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October 03, 2022

Commentary: NCM Pension Portfolios

On October 3, 2022, Portfolio Manager John Poulter shared key information about how he manages the fund and what he's seeing in the market today


Hello. I'm John Poulter. I'm the manager of the NCM Pension Funds. Today is October 3rd and we've just started the last quarter of 2022. And judging how the previous quarter ended, it looks like uncertainty has returned to the markets, or at least volatility is still with us.

Investors are certainly showing us how quick they can change their attitudes. The third quarter ended, I'm sure, as most investors know, with a very dismal month. September basically was red across the board in most capital markets, the TSX was down by 3.8%.

The S&P 500 was lower over 9%, and that was its worst month since COVID shutdown the economy in March of 2020. The year for these two indices has shown similar poor performance. The TSX is lower by 11%, and the S&P is now making new bottoms almost down 24 bonds for the month, fared a lot better. They were only down 70 basis points. But I have to remind people that for the year so far, they're down 12%. So they have not too many places for people to hide, but given the new lows in the S&P 500 - I thought I'd like to focus on that market and discuss a couple of things that I've been noticing. First of all, after the moves that we've been seeing, I think that there's, you know, could be the potential that, you know, yet another bottom is developing.

I've been at this game long enough to not try to call a bond, but there's a couple of important metrics that I'd like to share today that, you know, indicate that there's a little bit of new market support. So, it's not lost on us that the valuation characteristics for the equity market is getting a little better (with the performance that we've seen), this current chart shows the forward P/E ratio for the S&P 500. This is really an index where, you know, over the last few quarters, I've been writing about the valuation levels becoming unsustainably high and that's by and large concentrated in some of the growth companies that were kind of hijacking the market, and the concentrations in their high evaluations created the peak P/E levels. As you can see on this chart, the P/Es are now down from over 20 times down to what we think is a little bit more constructive, supportive and in some senses average: 15.5 times.

So, you know, we take this as an indication that there's been a lot of risks run out of the market and that risk has been primarily wrung out of the market by a lot of growth companies, seeing some pretty significant price declines. And as an example of that, the S&P 100 index, which is almost 100% dedicated to growth companies, is down almost, if not more than two times some of the other sectors that we might consider defensive. An example of that is the Nasdaq 100 year to date coming out of September was down 32%, and that could be compared to some defensive in less expensive sectors, such as health care and consumer staples. I'm looking at the spider ETFs and both of those, and health care was down 13 and Staples was down by 12. That compares to the 32 of the growth companies in the Nasdaq.

But, you know, nobody likes negative prices no matter what. My point here is that the important metric P/E is now showing a lot better support for the market. And a lot of that has come out of the growth areas of the market I was most concerned about. Going forward we have to worry about market volatility and our strategies have been pointing us at favoring lower beta companies. Lower beta means that there's less sensitivity to broad market moves and when we follow, lower beta naturally leads us into companies that often have higher dividends, and this gets me to my next chart, which is showing some support based on dividend yield and also importantly, something called buyback yields. The dividend yield is a measure that's showing better support. Dividend yields naturally go up when prices go down.

Historically, the S&P 500 has ranged between 3% and 5% for the dividend yield percentage, and the long-term average is 4.3%. So when the market got to a dividend yield back at the peak of 1.27%, we were looking at that as being a fairly stretched market and also a pretty low dividend yield. So, since the base of the dividend yield, dividend on top and price in the bottom is driven by prices. It's not surprising going as the green portion of the lower clip of this chart is showing that dividend yields have started to move back. So, from its low of 1.27, it's now at 1.7%, still low by historic standards, but at least it's moving in the right direction.

One of the reasons that dividend yields have been trailing lower over the last couple of years is the fact that there has been something called stock buybacks, which have been increasing sequentially for going on 20 years now. And that's the top portion of this of this particular chart and is showing you that the dividend buybacks are at peaks right now. Dividend buybacks, when there are peaks, there's a calculation you can do that says that there's a share buyback percentage, which is equivalent in some respects to share companies paying dividends. What that means is when companies buy back their stock. And that means that the stock that's remaining has higher claims on non-earnings going forward. So that's how companies can use their excess cash flow to reward investors. You know, in lieu of dividends.

When you factor in shareholder buybacks and then add it to dividend yield, you get to something, a number that some people call shareholder yield. And while those, in these numbers, tend to track together, you can see it in the land of a portion of this lower clip that it too, bottomed at 3% back when the market peaked, but it's now back at a pretty healthy level, heading towards 5%. And that too is getting back to average as far as an overall support for the market. So, we believe the combination of the buybacks and the dividend yield are showing us a reasonable level of support today.

Now, one of the things you have to know about dividends or the buybacks is in order for them to be successful, then you need the market prices to behave. And given what the markets have been doing recently, I wouldn't discount that investors might take a more of a “show me the money” attitude - meaning that they might demand higher cash dividends. So, using that green line at the bottom as a gauge. There's no doubt that there's some room for the dividend yields to move higher and hopefully that by the cash payout moving up.

So, to shift gears to what the portfolios look like today with the ongoing uncertainty, means that the pension funds remain in a tense defensive mode. As I mentioned, this means our equities that we're holding, we're trying to concentrate on lower beta stocks, which I think is a reasonable way to play this market.

In our fixed income portions of the portfolio, we remain with a very healthy tilt to shorter maturities, that will hopefully help us avoid the volatility that is still there as the impacts of both the central banks tightening. And now that we're in full policy mode for quantitative tightening, we're still a little concerned about longer-term interest rates. So, we think that that approach to be defensive still remains a pretty reasonable way to operate in both the credit markets and in equities.

So regionally, we're starting to see support in the U.S. I just went through that with those two charts that I showed you. So naturally, we're looking for some opportunities there. Canada remains a cornerstone, very decent rate in the portfolio but with more uncertainty continuing in Europe. Their inflation is just peaking with what's going on in Ukraine. We're starting to I'm starting to get a little more concerned there. So those exposures have been trimmed somewhat.

Again, we think that that's more of the defensive positioning. So defensive for the next quarter. We're confident that we will participate in the coming rebounds when they arrive. But, at the moment, it still seems to me that we should be playing it safe.

Thank you very much for your time today, and I'm hoping that you have happy investing.


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 October 3, 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.



John Poulter, CFA

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