Portfolio Update

Equity markets moved higher during the month of April, following a volatile March. Year-to-date, the S&P 500 is up 9.3% (total return in C$), while the S&P/TSX rose 7.6%, MSCI Europe 15.8%, MSCI ACWI 9.0% and MSCI Emerging Markets 2.9%. We continue to closely monitor developments in the banking sector. As highlighted in our April Portfolio Update, the issues appear specific to banks with poor risk management practices. The banks we hold are well capitalized with high-quality assets and a stable deposit base. We remain confident in their capacity to manage headwinds.

The economies of both Canada and the U.S. continue to show resiliency as they adjust to higher interest rates and inflation. Recent data suggest there are grounds to be cautiously optimistic. In the U.S., wage growth in both the public and private sectors, at 4.5% and 6.5% year-over-year respectively, is slightly outpacing inflation. This is a welcome boost for household balance sheets, which are currently benefiting from higher savings accumulated during the pandemic. Elsewhere, Europe remains at greater risk of recession and, in emerging markets, China is continuing to exhibit a strong recovery following the abandonment of its strict “Zero-COVID” restrictions. As detailed in the April edition of our Economic and Capital Markets Outlook, while we expect the global economy to face a challenging period, we do not believe an unduly pessimistic scenario is about to unfold. We continue to caution against adopting a short-term perspective and viewing the global economic outlook in a binary recession/no-recession framework. Rather, we look for industry-leading companies with quality management teams and the capacity to weather cycles.

The Importance of a Long-Term Investment Perspective: Teck Resources

In April, Teck Resources Limited, a diversified Canadian natural resources company, received a hostile takeover bid from Swiss mining company Glencore. Letko Brosseau exercises investment control or direction over 0.7% of Teck’s outstanding Class B shares and we believe Glencore’s bid is opportunistic and is far from reflecting Teck’s true underlying value.

We encourage investors to look beyond the prospect of tendering their shares of the mining firm for a small premium at the expense of long-term sustainable value creation. In our view, Teck Resources is one of the world’s highest-quality miners, with superior assets and a top-notch management team. Founded over 100 years ago, the company started as a small gold mine in Northern Ontario and is now a global champion with operations in Canada, the United States and Latin America. Under the long-time leadership and guidance of renowned Canadian geologist Norman B. Keevil, the company developed a portfolio of some of the most efficient mines in the world through strong financial discipline and taking a long-term perspective on investment decisions. These fundamental principles are synonymous with our approach to investing clients’ capital.

A focus on the long term has enabled us to look beyond sentiment and short-term cycles, allocating capital to quality businesses at attractive prices. In fact, as investors in Teck for the last 22 years, we made over $880 million in gains for our clients.[1] The company’s assets are in geopolitically stable jurisdictions: the Antamina mine in Peru is one of the most profitable copper/zinc mines in the world and its Red Dog mine in Alaska is among the highest-grade zinc producers globally. We strongly believe that Teck’s long mine life assets will consistently deliver in the decades to come and deserve a premium over lower quality assets. Factoring in the development of other projects, Teck is expected to double its production of copper over the short term and should be able to grow copper production further as they develop their pipeline of projects. Copper is key to ensuring Canada’s place in the development of clean energy technologies for the future.

Conclusion

A focus on the long term will continue to benefit investors: the longer the time frame, the greater the likelihood of a positive outcome. We not only stress its importance to investors but also encourage the management teams of the companies we invest in to do the same. While this may present challenges in cyclical industries, a prudent approach to capital allocation and an outlook beyond short-term challenges are key. Consequently, we will continue to monitor the market for possible dislocations from fair value, searching for investment opportunities. Short-term market gyrations are viewed as opportunities to increase our position in companies with solid fundamentals that we believe will perform well over time. Currently, our equity portfolios are well diversified by both sector and geography, trade at a compelling 11.2 times 2023 earnings and provide an attractive 3.3% dividend yield. We are maintaining a tilt towards equities over cash and bonds within balanced portfolios as we believe equities provide more attractive return prospects over the medium- and long-term.

[1] Represents the net gains on our investment in Teck Resources Limited for all mandates under management from May 1, 2001 to April 30, 2023.