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December 11, 2023

Commentary: NCM Core Canadian

On December 11, 2023, Portfolio Manager Keith Leslie, CFA recapped the 2023 performance of his portfolio, shared why he is optimistic about a “catch-up trade” in 2024, and highlighted a recent addition to the portfolio.


Hi there. It's December 11th, 2023 and I'm Keith Leslie of NCM Investments. And today I thought I'd give a quick update on NCM Core Canadian and finish with an example of a type of stock that we own in the portfolio.

As many of you know, NCM Core Canadian has a low volatility, Canadian equity only mandate. It was a space we purposely chose in order to differentiate ourselves from the hundreds of Canadian equity funds available to investors. There are very few low volatility funds, which is a big positive, but unfortunately there are so few that they're all lumped in with the higher volatility Canadian equity category when it comes to quartile ranking.

As a result, it's been a mixed year for the fund. The positive is that the fund had a strong 2023, or so far has had a strong 2023, versus the S&P/TSX Low Volatility index. As of the end of November, NCM Core Canadian is up 2.4% versus 0.3% for the low volatility index. In fact, the fund has outperformed this low vol index over every time period since its inception in 2016. The flip side is that the S&P/TSX is up 7.5% year to date, which makes comparing it to the Canadian equity category more challenging in 2023 after a first quartile performance versus this peer group in 2022.

We continue to construct a high active share portfolio compared to both the TSX and the TSX low volatility indices, which makes the fund an excellent complement to an index fund or an ETF.

Since 2020, the fund has been facing the headwinds of the Low Volatility index, underperforming the TSX by a wide margin. But that's the bad news. The good news is we believe we're entering a point where it's going to become a tailwind and the catch up trade will begin. And the fund is well positioned to take advantage of this change.

The portfolio is currently trading at 9.5 times trailing earnings versus the TSX at 14.7 times. That's a 35% discount in terms of P/E multiple. The return on equity on the fund is 21%, which is a 50% premium to the TSX at 14%. And the fund also has expected earnings growth of 11.8% in 2024 versus the TSX at 9.9%. So, to kind of summarize, a 35% premium for a significantly higher return on equity and better growth.

The fund also has an internal yield of 3.5% versus the TSX at 3.3%. And it carries a beta of about 0.82, which is kind of how we get to our low volatility mandate.

At this point we're super comfortable with how things are positioned and actually are really excited for the prospects of 2024 as this catch up trade begins.

One of the ways that the fund differentiates itself is it'll participate in the small and mid-cap part of the market as opportunities arise. One such example that the fund currently owns is a smaller company called Bird Construction symbol BDT.

Bird’s a construction company operating coast to coast in Canada since 1920, growing both organically and through strategic acquisitions. Its services span new construction, renovations, tenant improvements and maintenance, and they also provide purpose built structural steel, modular building design and construction. A little while back, they purchased Stuart Olson Construction - a name maybe you've seen around town.

We added it to the fund on June 1st of 2023 and continue to see the value despite it having a 50% run since then. It still trades at only 10.4 times trailing earnings. It has a 23% return on equity and a 3.4% dividend yield. Free cash flow yield of 11% and it’s expected to grow its earnings by 18% next year and 13% more in 2025. And finally, its three year beta is 0.76, which fits our mandate perfectly. We have lots of securities like this, and it's really the type of security we're looking to own in NCM Core Canadian.

In conclusion, while the Canadian equity peer group performance has not been where we'd hoped it would be, the fund has significantly outperformed the low volatility index, and we're anticipating a decent tailwind going forward as the low vol index closes the performance gap with the broader market. Thanks for your time and we'll talk again soon.


The information in this video is current as of December 11, 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 involved inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. All opinions in forward-looking statements are subject to change without notice and are provided in good faith. 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.