Fourth Quarter | 2021

Performance diverged across regions as U.S. equities continued their remarkable advance. Some of the larger U.S. technology-focused stocks powered to near all-time highs, although this wasn’t evident across all high-growth companies as the potential headwinds from higher interest rates remained, particularly in the more speculative areas of the market. Holdings that finished the quarter near all-time highs include Microsoft and information technology consultant Accenture. Accenture reported better-than-expected results, announced several acquisitions during the quarter, and provided an upbeat forecast.

Emerging markets were on the opposite side of the performance spectrum to the U.S. and continued to face weakness in China. Despite the headwinds, the Mawer Emerging Markets Equity Fund held up well relative to its benchmark. A contributing factor to the outperformance was the portfolio’s relatively more modest exposure to China. Although, we were not immune from the challenges posed by a potential slowdown in China. This included weak stock returns from Chinese online merchant platform provider China Youzan and online discount retailer Vipshop.

Across our portfolios, there were some strong performers that have been rewarded for their ability to manage the challenges from supply chain disruptions and inflationary pressures.

• LVMH Moët Hennessy Louis Vuitton had a robust quarter as supply chain challenges were less of an issue given a portion of its sourcing model is in-house and local. LVMH also benefited from its luxury products’ high-margin structure and pricing power in light of rising input costs.
• Loblaw Companies, a Canadian food and drug retailer, has demonstrated strong execution and is well-positioned to pass on food inflation to its customers. The company also has a discount segment that may be a more popular option for consumers if inflationary pressures persist.
• Electrocomponents, a global distributor of electrical and industrial components, is seeing very strong demand and revenue growth compared to pre-pandemic levels. The company focuses on stocking large amounts of low-turnover inventory categories so that they can rapidly meet urgent product requests from their customers. This makes their customers less price sensitive and positions the company well to pass on cost increases from higher freight and labour costs.

By contrast, many companies tied to the payment ecosystem displayed weakness this quarter.

• PayPal showed weakness as the market worried about business reopenings leading to slowing e-commerce spending, the financial impact of the transition away from the eBay relationship, and increased M&A risk.
• Brazilian merchant acquirer and payments processor, StoneCo, saw its stock price decline as intensifying competition has led to increased expenses impacting margins, while rising rates have impacted funding costs.
• Adyen, a high-growth merchant acquirer and payments processor based in the Netherlands, felt the impact of an increased likelihood of higher discount rates.
• Visa to a lesser extent also experienced stock price weakness as the whole payment ecosystem seems increasingly susceptible to disruption by alternative payment methods and infrastructure.
  Overall, equity markets had a remarkable quarter and when put in context with the last twelve months, it made for a bumper year for developed market stocks.

Mawer Balanced Fund investors benefited this quarter from positive returns in most equity asset classes as well as in Canadian bonds. Canadian bonds gained this quarter following communication from the Bank of Canada that the neutral rate was likely to be lower this cycle. From an asset mix perspective, our overweight position in equities aided relative performance.

We modestly trimmed our equity weight this quarter with the offsetting increase to cash and bonds. We remain overweight equities but are mindful of many of the scenarios that may unfold.

Looking ahead

In entering the new year, we acknowledge both the potential areas of risk and promise for global markets. Threats to a continued economic recovery have become more prominent in the minds of investors, most notably with the persistent threat of inflation and the risk of central bank policy error. As we walk through some of the evolving themes, we believe it is worth reminding our clients that we don’t try to predict the future, but rather, aim to build diversified portfolios that we deem resilient in many of the scenarios that could unfold.

The underlying drivers of inflation appear to be lingering. Management teams have continued noting supply chain disruptions and labour shortages are becoming a larger issue for employers. While companies have generally reported strong earnings, many have acknowledged input cost increases.

On the encouraging side, supply chain disruptions should resolve over time (there have been some signs this is starting to occur) and businesses that have pricing power, which is an attribute we look for in wealth-creating companies, are often well-positioned to pass rising input costs onto customers. GDP growth rates are still positive in most regions and the economic recovery since the 2020 COVID-19 recession has been strong. Global Purchasing Managers’ Index (PMI) readings, an index of the prevailing direction of economic trends in the manufacturing and service sectors, remain healthy. Employment levels have also continued to improve and in some regions are nearing pre-pandemic levels.

With the combination of a strong economic recovery, tight labour market, and inflationary pressures persisting, developed market central banks are maintaining or moving up timelines for tightening monetary policy. The U.S. Federal Reserve and Bank of Canada are indicating we will see interest rates move higher in 2022, while the Bank of England already had an interest rate hike in December. The prospect of higher interest rates has the potential to impact risk assets as discount rates move higher. We have been reviewing and adjusting at the margins our equity portfolios’ exposure to higher duration equities, those that are most exposed to higher discount rates. We are not making a prediction on how the world will unfold, rather ensuring we are not overly exposed to any one outcome.

As we mentioned in a recent Art of Boring blog, “Be aware, but don’t despair!” we believe when prudently selected, equities continue to offer attractive long-term value for patient investors. By diligently following our investment process, we seek to build resilient portfolios that can deliver attractive risk-adjusted returns for our clients irrespective of how the future unfolds.