona

Good Things Come… - STYLUS Asset Management...the STYLUS Funds each quarter, we typically analyze...

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Transcript of Good Things Come… - STYLUS Asset Management...the STYLUS Funds each quarter, we typically analyze...