Investment Commentary Q2 2024
Economic growth in both Canada and the US has continued to decelerate in 2024 in the face of higher interest rates. The Bank of Canada has already started to reverse course, cutting its policy interest rate by 0.25% in June and reducing by another 0.25% on July 24. The US Federal Reserve has not yet made any cuts but is widely expected to begin dropping its benchmark rate later this year as inflation rates moderate.
Investment performance in the second quarter was mixed across major asset classes. US large capitalization stock performance led the way with the S&P 500 gaining 4.3% in the quarter, although over 100% of this gain was attributable to just five technology-oriented stocks. The other 495 stocks in the index collectively lost money as evidenced by the fact that the S&P 500 Equal Weight Index (where all 500 stocks are given an equal weight) actually declined -2.6% in Q2 2024. Indeed, Nvidia, Microsoft, Apple, Alphabet and Amazon now comprise an astonishing 29% of the value of the S&P500 and have largely powered the index’s return since their declines in 2022.
It’s hard to say when the dominance of US large cap technology stocks will end (or at least moderate) as they clearly have a lot going for them in terms of expected growth, business model dominance and profitability. That being said, they come with high valuations and a low margin of error for achieving their business targets. Of the other 495 largest stocks in the large cap universe, many have reasonable growth profiles and more compelling valuations so any prudent investor would be remiss to focus all their attention on the other five with the assumption that current trends will continue forever.
Turning our attention to Canada, the TSX 60 Large Cap Index had a muted quarter, losing -1.3% of its value in Q2. The index was dragged down by the financial, technology and industrial sectors, while materials, energy and consumer staples modestly offset those losses. The TSX Small Capitalization Index generated similar returns, gaining only 0.8% in the last three months. This was ahead of the US Russell 2000 Small Cap Equity Index which lost -3.3%.
Returns from bonds were similarly flat with most US and Canadian aggregate indices returning between zero and 1% in the quarter. Bond yields were largely unchanged over the quarter, so the bond market saw little appreciation and returns were generated primarily from coupon payments.
Within this investment backdrop, most Bridgeport client portfolios generated modest gains over the last three months. Our Bridgeport High Income Fund generated a gross return of 0.9% in Q2 and is up 4.7% on a year-to-date basis through June 30. We added a high yield bond issued by Cooper Equipment Rentals (majority-owned by the Sobey and McCain families) to the portfolio, while a number of bonds matured and freed up proceeds for us to reinvest.
Bridgeport’s Canadian Equity Fund increased 0.4% in Q2 and was up 5.6% on gross basis through June 30. Major contributors to performance were Dollarama (+21% Q2 share price appreciation), Saputo (+15%) and Element Fleet (+13%). Offsetting these gains were Allied Property REIT (-13%), Bank of Montreal (-13%) and Granite REIT (-12%).
Bridgeport US Equity Fund was down -2.2% in Q2, but the fund has increased 8.4% year-to-date through June 30. Alphabet (+20%), Microsoft (+6%) and L3 Harris Technologies (+5%) added to the fund’s performance, while the major detractors included Disney (-18%) and Kenvue (-15%). New investments include Becton Dickinson, a diversified manufacturer and distributor of medical supplies, devices, equipment and diagnostic products, and Teledyne Technologies, an industrial company focused on the development and manufacturing of imaging and measurement sensors.
Bridgeport Small & Mid Cap Equity Fund lost -3.4% in the last three months and is down -0.5% year-to-date. Large gainers over the quarter were Park Lawn (+55%), which received a buyout offer from a private equity group, Dentalcorp Holdings (+23%) and Jamieson Wellness (+9%). Negative performance was attributable to Autocanada (-28%), Evertz Technologies (-16%) and Cogeco (-14%).
Bridgeport Alternative Income Fund had a good quarter. The fund returned 2.4% in Q2 and is now up 4% on a gross basis through June 30, comparing favorably to bond markets. Returns came from a diverse group of the fund’s private lending, leasing and royalty strategies.
Bridgeport Private Equity Opportunities Fund was up 1.7% in Q2 and 3.4% year-to-date. This fund now has exposure to 18 distinct private equity and venture capital portfolios managed by 15 institutional-caliber private investment firms. After modest valuation gains for most private equity holdings over the last 18 months, most investment managers are reporting that they expect deal activity and investment returns in the sector to increase in the coming quarters, especially if borrowing rates decline from current levels.
Bridgeport Private Real Estate & Infrastructure Fund was down about -1% in Q2 and has lost -0.7% on a year-to-date basis as valuations across the real estate sector remain depressed. As we previously reported, many managers are beginning to take advantage of market conditions and are making investments that they expect will generate attractive returns over the next several years. We allocated capital to one new investment in the quarter, a diversified global real estate fund managed by Starwood Capital. Starwood is a 32-year-old private asset manager with over 5,000 employees across 16 offices worldwide and $115 billion of assets under management.
We are prepared for the rest of the year to be eventful from an investment perspective given the upcoming US election and President Biden’s recent decision to drop out of the race. In addition, geopolitical events have the potential to create market volatility as conflicts continue in the Middle East and Ukraine and the West’s relations with China remain a concern.
Finally, we would like to welcome Mahesh Shanmugam to our team as Chief Operating Officer. Mahesh comes to Bridgeport with extensive experience in operations, finance and compliance at other asset managers and a leading investment fund administrator. We are excited to have Mahesh join us and I am sure many of you will have an opportunity to meet him in the future.
We wish you all the best for the rest of the summer. As always, please feel free to reach out if you have any questions.