October 31, 2022
Commentary: NCM Income Growth Class
On October 31, 2022, Portfolio Manager and CEO, Alex Sasso, shared key information about how he manages the funds and what he's seeing in the market today.
Hi everybody! Alex Sasso here, speaking on the Income Growth Fund. We've seen a lot of volatility in the markets recently. One of the benefits of owning an all-cap dividend-focused fund is its dividends tend to outperform over time, and they tend to come with lower volatility. It's interesting to see that the markets really are fighting three problems right now.
We've got rising bond yields. Equities tend not to do well in a rising bond yield environment, and neither do fixed-income instruments.
We've got earnings, which are expected to come under some pressure. So that obviously is normal for the back end of most years – with the exceptions were 2020 and 2021 - but in the majority of years, we see earnings trailing off. Now we're expecting them to trail off at a more rapid pace going into 2023.
And then we've got valuations, at least in this market they’re more expensive than we've seen historically and look expensive relative to bonds.
Now, those are three issues with the markets today. We expect those to become tailwinds as we move through 2023. Remember, the market is a forward-looking machine, so it's always looking out about six months’ time on average, and we expect bond yields to come down as inflation starts to roll over.
We've had goods inflation, which, albeit sticky, is starting to roll over. And then we have services inflation, which is still accelerating and really is the problem for the markets. As rents are a lagging indicator within that services inflation metric, but we do expect the core CPI number to roll as we move into 2023. That will help ease the burden on rising yields. And frankly, rising yields, the two-year and the ten-year will be the leading indicator that helps us determine when it's time to get cash to work in the marketplace.
And having said that, the Income Growth fund is running at a much higher level of cash than it normally does. Usually, we have it fully invested and over the past six months we've increased cash. In fact, 12 months ago we were at around 9% cash, we've almost doubled that weighting. We've started to put some of that cash just recently to work and we'll do so in different tranches. So, what we'll be looking for is those two years coming down, the two-year Treasury yield, the ten years coming down. And then we'll also try to get some colour from the central banks as to when will they’ll be close to the end of their interest rate rising process.
In terms of the fund itself, I can give you some of the category weightings. The fixed income weight in the portfolio has increased to 12.8% from 10.2%. We always keep it very close to the low double digits between 10% and 15% because we think over long periods of time we'll get better rates of return from the equities. And really, the fixed income side of the portfolio is yield generating and it's the ballast that lowers the standard deviation within the fund itself.
On the energy side, it now makes up 19% of the portfolio versus 16% a year ago. And part of that is because the energy sub-portfolio has done relatively well. And we've added a new company; a company called CES Energy Solutions and they provide a lot of the mud in the chemicals that go into producing the production of oil.
Materials stocks are down, it's down to a 1.8% weight in the fund, and that's versus 7% last year. The reason there is, Intertape Polymer was acquired by a company called Clearly Capital Group LP for $2.6 billion US dollars earlier. So, we're happy about that. It was taken out at a nice premium.
On the industrial side, the industrial weight is down and that's pointing to the fact that we had a company called Cervus Equipment, they were Deere Distributors, Deere Tractor and Deere Equipment Distributors, and they were sold. As was a company called LifeWorks and LifeWorks was sold to TELUS Corporation, so we had a couple of companies that were acquired there.
On the discretionary side, we added a new name in the fund, it’s Martinrea an auto parts company, and we're pretty excited about Martinrea. And then also in the auto parts side, we've taken down some of the retail-focused consumer discretionary names, notably Canadian Tire, and Sleep Country, and we sold both of those positions recently in the fund.
We've got 26 equity names, 11 fixed-income names in the portfolio. Again, it's a concentrated portfolio of our best ideas that pay a meaningful dividend, and make sure that the payout ratio in the fund is a relatively low number. And the payout ratio is the amount that these companies are paying out to unitholders in the form of dividends. We want those companies that we're invested in, to reinvest back in the company, because amongst the best performers over long periods of time on the TSX is the dividend growers. And that's really what we're focused in on is the dividend growers that also trade at a reasonable price.
The fund trades at very attractive valuation parameters as our growth metrics look better than the industry and better than GDP, but it trades at a significant discount than both the TSX and the S&P 500.
So, in a nutshell, that’s it. If there are any questions, please reach out to your NCM Wholesaler, or you can also send us an email at email@example.com. Thank you!
The information in this video is current as of October 31, 2022 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.
Alex Sasso, CFA
Chief Executive Officer and Portfolio Manager of NCM Small Companies Class and NCM Income Growth Class.