MACKENZIE CANADIAN FOCUSED RESOURCE USD Q COMMENTARY FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR DISTRIBUTION TO RETAIL INVESTORS.

Transcription

1 MACKENZIE CANADIAN FOCUSED RESOURCE USD FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR DISTRIBUTION TO RETAIL INVESTORS.

2 INCEPTION: January BENCHMARK: Blended Index Natural Resources*: 38.5% S&P/TSX Energy % S&P/TSX Materials % MSCI World Energy % MSCI World Materials STRATEGY ASSETS: US$ 747 million PORTFOLIO MANAGEMENT TEAM: Benoit Gervais, MSc., CFA Portfolio Manager Industry Start: 2001 Firm Start: 2001 Onno Rutten, MSc., MBA Portfolio Manager Industry Start: 1997 Firm Start: 2011 Scott Prieur, MBA, CFA Associate Portfolio Manager Industry Start: 2003 Firm Start: 2013 Asmaa Marrat, MSc., CFA Senior Investment Analyst Industry Start: 2000 Firm Start: 2013 PERFORMANCE SUMMARY In Q3 2018, the Mackenzie Canadian Focused Resource composite returned -4.8% (Gross, USD), -5.0% (Net, USD).This compares with the blended index return of -5.1%. The blended index is composed of 38.5% TSX Energy %TSX Materials % MSCI World Energy % MSCI World Materials. CONTRIBUTORS TOP 5 CONTRIBUTORS SECTOR AVG. ACTIVE WEIGHT CONTRIBUTION TO Q3 RETURNS SM Energy Company Energy 2.3% 0.6% Hornbeck Offshore Services, Inc. Energy 0.9% 0.4% Secure Energy Services Inc. Energy 1.9% 0.4% Goldcorp Inc. Materials -1.8% 0.4% Agnico Eagle Mines Limited Materials -1.6% 0.4% DETRACTORS TOP 5 DETRACTORS SECTOR AVG. ACTIVE WEIGHT CONTRIBUTION TO Q3 RETURNS First Quantum Minerals Ltd. Materials 2.8% -0.5% Nutrien Ltd. Materials -3.6% -0.4% Pieridae Energy Limited Energy 1.2% -0.3% Western Forest Products Inc. Materials 2.0% -0.3% Noble Energy, Inc. Energy 3.5% -0.2% CONTRIBUTORS TO PERFORMANCE SM Energy Co. and Secure Energy Services Inc. both contributed to portfolio returns over the quarter. Both companies are demonstrating good execution on business plans. DETRACTORS FROM PERFORMANCE First Quantum Minerals Ltd. underperformed together with the copper price which was disproportionately affected by trade sentiment. The company also suffered from proposed changes to royalties and taxes in one of its main producing regions. Western Forest Products Inc. detracted as it suffered from general pressure in the lumber sector, where futures prices collapsed due to market concerns of moderating U.S. housing starts. PORTFOLIO ACTIVITY The managers exited a long-term position in vanadium producer Largo Resources as the broad markets have finally recognized the value of vanadium as a contributor to improved resource efficiency. Vanadium helps steel producers meet modern standards, and vanadium has a potential role in utility-scale batteries. Positions in Norbord Inc. and Interfor Corp. were exited based on valuation. * Mackenzie Portfolio Analytics Group is responsible for calculating the blended index returns, which is a combination of 38.5% S&P/TSX Energy, 31.5% S&P/TSX Materials, 16.5% MSCI World Energy and 13.5% MSCI World Materials. It is rebalanced monthly. Past performance does not guarantee or indicate future results. Mackenzie Portfolio Analytics Group is responsible for calculating performance information. Investing involves risk. Please read the important disclosures under Important Notes which contain more information about the significance and the limitations of the information on this page.

