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Third Quarter | 2024
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(Includes Q3 2024 Series A and Series O Performance Overview)

Market Overview

In the third quarter of 2024, under the weight of previous central bank interest rate increases, global growth continued to slow. But in September, the U.S. Federal Reserve made its first interest rate cut this cycle, joining the Bank of Canada and other central banks who had already begun reducing rates due to retreating inflation. This has provided some relief for certain households and businesses who have been struggling with a higher interest rate environment. While the path of inflation and interest rates are never certain, we are now on the easing side of this cycle.

Equity market performance broadened out over the third quarter with interest rate sensitive sectors such as real estate, utilities, and financials performing well, propelling several stock market indices to all-time highs. The information technology sector lagged, however, as investors questioned higher valuations for companies benefiting from artificial intelligence spending. Tighter credit spreads and continued exuberance across several equity markets may suggest that investors have priced in in a low probability of a recession.

Regionally, Canadian equities led the advance in the third quarter given heavy exposure to interest rate sensitive industries, followed by Europe, Japan and emerging markets on a weaker U.S. dollar. Chinese stimulus announcements provided an end of quarter share price rally for some industries and companies with exposure to China, despite lingering longer-term challenges. Bonds also rallied this quarter as rates snapped a two-quarter streak of rising yields.

How Did We Do?

For the most part, “Be Boring” companies performed better in the third quarter compared to the previous two quarters.  Several holdings shined despite some market volatility experienced during July and August.

Colliers International Group, a diversified service provider for commercial real estate, performed strongly due to an improved outlook for the industry and lower interest rates. Industrial REIT, Granite Real Estate Investment Trust, similarly benefited from an improving real estate outlook.  

Meanwhile, insurance broker Aon posted strong organic growth in its recent reporting period, and is now seeing a positive impact from a recent acquisition that weighed on the stock earlier this year.  iA Financial, did better than the street expected primarily due to results in its core insurance service unit. The firm remains conservatively managed with a low-risk appetite around both their policy underwriting and investment portfolio, which we appreciate.

Financial exchange operators Intercontinental Exchange and CME Group were other examples of antifragile businesses that did well last quarter—as they benefit from volatility—and played a key role in protecting the portfolio against market uncertainty. Heightened volatility experienced during the quarter has led to a substantial increase in trading volume across exchanges, and CME Group expanded its margins as it continued showing strong cost control.

Some of our companies based in Japan did quite well this quarter. Management consultant BayCurrent Consulting, telecom KDDI, and B2B maintenance, repair, and operations distributor MonotaRO, all enjoyed significant bumps after lagging earlier in the year. BayCurrent continues to hire to take advantage of a long runway in IT consulting in Japan given that Japanese corporates have historically underinvested in IT, and the market cheered as the company reported higher-than-expected revenue per consultant. In addition, KDDI, BayCurrent, and MonotaRO are all domestically focused businesses; as a result, North American investors further benefitted from the significant appreciation of the Japanese yen.

Unlike previous quarters, portfolio constituents with AI-related exposure did not keep up with the market over the last three months including advanced lithography machine producer ASML and single wafer atomic layer deposition technology company ASM International.

Outside of AI, Novo Nordisk also pulled back due to increasing regulatory risks and a potential rise in competitive intensity in obesity pharmaceuticals.   

Like last quarter, households continue to face financial strain under a rising cost of living which has impacted some of our consumer holdings including Dollar General, luxury goods company LVMH Moët Hennessy, Nike, BMW, and cosmetics company Estée Lauder Companies.

Some of this weakness in consumer names was partially offset by better performance from other consumer holding stalwarts. Share prices of the recurring consumables distributor Bunzl and caterer Compass Group benefited from better-than-expected results that suggest our long-term investment theses for both remains intact.

Our underweight to the energy sector helped this quarter as oil prices declined on concerns of slowing demand. Meanwhile the spot price of gold reached an all-time high as interest rates declined and the U.S. dollar depreciated, which negatively impacted performance given our overall lack of exposure to the metals and mining industry. Our investment philosophy favors businesses that are wealth creating with sustainable competitive advantages. So far, we have found it challenging to invest in gold producers that meet our investment criteria.  

For balanced investors, there was improved absolute performance compared to the previous quarter on certain equity strategies and reasonable performance of bonds as interest rates declined. Given our neutral position on credit exposure, we did not benefit from a further tightening of credit spreads. As interest rates continued to decline this quarter, the balanced strategy further deployed cash into bonds, moving both asset classes closer to their strategic target weight. The incrementally higher allocation to fixed income provides a degree of downside protection to a slowdown or recession scenario, while also recognizing the current lower expected return on cash holdings. 

