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November 21, 2022

Commentary: NCM Pension Portfolios

On November 21, 2022, Portfolio Manager John Poulter shared his latest perspective on the market and how he’s managing NCM Conservative Income Portfolio, NCM Balanced Income Portfolio and NCM Growth & Income Portfolio.

Transcript:

Good afternoon. My name is John Poulter. I'm the portfolio manager for the pension funds. I'm here today to talk to you a little bit about what I've been doing in the pension funds with respect to the different allocation changes that I've made through the summer and changes I've made in preparation for the end of the year and as we move into 2023. I'm going to start off with an overview of what I've been doing in the equity markets, and then I'm going to briefly touch on fixed income and along the way just discuss a few related issues.

I guess anybody that has followed what I have been writing in the commentaries for the pension funds will know a couple topics that I've been looking at over the years, and these are important for the asset allocations today because one of the main themes that I've been kind of watching with a lot of caution over the last few years, was the theme of the top heavy nature of the the U.S. markets and specifically the S&P 500.

And the reason I want to bring that up today is because after the last year and the amount of damage that's happened to a lot of the new economy and the technology related names that have been the headline grabbers for the last couple of years, I'd say that the give back in performance by these companies is notable and it's also making me look at the U.S. market in a very, very different way.

The types of companies I'm talking about are usually embodied in the QQQ index, which looks at the big Nasdaq names. But I can throw out a couple of the kind of the household names that we all know about, like Facebook or now Meta, which is down by over two thirds from $379 down to $109. Amazon, of course, which is down by half, $176 down to $92 and change. There's a company called Match Group, which is another darling not too long ago that's also down by two thirds. And of course, Netflix, I think, is familiar to a lot of people, down from $690 to $285 and another two third loser in this group. The top heavy nature of the market that was being driven by these names has now obviously changed significantly because of the performance give up by a very, very narrow group of companies.

And it's actually made some differences in my S&P 500 fair valuation model which for a number of years had actually been reading as being expensive and at a few points last year, extraordinarily, like two standard deviations, expensive. And I can I can report now that as of at least the end of September, up to the market's significant sell off through the end of the summer that that model actually went to, what I would say, a neutral reading, which is quite significant, given that it had been at such high levels of valuation, again driven by significant pockets of market cap growth and technology issues.

So that's created a pretty big difference in my outlook for the S&P 500 and for the first time in a long time, I've been edging my investments in the equity markets away from other developed countries such as Britain and Europe and a number of the majors in the Pacific Basin and I've been partially reallocating them into our core global fund, which has got a very significant allocation to the USA, the area of the market now that I think is not nearly as risky as it was and it might actually globally be providing some pretty interesting opportunities. At least on a relative basis, I'm thinking it's where you'd like to be.

So one of the things that I do in the pension funds is I have an ETF that I use, which follows developed countries, non-North American, and I've been actively allocating away from that ETF and I've been putting those funds into the Core Global fund and I'm looking forward to next year's markets, which seem to be finding themselves, finding their bottoms and you'll see higher lows as we crawl back to a normal equity environment, which I believe could be coming in the not too distant future. So that was a big change for me in the North American outlook, specifically moving from non North American developed countries into the main major U.S. holdings in the Core Global.

Also importantly in the pension funds is a very healthy weighting towards Canada, which has been a very good place to be, relatively speaking, over the last 12 to 18 months, the Canadian market has held up much better than some of the other developed countries that we follow, particularly the USA. And I made the effort probably about a year ago to start looking at defensive Canada, and I went into defensive or low beta Canada because obviously I was worried as everybody else was for higher rates and a derailed equity market, both of which we've now experienced and I wanted to be positioned in companies that would have less of an overall sensitivity to the equity markets in general. So that meant that I moved the predominant share of my Canadian investments into Core Canada. The NCM Core Canada portfolio was specifically designed to be defensive and lower beta.

That was then and this is now. I'm looking at the outlook for Canada in a little bit more of a positive light. I'm believing that it might be time now that the Core Canadian model has has served its purpose as a volatility dampener and I'm now switching that allocation from being two thirds Core Canada and one third Income Growth, another NCM fund, and I'm now switching that to two thirds Income Growth and maintaining a one third position in the Core Canadian portfolio.

So as far as allocations within an individual market, this is a significant move and it's one that I'm doing with the prospects of 2023 being a better year for equity markets in general and a better year for Income Growth as a portfolio and a mandate and a theme of its own.

So that now gets me to my ideas about fixed income. Also, another area where we had gone to a very defensive position over the last couple of years with the anticipation that the rate cycle would see higher interest rates. And in fact, we've now seen them. If you look at inflation as the driver for central bank policy, I would say that we are taking the opinion here that we have seen peak inflation, the activities of central banks all over the globe is and will be having the impact that they would like it to have.

That means that it will be moderating to inflation in general, and that is something that you want to position for prior to the dust settling, if you will, on the current rate cycle. So that means that we are starting to edge out the yield curve a little bit. These are going to be modest moves. We'll be making them over the next few months as we watch the interest rate cycle play out and see what the the activities are going to be with the central banks both here, Europe, USA, pretty much everywhere in the world where people have been tightening with the idea of lowering the interest or inflation back towards the lower single digits.

We also have noticed that the current rate cycle has also created a bit of a dislocation in bond markets in general, and that dislocation is particularly getting spread-driven bonds. That means your corporate bonds that trade an interest rate spreads above your risk free governments. And we're seeing spreads have widened and that has caused the situation where bonds that are corporate bonds, both investment grade and high yield in many cases are trading at significant discounts to their par value.

A discounted bond gives you the opportunity for a capital gain trade on a bond price. So it's causing us to look at the corporate bond world, both investment grade and high yield, with increased interest. And so one of the ways that we're implementing that in our policies and our mandates is to reduce the short term governments where we had been when we were worried mostly about interest rates rising and looking more to both investment grade and in some cases high yield corporate bonds to pick up that double benefit of having higher yields, as well as having capital appreciation embedded in the actual investment itself.

And then lastly, I'd like to talk about the thematic investments in the pension fund. I hold a number of themes in the investment fund, they tend to be along the lines of secular themes such as global agriculture, global water, global infrastructure. And they also are themes which I call my new economy themes, which tend to be in ETFs that are predominantly owning high-growth companies in the new economy, such as cybersecurity and electronic vehicles, and new clean energy.

I haven't made any changes in that portion of the portfolio. It's been a bit of a barbell for me for the performance. The secular themes such as global agriculture, global real estate, global infrastructure have done fairly well in the very rough markets over the last year. But the companies in the new economy have also been sensitive to what's happening to a lot of these growth companies in general.

So as a package, they're down about 9%, which of course compares to a 15% down S&P 500. So relatively speaking, they're holding in OK. But I'm looking forward to a better year, particularly for the growth side of those thematic investments. So that concludes my comments on the positioning and the changes that investors will see in the pension funds.

It's been a very busy summer, but I also often like to tell people that I prefer to prepare for new changes in the market ahead of them actually happening. And that way you can reap the benefits from being early and hopefully making good decisions. So thank you very much. And we'll talk to you next month.



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 November 21, 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.

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Pension Portfolios Team

Managing global balanced portfolios with pension-style exposure to a range of conventional and non-correlated assets.

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