3 PERFORMANCE ATTRIBUTION 2018 Q3 Country 2018 Q3 Sector 1 Year Country as at September 30, Year Sector as at September 30, % 0% 3% 6% 9% SECTOR ATTRIBUTION Energy Utilities Materials Industrials Cash COUNTRY ATTRIBUTION Canada United States Italy Hong Kong Ireland New Zealand Sweden Brazil Austria Portugal Belgium Israel Spain Germany Denmark Finland Luxembourg Netherlands Norway Switzerland Australia France Japan United Kingdom Cash Other -2% -1% 0% 1% 2% Other -1% 0% 1% 2% Allocation Stock Selection Currency Cash Other Attribution versus Blended Index Natural Resources in USD comprised of 38.5% S&P/TSX Energy % S&P/TSX Materials % MSCI World Energy % MSCI World Materials PORTFOLIO POSITIONS ADDED AND REMOVED DURING THE QUARTER NAMES ADDED Baytex Energy Corp. (Canada-Energy) Crown Holdings, Inc. (United States-Materials) Eastman Chemical Company (United States-Materials) International Paper Company (United States-Materials) NuVista Energy Ltd. (Canada-Energy) PDC Energy Inc (United States-Energy) Petroleo Brasileiro SA Sponsored ADR (Brazil-Energy) Royal Dutch Shell Plc Sponsored ADR Class A (United Kingdom-Energy) TransCanada Corporation (Canada-Energy) Warrior Met Coal, Inc. (United States-Materials) WestRock Co. (United States-Materials) NAMES REMOVED Conifex Timber Inc Subscription Receipts (Canada-Materials) Hornbeck Offshore Services, Inc % 01-apr-2020 Interfor Corporation (Canada-Materials) Kelt Exploration Ltd. (Canada-Energy) Largo Resources Ltd. (Canada-Materials) Leucrotta Exploration, Inc. (Canada-Energy) Norbord Inc. (Canada-Materials) Raging River Exploration Inc. (Canada) Trinidad Drilling Ltd. (Canada-Energy) Wesdome Gold Mines Ltd. (Canada-Materials) Whiting Petroleum Corporation (United States-Energy) Past performance does not guarantee or indicate future results. Mackenzie Portfolio Analytics Group is responsible for calculating performance information.

4 OUTLOOK While US equity markets continued their near-linear upward trajectory, emerging markets and the resources sector experienced a substantial set-back during Q3/2018. U.S. Growth indicators accelerated, which led to increasingly hawkish expectations for future action by the U.S. Federal Reserve, which in turn pushed up bond yields and the U.S. dollar. The stronger dollar, combined with concerns about the impact of trade tariffs led to a substantial correction in emerging market equities. While resources were similarly dragged down, physical indicators of the oil, copper, aluminum and steel markets suggested continued strength in physical demand. Many current-day economic models infer that trade tariffs will slow the growth potential. We are reserving judgement, as trade barriers are rising for the first time in 30 years and economic models have yet to be reconstructed to account for these changes. We suspect there are offsetting variables. Specifically, we continue to think that wage growth in the bottom half of society could have a significant effect on economic multipliers. As a reminder, the average American worker has not seen real wage growth in 40 years. Most of the economic rent was shifted to workers in the emerging markets. We believe that moving operations back onshore will have some positive, but currently unknown, effect on wages and developed market growth. Leading indicators of global economic growth continue to point to moderating, but still sustained, economic momentum. Divergence has however been widening, with the US outperforming, and Emerging Markets (particularly China), currently underperforming relative to trend. While earnings growth remains strong; valuation multiples are adjusting to the reality of higher interest rates, which continue to be required in the US to manage the go-forward rate of growth. Until signs of a broad-based global economic slowdown appear, it is our opinion that investors should be prepared for the more likely scenario of a continued economic expansion. As we have enumerated in the past, there are five economic signals we watch closely for any warning signs of a sustained slowdown: Capex peaking, wage growth accelerating beyond 4%, sharply accelerating inflation, inversion of the yield curve, and global home and auto sales peaking. Of these five, four are firmly signaling continued growth. The fifth, global home and auto sales, have shown a recent moderation. Therefore, while the portfolio is positioned for the anticipated heightened volatility, current indicators suggest we remain in what we refer to as the fall season of investing; signified by late-cycle growth during which resource equities historically have outperformed the broad market. Resource equities are trading at undemanding valuation multiples. If economic growth persists while interest rates rise in a modest trajectory, we see an opportunity for value stocks, including resources, to outperform growth stocks which are generally more interest rate sensitive. Commodity sector returns were mixed over the quarter with oil and gas delivering positive returns while returns in