Investment Commentary Q3 2024
Publicly traded equity and bond markets powered ahead in the third quarter as the US Federal Reserve made its first interest rate cut (0.5%) in four years in September and the Bank of Canada made its second and third cuts in July and September (0.25% each).
Canada’s current inflation rate at 1.6% is now lower than the central bank’s 2% target, which has led to a fourth rate cut of 0.5% rate in October as of the writing of this report. US inflation has also come down sharply from its high of 9.1% in 2022 and now stands at 2.4%. The consensus view is that the US Federal Reserve will drop its benchmark rate another 0.5% at its upcoming meeting in November.
The S&P 500 (Canadian dollars) and TSX 60 indices advanced 4.2% and 10.3%, respectively, in the third quarter amidst the favourable backdrop of falling inflation and interest rates. As we have discussed before, stocks tend to rise as interest rates fall as the value of future corporate earnings are worth more when discounted back to the present. This is often an especially important factor for growth-oriented stocks where more significant future earnings increases are being discounted.
Bonds also had a strong quarter as declining interest rates led to higher bond prices. The Canadian and US Bloomberg Aggregate Bond Total Return indices rose 4.5% and 5.2% in the third quarter, substantial returns over a three-month period in the staid world of bonds.
Bridgeport’s pooled funds all generated healthy investment returns in the quarter with the strongest performance coming from our publicly traded equity and fixed income strategies which generated three-month returns between approximately 5% and 11%.
Bridgeport Canadian Equity Fund was up 10.8% on a gross basis in Q3 and 17% year-to-date. The strongest performers in this fund were several real estate-oriented stocks including Allied Properties (+35% third quarter total share return), Colliers International (+34%), Brookfield Corp. (+26%) and Granite REIT (+22%). Very few holdings in the fund had material declines with the exception of Cenovus Energy (-15%).
Bridgeport US Equity Fund generated a gross return of 5.4% in the third quarter and 14.3% through September 30, 2024. Investments in Kenvue (+28%), Starbucks (+26%), Lowes (+24%) and Fiserv (+21%) were strong contributors to performance, while the most significant detractors were Charles Schwab (-12%), Alphabet/Google (-9%), ConocoPhillips (-7%) and Microsoft (-4%).
Bridgeport Small & Mid Cap Equity Fund returned 5.8% in the last three months and 5.2% year-to-date. Large gainers were Cogeco Communications (+40%), NVR (+29%), Match Group (+25%) and Waters Corp (+24%). The most significant decliners were Autocanada (-16%), Lumine Group (-14%) and Superior Plus (-14%).
Bridgeport High Income Fund had another strong quarter, increasing 6.6% in Q3 and 11.6% since the start of 2024. Returns in this fund came from the receipt of interest and dividend income as well as price appreciation from a broad mix of our holdings which benefited from declining interest rates.
Our private asset strategies generated positive returns in the quarter and on a year-to-date basis, albeit at more modest levels than our publicly traded equity and income portfolios. Private asset investment returns sometimes run counter to stock and bond markets as we saw in 2022 when publicly traded markets lost significant value, while our private asset funds generated healthy returns (for reference, the S&P 500 lost 19%, while Bridgeport Private Equity Opportunities returned +9.3% in 2022). Based on outlooks from the various underlying private asset managers with whom we partner, we expect returns across our private credit, private equity and real asset strategies to accelerate over the last part of 2024 and into 2025, while continuing to provide important diversification to client portfolios in the event stock and/or bond returns lag.
Bridgeport Alternative Income Fund earned a 2% gross return in Q3 2024 and is up 6% through September 30, 2024. Returns in this fund have been particularly steady with 90% of monthly gross returns being positive since we launched the strategy in late 2018. The largest monthly negative return for the fund was -1.3% which occurred during the early days of the pandemic.
Bridgeport Private Equity Opportunities Fund was up 1% in the quarter and 4.5% year-to-date. Most investment managers in this sector expect deal activity and investment returns to increase into 2025, spurred on by lower borrowing rates. One new investment commitment we made in this fund was to Berkshire Partners. While unrelated to Warren Buffett’s Berkshire Hathaway, this firm has generated investment returns over the last 35 years that are among the best in the broader US “middle market” private equity industry. Berkshire’s 11th fund is focused on acquiring controlling ownership of fast growing, profitable and sector-leading U.S. businesses.
Bridgeport Private Real Estate & Infrastructure Fund gained 1% in the last three months and is up slightly less than that on a year-to-date basis. After a 20-year bull run, the private real estate sector has taken a pause over the last two years as interest rates shot up and the outlook for some segments like office and retail became uncertain. Many managers and institutional investors have suffered losses in private real estate since 2022. Our fund has held its value during this period as we took a relatively cautious approach to deploying capital at the launch of the fund and we have minimal exposure to troubled segments. We expect to see strong opportunities going forward now that interest rate levels have come down and we will be making additional investment commitments in partnership with top-tier managers in the coming quarters.
Our view continues to be that a balanced approach is the key to both investment success and assisting our clients in achieving their financial objectives. Our experience suggests that today’s leading investment segments are sometimes tomorrow’s worst performers and vice versa. Proper diversification reduces risk and portfolio volatility which is often an important factor in lessening the emotional aspect of investing. This, in turn, allows clients to more easily “stay the course” through turbulent times or unexpected market events.
Speaking of market events, we will be monitoring the upcoming US election and its potential impact across our portfolios. Despite one’s political leanings, the historical record is unclear as to whether the stock market performs better under a Democratic or Republican President as there are usually a multitude of other factors that end up playing a role during any given four-year period. There is no doubt, however, that the next few weeks will have some surprises in store if the past two US elections are any guide.
We wish you all the best for the balance of 2024 and a happy holiday season. As always, please feel free to reach out if you have any questions.