Commentary: NCM Pension Portfolios

Transcript:

Good afternoon and thank you for joining us today. My name is John Poulter It's Monday, April 17th, and I'm the portfolio manager for the Pension funds, the NCM Pension funds. And to start on a very general level, the environment that we're in now as we move into the second quarter of 2023 is what I call data point dependency volatility.

And all that simply means is that everyone is sitting and waiting for the latest economic report, the latest Fed musings or the latest activities to come out of the regulators in Europe and those data points are usually dependent on the, these days, on the outlook for inflation. The constant watch on economic weakness and the economic weakness of course is on close watch because of the tightening of the central banks and the credit cycle that we're currently in the middle of or I would argue that we're coming to the tail end of.

And so that gets me to my next point, which is we've got a tug of war between inflation, which has regulators moving rates higher and then the fear of economic weakness, which clearly is damaged by the cost of capital going up. And I'm expecting that the fear of weakness is going to win out and a few more reasonable data points from inflation going in the right direction, which is almost guaranteed because the year over year numbers are coming from some pretty high levels.

So my expectation is that the fear of economic weakness is going to be more in regulator’s minds these days, and the central banks. And that means that they're more likely to start looking at an easing cycle. So if there is an economic management, and I think that the Fed and other central banks now have some pretty good interest rate related bullets to manage economic fears and concerns, and if they do that by starting to cut rates, which is my belief that they will start cutting than many of my competitors believe, I think it's coming earlier rather than later in the year.

You're going to see a market rally that's going to reflect both the management of the economic situation with lower rates coming sooner and I think we're going to have a pretty successful and decent second half of 2023. And on the broad indexes are showing us that we're already seeing a pretty decent year just in the you know, through all the volatility, a decent first quarter as far as returns goes.

So given those expectations, what's the prescription? I'm going to start and go through this relatively quickly. The first topic I'm going to tackle is what I'm doing in the income markets and I think at a very headline level, I think the 2% inflation that the Fed and other central banks are targeting is going to be very, very hard to achieve. And I think that they're they're likely to abandon that, at least for the near term. And I think they’re satisfied that, you know, lower inflation might mean between two and a half and three and a half percent, which longer term, it isn't such a terrible number.

The second point to make on that is long bonds should provide a real rate of return, which means in my world, 100 to 150 basis points or percent or a percent and a half over inflation, so long rates might find a new corridor somewhere between three and a half and four and a half percent. And we're currently at the low end of that range right now, which to me means that the rally that we've seen in long bonds over the last little while has it, you know, probably shot it's bolt, and we're at the low end of the range, which to me means there might be some long bond price risk going forward.

So that means that we're still favoring the short term bonds. Many of them have decent discounts in their prices. And these are, you know, high investment grade credits. So what you're seeing now is you can pick up some decent yields in the 1 to 5 year maturities and you get a decent coupon plus capital appreciation potential.

The bonds that I've been buying in the Pension Portfolios over the last few months, I have an average price of around $93, $93.40, to be more precise. They have coupon yields of around 4%. But given that discount, it means that my average yield in this part of the curve is about 6%. So I'm expecting that the capital appreciation will come either by an easing in central banks, which should have prices in the short end of the curve respond positively or simply the pull to par as these decent credits come to their maturity and investors are paid their principal back. So that's the main basis of my strategy for fixed income. It's 50% investment grade, it's 50% high yield and 75% of the portfolio is 1 to 5 year maturities.

And so that gets me to the equity market and my outlook for the equity market, as I said at the beginning, is fairly positive. I think it's going to be data point dependent, but I think the data points are going to be more supportive, particularly if we see the central bank starting to ease their rate policies. And I've been doing a lot of work looking at the damage that we came out of 2022 with. And I've seen a lot of P/E compression and specifically in some very isolated parts of the market.

So that is a long way of saying that my models right now on a sector allocation basis favor consumer discretionary, consumer services and technology. That's where a lot of the damage happened. But it's where we're seeing earnings hold in. And you've seen a lot of P/E compression, meaning that these the various companies that make up these sectors are trading at much more favorable valuation levels today.

And if you look through those sectors and you look at the broad markets, you'll realize that 56% of the S&P 500 is made up of those particular sectors. And also, more importantly, 80% of the Nasdaq 100 is made up of my favoured sectors today. So what's a quick and easy way to reflect my sector ideas? Well, it simply means that I'm going to focus very specifically on the S&P 500 and the NASDAQ 100.

And to do that, I've trimmed some core global allocations and I've separated the proceeds of that into one third of the S&P 500, one third of the NASDAQ 100, and then a third going to non-North American developed country assets. So I can maintain my global exposure by using a specific ETF that gets me non-North American developed country and highly diversified developed country exposures.

I'm seeing in these sectors that earnings are holding up quite well. And the fact is, some of the companies that I'm looking at now in these sectors are, you know, they were trading at 60 times P/E and now some of them are at 15 to 20 times, meaning that the growth that's embodied in these particular sectors is now being sold with much more favorable valuations.

And I think it's very good value for the growth potential that I'm building into the portfolio. And the last comment I'll make is Canada, which I made adjustments in the first quarter. It remains at two thirds, in my Canadian equity allocation, two thirds to the NCM Income Growth portfolio, which is mid-cap and more growth oriented investment program.

And one third in NCM Core Canadian, which was low beta and served me very well last year. But overall I'm looking for a growth and a mid cap tilt for my Canadian investments. So that concludes my comments on the general overview that is driving my decision making in the NCM Pension Portfolios today. And hopefully I've been clear on how I'm taking my ideas and instituting them into the allocations within the funds.

Thank you very much.

Disclaimer:

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 April 17, 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.