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February 21, 2023

Commentary: NCM Core Canadian

On February 21, 2023, Portfolio Manager Keith Leslie shared some interesting insights into late 2022 and early 2023 market performance, plus a few changes to NCM Core Canadian.


My name is Keith Leslie and today is Tuesday, February 21st, 2023. I thought I'd do a quick review today of the market and then discuss a few changes we made to the NCM low vol Core Canadian. In 2022, the TSX was down 5.8%, aided by a very strong fourth quarter return of 6%. The market was extremely volatile throughout the year, which again I guess was made up in the fourth quarter, bringing the return from almost 12% down to just down 5.8%.

Surprisingly, the TSX Low Vol index was down 10% in 2022, even after returning just under 3% in Q4. Typically, we would expect the low vol index to outperform in a down market, but unfortunately last year, there was a function of the high returns in the energy sector and poor performance in the normally steady utility and real estate sectors and made it so that wasn't the case.

Now that was last year. As many of you know, we had a very strong January this year, so we thought we'd take a look into what's happening or what happened in January. That strong momentum from Q4 really did return in the TSX, with the TSX being up 7.4% and the low vol index up 2.9%, that's in January alone, they made up another 7.4%.

I decided to drill down into what moved the TSX to start the year and it became apparent quickly why many funds underperformed in January. You needed to own last year's worst performing stocks in order to have outperformed.

What I did is I first started with looking at the top ten performing index stocks. In January, they averaged 34% return. These same ten stocks had an average return of -45% last year and a median return of -50% last year. In other words, the best performing securities in January were among the worst in 2022. They also traded at 65 times earnings on average.

I thought, well, maybe we'll go a little deeper. I looked at the top 20 stocks, top 20, best performing stocks. Got the same story. The average return was about 30%. And those same 20 stocks returned -41% on average in 2022. Also trading at 65 times earnings.

Finally, I decided to take it one step further, looking at the top 30 stocks in January. They averaged a return of 27% and they were -31% in 2022. They traded at a more reasonable, yet still inflated 29 times earnings.

So I think the moral of the story was that there was a bounce back in January of some of the worst performing stocks. High multiple stocks with low profitability, poor momentum is not typically the type of stock we’d look to invest in.

Having said that, bounce backs in January are not uncommon, but they tend to work themselves out over the course of the year as these companies need to post solid results for the run to continue. And many of them have been posting weak results for the last few quarters or even more. So it's unlikely, in my opinion, that they'll continue this strong performance.

The second part of this equation is, okay, so what worked and we wanted to see what didn't work. So on the flip side, we examined the bottom ten index performers in January. They averaged -12% despite the market being up almost 8%, or up, what was it, 7.4%. They averaged -12% and they traded at 5.3 times earnings and on average, they returned 27% in 2022.

So, again, the top performers were the bottom performers. Again, much like on the on the top performers, I decided to break this out into the bottom 20 and the bottom 30. And the story was pretty much the same. The bottom 20 performers averaged -9%, and they were up 25% last year and the bottom 30 averaged -9% as well, and they returned, sorry, they returned -7% after a plus 20% in 2022.

The bottom line is that we saw a rotation in January of some of last year's laggards bounce back and some of last year's winners falter. We believe some of the mean reversion was justified, but much of it is unsustainable and will likely reverse again.

In my opinion, most of the companies that performed well in 2022 posted positive results, have solid business models and trade at reasonable valuations. The stocks that ran up in January are more speculative in nature and are typically trading at premium valuations. They may have oversold in 2022, and we expect things to normalize over the remainder of 2023. So that's kind of a quick view of the market.

The NCM Core Canadian, we really haven't made a lot of changes year to date, but I just thought I'd highlight a couple of them. What we did is we reduced our energy exposure by 2.5%, which brings us to about half the TSX weight. We're about 8.5% energy versus TSX around 17%. So that was one change.

Now, I added to the industrials weight with the addition of Ritchie Brothers auctioneers, that makes us about 2.5% overweight industrials now. And I also added Manulife to the model to increase our weight in financials, again, bringing us just a slight overweight on financials.

At this point, I don't foresee any further big changes. We are in the middle of earnings season and you know, that always changes as companies report numbers and give us a preview of what they see in the future. But at this point, I'm very comfortable with how the portfolio is currently positioned and don't plan to make any further changes.

With that, thanks for your time. I appreciate it. And we'll talk again soon.


The information in this video is current as of February 21, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.



Keith Leslie, CFA

Portfolio Manager of Canadian equities with over 24 years of investment management experience.