Canadian equities took a breather in June while sectors linked to AI continued to drive performance in the U.S. Halfway through the year, the Fund’s NAV has returned 1.9% while its share price has returned 4.6%, outperforming the Benchmark return of 0.3%.
Although the TSX Composite Index has lagged the S&P 500 so far this year, the Bank of Canada (BoC) easing cycle, which began on 5 June, is expected to drive a rebound in Canadian equities in the second half of 2024. Historically, the TSX has averaged double-digit gains twelve months after the first BoC rate cut. We believe core defensive yield sectors including telecommunications, utilities and real estate are particularly well-positioned to outperform in the second half.
Real estate was the biggest positive contributor to the Fund’s performance this month. Canadian REITs returned 0.6% in June, outperforming the TSX Composite by 2%. The BoC’s decision to cut rates on 5 June is showing early signs of positive sentiment for the sector. There are four BoC meetings remaining in 2024 and the Overnight Index Swaps market is currently pricing more than two more cuts from the BoC before year-end.
Canada’s population has increased 8% since before the pandemic. Supply of real estate has not kept pace with the surge in demand, causing Canada’s per capita housing stock and shopping centre space to fall by 2% and 6% over this period. As a result, rents have increased while vacancy rates have fallen to historic lows within these asset classes. Apartment rents have risen close to 10% year-over-year while retail property leasing spreads are also in the high single-digits. The operating environment is as attractive as it has ever been for these real estate sectors and when investor focus finally shifts from interest rates to fundamentals, we expect a swift re-rating in REIT unit prices.
Chartwell Retirement Residences (CSH), a longstanding core holding in the Fund, announced a $345 million equity raise in June at a price of C$12.20/unit. The proceeds will be used to fund C$763 million of acquisitions, including 10 residences in Quebec across two relatively new seniors’ housing portfolios that will lower the company’s overall portfolio age by three years. CSH becomes the first REIT in Canada to issue equity in 2024 – showcasing a unique cost of capital advantage. CSH has consistently exceeded expectations over the past several quarters as occupancy recovers towards pre-pandemic levels in its residences. With the population of those aged 85+ expected to grow by 50% over the next decade in Canada, CSH’s portfolio of private retirement homes should benefit from steadily increasing demand and limited new supply. In this light, we are happy to see CSH opportunistically acquire new assets and view the transactions favourably. The market agrees as Chartwell’s stock price is already trading 8% above the equity issuance price.
The Fund initiated a position in AGF Management Limited this month, a Canadian investment management firm with C$50 billion of assets under management. The firm reported 10% growth in capital flows during the first quarter, underpinned by an increase in gross sales. It also closed its acquisition of Kensington Capital Partners earlier in the year which more than doubles the size of the company’s Alts platform. AGF trades at an attractive valuation at just 5.4x forward price-to-earnings and a fully covered dividend yield of 5.6%. It becomes the Fund’s third non-bank holding within the Financials sector and reflects our positive outlook for Canadian asset managers in the second half of the year.
