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March 08, 2023

Commentary: NCM Pension Portfolios

On March 8, 2023, Portfolio Manager John Poulter provided insight into why he is now more positive about US equities than he has been in several years.


Hello, my name's John Poulter. Today is Wednesday, March 8th, 2023. I'm the manager for NCM Pension Funds, and I'm going to talk to you today about some themes or a specific theme for equity markets that I've been developing over the last quarter. This theme has been developed after my work and digging into last year's sell off and I'm doing this so I can put together a game plan to try to capture some of the upside recovery that we're pretty certain is going to happen.

There's never been a sell off that didn't recover, but some themes played better than others when the tide turns. So I put together a couple tables today to help me make my case. I thought I'd share them with you today as they frame what I've been noticing in the market right now.

The theme looks like it's a risk on trade that seems to be driving the market performance so far this year, which by the way, has been pretty good. And risk on means that investors are buying and supporting companies that are defined by growth. And these companies historically are more volatile than the average company and hence the risk. But I don't think it's a risk on trade, and that's the basis of my theme.

What I'm seeing today is that PE compression that was caused by last year's sell off has brought higher growth equities back into a buying range. And that means that the risk definition in the risk on statement might not be defining markets today. It's more great growth at value is the theme. And these are what I'm showing you in these in these tables today. The top table is showing PEs, price to earnings ratios, PEG ratios, which are PEs divided by growth and also average returns.

And what we're seeing here, it when you look at the blue line, the blue lines themselves, so they indicate one third groupings of the S&P 500 all grouped according to the growth of the companies that are in the S&P 500. So one third of groupings looking at them, it's clear that the highest growth group, which is at the top of the page in blue, has been turning in the best performance so far this year.

And it's also can be seen on the page that the average PE of this group is trading at 24 times next year's earnings. Now that's a little on the high side of average for the overall index, but it's very impressive to see that that PE is associated with a average PEG ratio of these companies of 1.3.

And PEG ratios are, as I was saying, created by dividing the PEs by the long term earnings growth of these companies. So higher growth companies with moderate PEs have lower PEG ratios. And this means that investors are getting plenty of growth for their investment dollars.

So simply stated, low PEs and low PEG ratios indicate better investment value. And this group of companies represented in the top blue line have been driving a lot of the performance that we've been seeing in the market so far this year. And I think that that's because the value that investors are getting for moving into these higher growth companies is driving this. And it means that they're buying more growth for lower dollars than they did last year. And obviously that's a reflection of the sell off itself.

So the other interesting thing on this table is the green line, and that's what I'm calling on the table itself High Growth Value. And it represents a very interesting subset of the companies in the highest growth category of the S&P 500. These companies trade at a PE of 11 times, 10.9, less than 11 times, and giving them a PEG ratio of 0.7. Now, they haven't been the best performers so far this year, but they certainly represent some of the best value in the overall S&P 500. And this means to me that there's plenty of companies that fit my theme and there's lots of places to look in this index to find low PEs meaning, great value and terrific growth profile as well.

Now there's a table on the lower part of this graphic. That is another way of looking at growth. And the second table shows a similar result for performance along the growth separation methods. But this separation is not as quantitative. It's more by what the typical expectations are for the market’s sectors for growth. And again, I'm showing the top group as being the highest growth sectors. They represent over half of the S&P 500, 56.3%, and they're represented by communications, consumer discretionary and technology. And you can see when you look at just this group in isolation, which is where you find a lot of the higher growth companies, they are on average to the period tested towards the end of February were up 4.7%.

And then you look at the medium growth sectors, which include financials, industrials, materials and real estate, 22.6% of the market and on average up 1.2%. And then there's the low growth sectors, which happened to be sectors that held in very well last year. But you can see that they've not been keeping up with some of the rebounding stocks today and they represent about 22% of the index. But as a group, they're lower by 30 basis points over the period that I measured here.

So clearly, most of this year's performance is being driven by three sectors that caused a lot of last year's pain, indicating a rotation back to sectors that will rebound and the groups lagging so far this year are sectors that held in relatively well. And as I said, these were the defensive sectors.

So, you know, I'm sensing an investor appetite to find growth and they're finding it many companies that are now much better defined as value. It's clear to me that the top growth companies in my last table with 56% of the market are driving the overall returns and so to me, this indicates that the S&P 500 should be a pretty good index to follow this year as investors continue to reward growth with recovery pricing. We might not get the lofty valuations that we saw in the past year, but this type of analysis and the theme that I'm holding on to right now certainly suggests that there is room to move much higher.

So this makes me kind of more constructive or like the US market more than I have in the past few years. And it's been driving some of the changes that I've made in the Pension Portfolios, specifically more of a tilt toward the various sectors and the growth profiles that I've just spoke to you about today. For today, that's my message. And I hope I've been clear in the themes that I’m following. Thank you very much.


John Poulter is a Portfolio Manager, with Cumberland Investment Counsel Inc.(CIC). CIC is the sub-advisor to its affiliate, NCM Asset Management Ltd. The information in this video is current as of March 8, 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.



John Poulter, CFA

John oversees key strategic asset allocation decisions across the firm and manages the NCM Pension Portfolios