the materials sector were generally negative. We continue to see healthy global oil demand going forward as we enter what has historically been the strongest quarter of the year for demand growth and believe oil prices will be well supported into winter. Oil stocks broadly remain in deep value territory with oil prices hovering in the $70 per barrel range. It is now up to individual companies to execute on their business plans by growing and spending within their means, to support a re-rating of their share prices. Elevated oil price differentials are weighing on Canadian oil producers. Differentials are anticipated to remain elevated until one more of the announced pipelines comes online (e.g.; Line 3, Keystone XL and/or TMX). Some relief could be underway with the anticipated late-2019 entering of service of Enbridge s Line 3 from Edmonton to the U.S., and more crude-by-rail contracts. Materials were down during the quarter due to US-China trade concerns and moderating economic growth in China that has been brought about by tightening financing and environmental standards. Non--traded commodities have fared much better and physical market indicators have remained constructive which points to weakened market sentiment, rather than a trade flow sentiment, affecting the pricing of metals (e.g., copper, aluminum) and construction materials (e.g., lumber). Gold remained under pressure during the quarter due to rising real interest rates (nominal treasury yields minus inflation). However, with early indicators of inflation pressures and a Fed that will be data dependent in determining further rate hikes, we could be approaching the cyclical peak in real interest rates. Institutional gold market positioning is on the extreme short end of the spectrum, and any indication that real interest rates have peaked for this economic cycle could provide a strong positive indicator for gold. Combined with increasingly uncertain macropolitical environment, we continue to argue for gold and gold equities as a risk insurance complement to portfolios. Investing involves risk. Please read the important disclosures under Important Notes which contain more information about the significance and the limitations of the information on this page.

5 OUTLOOK (cont d) Leading indicators of global economic growth continue to point to moderating, but still sustained, economic momentum. Divergence has however been widening, with the US outperforming, and Emerging Markets (particularly China), currently underperforming relative to trend. While earnings growth still remains strong; valuation multiples are adjusting to the reality of higher interest rates, which continue to be required in the US to manage the go-forward rate of growth. Prior to recent market corrections, resource equities had been trading at undemanding valuation multiples and resource equities therefore might be less exposed to further volatility when compared to prior market corrections. Portfolio positioning in Mackenzie Resource Portfolios is favouring Energy over Materials, as supply/demand fundamentals in Energy appear relatively more attractive, and Materials are more dependent on China. Mackenzie s Resource Team has been reducing volatility exposure and is generally overweight precious metals, which are delivering on their historical role as portfolio insurance. This portfolio positioning is anticipated to dampen the current market volatility; which the portfolio managers believe might offer late-cycle investment opportunities in Resources as long as underlying economic growth momentum is sustained. COMPOSITE AND BENCHMARK PERFORMANCE (USD) AS AT SEPTEMBER 30, MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS SINCE INCEPTION* Mackenzie Canadian Focused Resource (Gross) -4.8% 6.4% 3.2% 0.9% 13.1% -6.2% -4.3% -3.0% Mackenzie Canadian Focused Resource (Net) -5.0% 5.9% 2.3% 0.1% 12.2% -7.0% -5.1% -3.8% Blended Index Natural Resources** (comprised of 38.5% S&P/TSX Energy % S&P/TSX Materials % MSCI World Energy % MSCI World Materials) -5.1% 3.6% -1.4% 2.4% 12.4% -3.3% -1.8% -1.7% 1 Mackenzie Investments (the Firm ) has been managing Canadian Focused Resource assets since January The Firm claims compliance with GIPS starting January 1, 2008 and has been independently verified for the period of January 1, 2008 to December 31, Returns for periods greater than 1 year have been annualized. * The composite inception date is January 1, ** Mackenzie Portfolio Analytics Group is responsible for calculating the blended index returns, which is a combination of 38.5% S&P/TSX Energy, 31.5% S&P/TSX Materials, 16.5% MSCI World Energy and 13.5% MSCI World Materials. It is rebalanced monthly. Past performance does not guarantee or indicate future results. Mackenzie Portfolio Analytics Group is responsible for calculating performance information. Investing involves risk. Please read the important disclosures under Important Notes which contain more information about the significance and the limitations of the information on this page.