Looking Ahead

A new development arose this quarter as several stock markets reached all-time highs in the absence of leadership from the technology sector. During the first half of this year, the big theme was strength in public equity markets largely led by artificial intelligence (AI) related companies. This quarter, as inflation further slowed, market exuberance continued with a broadening out of sector leadership to include the more interest rate sensitive sectors such as real estate, utilities, and financials as interest rates declined.

At the margin, the market seems less certain than it was six months ago with respect to AI. The real question now is whether AI is a real trend. We believe that it is, and we’ve likely gone through the initial hype stage, where people are super excited about a paradigm-shifting technology. As we’ve seen in the past, that hype often outruns reality in the short term, leading to some degree of correction. In other words, early technology innovators are not always the longer-term winners, and innovation has not always led to long-term profitability.

While we are on the easing side of this economic cycle, volatility and further changes in market leadership seem closely tied to the path of interest rate expectations. Tighter credit spreads and all-time highs for several equity markets may suggest that investors have already priced in a low probability of a recession and a further decline in interest rates.

We are mindful that the path of inflation and interest rates is never certain, and the start of a rate cutting cycle hasn’t necessarily provided any ability to predict a recession or the direction of the stock market over the near term. This is why “Prepare, don’t predict” is such an important mindset at Mawer and lies at the heart of our investment process. Investing in a diversified portfolio of real businesses with strong competitive advantages, that generate recurring revenues, that have flexibility in their cost base, that maintain dominant industry positions, that are run by competent managers, and that refrain from taking undue risk from a leverage perspective, should lead to genuine wealth creation. While market sentiment can shift quickly and unpredictably in the short run, attractive risk-adjusted returns over the long term is the real goal.

Disclaimers

This document is for informational purposes only. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts and prospectus before investing. The indicated rates of return (other than for a money market fund) are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions. The indicated rates of return for a money market fund is an annualized historical yield based on the seven-day period ended as indicated and annualized in the case of effective yield by compounding the seven-day return and does not represent an actual one-year return. The indicated rates of return do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that a money market fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment will be returned to you. Mawer Mutual Funds are managed by Mawer Investment Management Ltd.

Mawer Mutual Funds do not have trailing commissions. If you purchased units of the Mawer Mutual Funds through a third-party dealer, you may be subject to commissions or additional sales charges. Please contact your dealer for more information.

This Mawer Quarterly includes certain statements that are “forward looking information” or “forward looking statements” (collectively, “forward looking information”) within the meaning of applicable securities legislation. All statements, other than statements of historical fact, included in this report that address activities, events or developments that the portfolio advisor, Mawer Investment Management Ltd., expects or anticipates will or may occur in the future, including such things as anticipated financial performance, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions, results of operations, are forward looking information. The words “may”, “could”, “would”, “should”, “believe”, “plan”, “anticipate”, “expect”, “intend”, “forecast”, “objective”, “will” and similar expressions are intended to identify forward looking information. Undue reliance should not be placed on forward looking information. Forward looking information is subject to various risks described in the Simplified Prospectus, uncertainties, and assumptions about the Fund, capital markets and economic factors, which could cause actual results to vary and in some instances to differ materially from those anticipated by the portfolio advisor and expressed in this report. Material risk factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. The foregoing list of risk factors is not exhaustive.

All opinions contained in forward looking information are subject to change without notice and are provided in good faith and are based on the estimates and opinions of the portfolio advisor at the time the information is presented. The portfolio advisor has no specific intention of updating any forward looking information whether as a result of new information, future events or otherwise, except as required by securities legislation. Certain information about specific holdings in the Fund, including any opinion, is based upon various sources believed to be reliable, but cannot be guaranteed to be current, accurate or complete and is subject to change without notice.
Index returns are supplied by third parties—we believe the data to be accurate, however, cannot guarantee its accuracy.

Performance returns for the Mawer Mutual Funds and benchmarks are calculated by Mawer Investment Management Ltd. These returns are historical simple returns for the 3 month, YTD, and 1 year periods, and annualized compounded total returns for periods after 1 year.

Non‑performance related material in this document reflects the opinions of the writer, and does not reflect fact or predictions of actual events or impacts, and cannot be relied upon for investing purposes or as investment advice or guarantees of any kind.


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