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Quarterly Check-in – July 2024

In our mid-year quarterly webinar, we discussed strategic weightings, top performers, demographic and fiscal trends and how our funds are positioned to protect investors from downside risk while participating in a market that could still go higher.

In our webinar after the first half of 2024, our Portfolio Manager Sam LaBell and Associate Advising Representative Vartan Tanielian discussed strategic weightings, top performers, demographic and fiscal trends and how our funds are positioned to protect investors from downside risk while participating in a market that could still go higher.

Highlights:

Performance and top performers of the funds YTD: We’ve been underweighting financial services in our funds, particularly banks. “Our view is that the credit cycle in Canada is still chugging along and has not bottomed,” Sam said. “There are more provisions for credit losses coming for the banks.” On the other hand, we’ve been overweighting energy and materials. “In terms of materials, we weighted towards the gold side of the ledger. Our view was that with lots of economies trying to diversify away from U.S. dollar holdings, central banks were coming back in and buying gold.” Outside of financials and materials, a few of the top performers discussed include Bombardier Inc. (TSX: BBD.b), Aritzia Inc. (TSX: ATZ), Constellation Software Inc. (TSX: CSU), Loblaw Co. (TSX: L) and AltaGas Ltd. (TSX: ALA).
Stock pickers market: “We look for stocks that have a unique catalyst that is underappreciated by the market, as well as good long-term compounders,” Sam said. “Mixing in those two value approaches has been very effective on the long side.”
Short sales: “Our goal on the short side is not necessarily to find the company that will go to zero and make a large bet,” Sam said. “It’s to find a group of companies in a portfolio approach that will underperform the index and underperform the long side of the book.” Short contributors included Toronto Dominion Bank (NYSE, TSX: TD), Bank of Montreal (NYSE, TSX: BMO), National Bank of Canada (TSX: NA), Boralex Inc. (TSX: BLS), Innergex Renewable Energy Inc. (TSE: INE), Emera Inc. (TSX: EMA), Barrick Gold Corp. (NYSE: GOLD, TSX: ABX), Canadian National Railway Co. (NYSE: CNI, TSX: CNR), Pool Corp. (Nasdaq: POOL) and Canadian Tire Corp. (TSX: CTC.a).
Demographic and fiscal challenges ahead: The boomer generation is aging, which means they are saving and spending less, while the millennial generation is entering their spending years. “Anywhere the boomers and millennials overlap, you’re going to get a double consumption cohort,” Sam said. “If you have an area where the boomers are spending less and the millennials are not necessarily picking up the slack, those areas are going to suffer.”
U.S. stimulus and economic conditions: The Congressional Budget Office’s latest economic outlook expects ongoing deficits for the next decade, which is both stimulative and will sustain inflation, but also increases the interest burden. Stimulation means that personal consumption expenditures remain above average, while U.S. employment is still favourable and retail sales are healthy but not outstanding (excluding autos).
Bond risk: “There is a risk that the public markets may want a higher yield on the 10-year U.S. treasuries, and that could reset all the valuation baselines for stocks,” Sam said. He then discussed various scenarios of what happens to markets when the 10-year yields are below the Fed funds rate, such as they are now. He then discussed positive and bearish cases for the S&P 500.
Positioning: We want to protect the funds against downside risk, but there is still a good chance we could have a good return between now and next year. “We need to be ready to participate and not be completely out of risk assets and entirely into yield plays,” Sam said. “So we have a good exposure to yield, but we also look for catalysts.” We also think Canadian companies with a global outlook will tend to outperform and want to stay diversified.
Fund benefits: The Veritas Canadian Equity Fund has outperformed the benchmark ETF with lower volatility. The Veritas Absolute Return Fund has low index correlation and volatility and is designed to diversify equity exposure. The Veritas Next Edge Premium Yield Fund has a low-volatility covered option strategy designed to produce consistent tax-advantaged income and capital gains. Of course, capital preservation is paramount in all our strategies.

DISCLOSURES

The S&P/TSX Composite Total Return Index is a Canadian dollar denominated, capitalization-weighted index that includes the largest float-adjusted stocks trading on the Toronto Stock Exchange, subject to inclusion criteria. The index provides the broadest representation of market-weighted returns for large capitalization Canadian-listed stocks, including reinvested dividends, making it an appropriate index for diversified portfolios that invest primarily in Canadian stocks, such as the Veritas Absolute Return Fund and the Veritas Canadian Equity Fund. We may also refer to exchange traded funds (ETF) that closely track the S&P/TSX Composite total return, such as the iShares Core S&P/TSX Capped Composite ETF which carries a 0.99 or greater correlation to the index. While our funds are benchmarked against the S&P/TSX Composite, we may reference returns for the S&P 500 and NASDAQ Composite, as well as yields on U.S. ten-year Treasury bonds, which we view as relevant investment benchmarks for investors in North American equities. The S&P 500 represents approximately 80% of the total market capitalization of U.S. stocks, and remains the most broad-based indicator of large-cap U.S. equity returns. In contrast, the NASDAQ has a greater proportion of technology and growth stocks, which we view as providing additional insight into investors’ risk appetite. The ten-year U.S. Treasury rate is referenced as a measure of the lowest-risk investment alternative to equities (‘the risk-free rate’). Contact Veritas Asset Management Inc. for more information regarding comparative indices.

The information contained herein is for general information purposes and does not constitute a solicitation for the purchase or sale of securities. The full details of the Fund, its investment strategies and the risks are detailed in the Fund’s current simplified prospectus and fund facts document, copies of which may be obtained from Sedar, your dealer, Veritas Asset Management Inc. (“VAM”) or at Veritasfunds.com. Please read the prospectus before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. All performance data assume reinvestment of all distributions or dividends and do not take into account other charges or income taxes payable by any unitholder that would have reduced returns. The performance of the Fund is not guaranteed, unit values change frequently and past performance may not be repeated. Performance is presented in Canadian dollars, unless otherwise stated, and is net of fees of Series F units of the Fund. VAM is an affiliate of Veritas Investment Research Corporation (“VIR”) by virtue of being under common control that may also from time to time have certain common directors, officers and/or employees. VIR produces and issues independent equity research regarding public issuers to investors and other capital markets participants. VAM is a client of VIR and receives research reports from VIR at the same time as VIR’s other clients. VIR and VAM have implemented policies and procedures to minimize the potential for and to address conflicts of interest, which are available upon request.

Cautionary Note Regarding Forward-Looking Statements

The information in this release may contain forward-looking statements. All statements, other than statements of historical fact, that address activities, events or developments that Veritas Asset Management Inc., the Portfolio Manager, or any affiliates thereof (the ‘Companies’) believe, expect, or anticipate will or may occur in the future (including, without limitation, statements regarding any targeted returns, projections, forecasts, statements, and future plans and objectives of the Companies) are forward-looking statements. These forward-looking statements reflect the current expectations, assumptions or beliefs of the Companies based on information currently available to the Companies. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the Companies to differ materially from those discussed in the forward-looking statements, and even if such actual results are realized or substantially realized, there can be no assurance that they will have the expected consequences to, or effects on, the Companies.

For a list of factors that could cause actual results or events to differ materially from current expectations, please refer to our Prospectus and the section ‘Risk Factors’. Any forward-looking statement speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Companies disclaim any intent or obligation to update any forward-looking statement, whether as a result of new information, future events, or results or otherwise. Although the Companies believe that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and accordingly undue reliance should not be put on such statements due to the inherent uncertainty therein.

Quarterly Check-in – July 2024

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