6 DISCLAIMER Mackenzie Investments Corporation and Mackenzie Financial Corporation are regulated as Investment Advisers by the U.S. Securities Exchange Commission (SEC). Mackenzie Financial Corporation is also regulated as a Portfolio Manager in all provinces and territories in Canada by the relevant securities commissions in each jurisdiction. Additional information about Mackenzie Investments Corporation and Mackenzie Financial Corporation is available on the SEC s website at and on the various securities commissions websites in the provinces and territories of Canada. IMPORTANT NOTES Investing involves risk. Any opinion expressed herein is as of September 30, 2018 and is subject to change without notice. The contents of this document are provided for illustrative and marketing purposes and do not constitute specific advice regarding your personal investment situation or provide specific individual advice about investment, insurance, financial, legal, accounting, tax or similar matters. Certain information contained in this document is obtained from third parties. Mackenzie Investments believes such information to be accurate and reliable as at the date hereof, however does not guarantee that it is accurate or complete or current at all times. The information provided is subject to change without notice and Mackenzie Investments cannot be held liable for any loss arising from any use of or reliance on the information contained in this document. No portion of this communication may be reproduced or redistributed without the express permission of Mackenzie Investments. Views expressed regarding a particular company, security, industry or market sector are the views of only that speaker/author as of the time expressed and do not necessarily represent the views of Mackenzie Investments or its affiliates. Any such views are subject to change at any time based upon markets and other conditions and Mackenzie Investments and its affiliates disclaim any responsibility to update such views. These views are not a recommendation to buy or sell and may not be relied on as investment advice and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any client. Speculation or stated beliefs about future events, such as market and economic conditions, company or security performance, upcoming product offerings or other projections are forward-looking statements. These forward-looking statements represent the beliefs of the speaker/author and do not necessarily represent the views of Mackenzie Investments or its affiliates. Forward-looking statements are inherently subject to, among other things, risks, uncertainties and assumptions which could cause actual events, results, performance or prospects to differ materially from those expressed in, or implied by, these forwardlooking statements. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, the volatility of global equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings, catastrophic events and the ability of Mackenzie Investments and its affiliates to attract or retain key employees. The foregoing list of important risks, uncertainties and assumptions is not exhaustive. Please consider these and other factors carefully and not place undue reliance on forward-looking statements. In addition, Mackenzie Investments and its affiliates manage a number of separate strategies and portfolio managers for those strategies may have differing views or any analysis with respect to a particular company, security or the economy than the views expressed herein. Mackenzie s Portfolio Analytics Group is responsible for conducting performance attribution. The group uses Factset Research Systems for conducting performance attribution based on daily holdings. The model uses a multi-currency attribution based on Brinson-Fachler Model. The model decomposes portfolio returns into currency, allocation, selection and interaction effects. Past performance does not guarantee or indicate future results. Information under Composite and Benchmark Performance (USD) reflects the performance of the Mackenzie Canadian Focused Resource Composite, and does not necessarily reflect the performance that any particular account investing in the same or similar securities may have had during the period. The performance of other accounts is likely to differ from the performance shown for a variety of reasons, including, but not limited to: differences in market conditions, portfolio turnover and in the number, types, availability and diversity of securities that can be purchased; economies of scale, regulations and other factors applicable to the management of large separate accounts and mutual funds; client-imposed investment restrictions; the timing of client investments and withdrawals; the deduction of taxes; tax considerations; and other factors. Information presented under the headings Contributors to Performance, Detractors from Performance and Portfolio Activity are made with specific reference to a representative account within the Composite. Gross performance results do not reflect the deduction of management fees and other expenses except for brokerage commissions and other trading expenses. If those fees and costs were reflected, results would be reduced. Including these fees and expenses would reduce the returns shown. Net performance results reflect the deduction of the maximum standard fee of 0.85% charged to institutional clients without taking into account breakpoints, calculated daily and invoiced quarterly, as well as the transaction costs and certain other fees and expenses, including certain taxes, described in the Investment Management Agreement. Certain clients could pay different fees which would result in different net performance returns. Net performance results also do not include the deduction of custodial fees, which will reduce the returns shown. Taxes have not been deducted. Information about Mackenzie Investments investment advisory fees is described in its Form ADV, Part 2A. A fee schedule will be provided upon request. Both gross and net performance returns assume the reinvestment of dividends, interest, and realized and unrealized capital gains and losses. Index returns do not reflect transaction costs or the deduction of other fees and expenses and it is not possible to invest directly in an index. The Mackenzie Canadian Focused Resource Composite contains fully discretionary, Canadian Focused Resource accounts. New accounts are included in the Composite beginning with the first full month under management after they have been fully invested. Although certain client accounts comprising the Mackenzie Canadian Focused Resource Composite are managed in Canadian dollars, the performance information shown above was converted from Canadian dollars and is expressed in U.S. dollars. The performance of an account managed in U.S. dollars may differ. Returns were converted at the end of each month based on the 4:00 PM spot rate on the last business day of the month as reported by StatPro to our system vendor CGI StarSource.

