What Happened in Q1?

The bullish momentum in the stock market remained robust in the first quarter of 2024, defying concerns about prolonged higher interest rates. Despite lightened expectations for Federal Reserve rate cuts throughout the year, the S&P 500 posted impressive gains, surpassing a 10% increase in the first quarter. Meanwhile international equities (excluding US) delivered a solid 7.6% return. Notably, technology stocks continued to spearhead the US rally, fueled by optimism surrounding the burgeoning artificial intelligence sector. Even value stocks, which have been laggards for over a decade, joined the rise, contributing to the broad market rally. However, the bond market faced headwinds as stickier inflation readings delayed the prospect of aggressive rate cuts from North American central banks, leading to a -1.3% return for Canadian bonds.

Interestingly, geopolitical tensions, including conflicts in Ukraine and the Middle East, failed to significantly dampen market sentiment, indicating a certain level of complacency among investors. However, with the equity market's performance somewhat decoupled from interest rate expectations, focus has shifted towards corporate earnings as a potential determinant of future market movements. Thus, while uncertainties persist, particularly regarding inflation and monetary policy, the prevailing optimism surrounding economic fundamentals and technological innovation continues to underpin the bullish sentiment in the stock market.

Individual portfolio performance over the quarter while dependent on client’s unique asset mix, experienced returns ranging between 3.0% to 4.5%, well within the expected targets. We are very pleased with the performance as it reflects the careful strategies implemented to optimize returns while managing risk. Notably, these returns were achieved with significantly less exposure to public equities compared to traditional balanced portfolios.

Strategic Income Pool

Kinsted’s Strategic Income Pool concluded the quarter with a 2.2% increase, driven by steady performance across many holdings. Private credit remains a standout performer, delivering exceptional returns with numerous credit funds achieving approximately 10% return on an annualized basis. The consistent yield from music royalties of over 7% continues to enhance portfolio performance. We are considering increasing exposure to private credit due to its promising outlook, fueled by regulatory changes and the retreat of traditional banks. Despite challenges posed by higher interest rates, the attractiveness of private credit investments, particularly in sectors like digital infrastructure and clean energy transition, where private lenders play a significant role in financing, remains strong.

Real Asset Pool

The Kinsted Real Asset Pool performed well during the quarter, with the pool gaining just over 2% while exhibiting minimal volatility. Signs of recovery were observed in some global agriculture holdings, while domestically oriented real estate delivered strong returns. Although holdings in several private infrastructure funds were relatively muted, we anticipate those returns to improve over the next 12-18 months as fund managers begin to divest of assets which are currently being priced at substantial discounts to fair value.

Strategic Growth Pool

The Kinsted Strategic Growth Pool also had a solid quarter, up over 4%. While it's understandable that Strategic Growth may not align perfectly with public equities due to its low correlation with public markets, private assets such as private equity and venture capital, which constitute a significant portion of the portfolio, are showing signs of emerging from a prolonged slump. Expectations of thawing in M&A activity and the IPO market bode well for Strategic Growth. Additionally, holdings in more esoteric strategies such as CLOs (collateral loan obligations) and special situations contributed to the solid quarter. Similar to real assets, we anticipate harvesting of assets within some holdings, which should enhance portfolio performance over the medium term.

Canadian & Global Equity Pools

In terms of equity pools, the Canadian equity pool concluded the quarter up 4.5%, while the Global equity pool achieved a positive 8.0%, slightly underperforming its benchmark due to cash drag. Nonetheless, most new holdings added over the past nine month or so are performing as expected or better, with lower volatility compared to the benchmark. We remain committed to a prudent allocation strategy to optimize returns over the long term for public equities.

Q2 2024 Outlook, and Beyond