7 IMPORTANT NOTES (cont'd) COMPLIANCE STATEMENT Mackenzie Investments claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Mackenzie Investments has been independently verified for the periods January 1, 2008 through December 31, Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The verification report is available upon request. Verification does not ensure the accuracy of any specific composite presentation. FIRM OVERVIEW Mackenzie Financial Corporation ( Mackenzie Investments ) provides investment management and related services through multiple distribution channels. Assets under management as at September 30, 2018 were US$ billion. We provide our investment management expertise through mutual funds, pooled funds, segregated accounts, and separate accounts for retail and institutional investors. Mackenzie Investments is dedicated to generating consistently superior long-term investment returns for its clients. The Firm is a member of the IGM Financial Inc. (TSX:IGM) group of companies. On October 19th, 2017, the investment management functions of Investors Group and Mackenzie Investments joined together to form a single global investment management organization to support both companies resulting in the 2017 increase in total firm assets. As part of this new investment management organization, Investors Group Inc. became part of Mackenzie Investments in order to effectively serve both Investors Group and Mackenzie Investments clients. There has been no change of ownership impact to the two firm s mutual parent, IGM Financial. This strategy is managed by Mackenzie Investments Corporation, a wholly owned subsidiary of Mackenzie Financial Corporation. COMPOSITE DESCRIPTION The Canadian Focused Resource Composite seeks to provide long-term capital growth by investing primarily in natural resource companies across a broad spectrum of industries. Portfolios in the composite must invest at least 50% of assets in Canadian companies. The composite was created on January 31, BENCHMARK DESCRIPTION The benchmark is a blend of 38.5% S&P/TSX Energy Total Return Index / 31.5% S&P/TSX Materials Total Return Index / 16.5% MSCI World Energy Total Return Index, net of withholding taxes / 13.5% MSCI World Materials Total Return Index, net of withholding taxes. Mackenzie Portfolio Analytics Group is responsible for calculating the blended index returns and it is rebalanced monthly. The S&P/TSX Composite Index is a capitalizationweighted index that represents some of the largest float-adjusted stocks trading on the Toronto Stock Exchange. The S&P/ TSX Energy Index includes energy sector stocks within the S&P/TSX Composite Index. The S&P/TSX Materials Index includes material sector stocks within the S&P/TSX Composite Index. The stocks are selected based on the S&P/MSCI Global Industry Classification Standard (GICS ). The MSCI World Index is a free float adjusted, market capitalization weighted index that is designed to measure the equity market performance of developed markets. It consists of 23 developed market country indices. The MSCI World Energy Index includes energy sector stocks within the MSCI World Index. The MSCI World Material Index includes material sector stocks within the MSCI World Index. The stocks are selected based on the GICS. REPORTING CURRENCY Valuations and composite performance are reported in U.S. dollars. The composite includes Canadian dollar portfolios that have been converted to U.S. dollars. LIST OF COMPOSITES A complete list of composite descriptions is available to prospective clients upon request. Please contact Carol De Veau at cdeveau@mackenzieinvestments.com. Mackenzie Financial Corporation All rights reserved. For Institutional Use Only. This material does not constitute an offer to sell, or a solicitation of an offer to buy, any type of securities /18 MACKENZIE INVESTMENTS 180 Queen Street West, Toronto, Ontario M5V 3K1 T F E cdeveau@mackenzieinvestments.com mackenzieinvestments.com