NCM Income Solutions Dream Team webinar replay

Watch as host, Wan Kim, gets answers from portfolio managers Alex Sasso, Michael Simpson and Jason Isaac on issues including:

0:52 How will the US midterms impact the rest of '22 and early '23?
4:11 How are you preparing for a potential recession?
11:12 What lessons are you applying from previous recessions?
19:48 How much cash are you currently holding?
22:56 How will disappointing earnings affect dividend funds?
27:36 Is NCM Investments flowing net positive?
28:26 What’s your favourite country, sector, company or idea right now?
34:18 Looking back as 2022, what’s your Mulligan?
36:39 Michael, how is a Dividend Champion different than a Dividend Aristocrat?
38:16 Alex, why are dividends so important to your investment style?
41:55 Jason, what does it mean to be an aggressive asset allocator but conservative stock picker?

TRANSCRIPT

Wan Kim:
Hi everybody. Thanks for tuning in. My name's Wan Kim, I'm Senior Vice President, National Sales and Marketing for NCM Investments. I'm calling this our Income Solutions Group Dream Team webinar, and I've got three great fund managers with me. It's really important because yesterday was a really interesting day in terms of what's happened with Americans, so I wanted to really gather the team together to collect thoughts. I've got three of our managers. Representing Canada is Alex Sasso, who manages NCM Income Growth. North America we've got Mike Simpson, the NCM Dividend Champions, and global we have in Calgary, Jason Isaac, who manages NCM Global Income Growth.

Let's kick things off right away. What we've done is we put a bunch of questions together that was collected from our advisors and our wholesalers throughout the country. This first question actually comes from an advisor in Burlington. This first question is, "So the US midterms are over, how does this impact the rest of '22 and early '23 as it relates to the markets?" I'm actually going to pose this question to Jason and Michael because both their mandates cover the US. We'll kick it off with Jason first.

Jason Isaac:
The midterms are always a hotly discussed topic and do affect the markets. But the funny thing, after it's all said and done, when you look out 12 months after midterms, the markets are always up. I do have a slide that highlights that, if the master of slides wants to throw up slide 11, that would be great. What it shows is that while we can quibble on the exact performance, 12 months out, the markets are never down. The average performance is about 15%, and 17 of the last 19 midterms cycles, six months after the election, the markets are up as well. I think the knock on is the fact that we've got a little bit of what looks to be gridlock. Not even going to get into the political debate of whether that's good or bad, but the markets actually seem to like that. When you've got the White House held by one party and the House and Congress held by another party, the average return 12 months out for the S&P 500 is 13% positive.

So, the only things that you really have to worry about, we got to keep an eye on, would be the debt ceiling. The Republicans are starting to banter about the fact that they're going to use that as leverage, so what are they going to do? We've been there before. And then the Fed, you're going to get a little bit different oversight on the Fed and what the Fed should or shouldn't be doing, but the end of the day, I think the Fed is still going to keep laser focus on what inflation's doing. Seemed to be in the exit polls one of the biggest issues, up there with abortion.

Long story short, the markets tend to just run right through this, and as you can see by the blue line on the chart on the left there, they just power through and we're in a strong seasonality perspective. Markets drive on, they tend to do that.

Wan Kim:
That's awesome. Thanks Jason. Michael, do you have anything to add to that?

Mike Simpson:
Yeah, I would just add that the markets don't like uncertainty, and as Jason was saying, gridlock makes very controversial, all-encompassing legislation harder to pass. If you have a divided Congress, a divided House, we already know the US political system, which is far different than the Canadian parliamentary system, is divided. So if you have less aggressive bills that would impact business, the type of companies we invest in, it's good to have somewhat of a stalemate. In the event of a major global emergency, not necessarily the best thing, but people change how they respond to those type of things. All I would say is a year from now, people won't be talking about the midterms, they'll be getting ready for the Presidential election. In essence, to keep it simple, gridlock is good and it doesn't change how we invest.

Wan Kim:
Okay, that's awesome. The next question actually comes from Saskatoon, and that's a great town, I grew up there. But this question is really geared for Alex and for Jason. "With everyone talking about recession in 2023, what are you guys doing from a global and Canadian fund manager perspective to prepare for it if it happens?" I'll let Alex lead off from a Canadian perspective, thoughts on recession and how he's preparing for it with Income Growth.

Alex Sasso:
We may already be in a recession, Wan. As you know, recessions are lagging indicators, so we're not going to know until we're already in it. I've been obsessing over the 2-Year and the 10-Year Treasury Bond Yield moves, it's what I do each morning when I come in. The 2-Years in particular will tell us when inflation will roll over. The key, in my opinion, is because the 2-Year leads inflation, that'll give the green light to the Central Bankers to step off of the restrictive monetary policy stance.

Right now, the equity markets have a few different issues. One is bond yields and rising bond yields. It's tough for the equity market to sustain a rally in that environment. Lower earnings expectations, we're in earnings season right now. We're seeing it, we're getting the impression from management teams that they're not guiding down. Estimates are coming in okay, but we're hearing language that's saying that they're cautious about '23. Of course the third issue is multiple compression. As I said, it's been difficult in this kind of environment with these three issues for the market to create a sustainable rally. Yes, October was pretty good, but year to date, the numbers haven't been great for most indices around the world.

Now remember, these headwinds will become tailwinds in 2023, so the trick for us to figure out is when this pivot or this transition will happen, and as a group of risk-focused fund managers, we know we're not going to time the bottom perfectly. So what am I doing? I've got a big cash weight, I'm taking that cash weight and I'm divvying it up into three tranches. So tranche one we put to work in the last couple weeks, and we put it to work because we felt that multiples, at least here in Canada, have bottomed or come close to bottoming. We base that from the absolute level, which is low double digits, PE ratios. So that's pretty inexpensive. And relative to history, it looks inexpensive. Tranche two and tranche three will be invested when we feel that earnings expectations have bottomed or are close to bottoming, and then when that 2-Year peaks. That's really critical for us, when that 2-Year peaks, because as I said, it leads inflation, it'll tell us when inflation is rolling over in a sustainable way.

One small other thing that I want to mention is we're focused on the PMI’s too. And the reason the PMI is important, now that it is getting close to puncturing the all-important 50 mark. Below 50, it tells us that the economy is contracting. But that's important because every Fed Governor has cut interest rates when we've gone below the 50 except one, and that was Volcker.

Now speaking of recessions, I want to say one more thing before I hand it off. To our advisor community friends, don't be scared about the “R”-word, don't be scared about recessions. They shouldn't necessarily be viewed as a negative event because every recession is necessary to create the next cycle. It gives birth to the next cycle. They happen relatively infrequently in our lifetimes, so we need to take advantage of them because they're one of the only few return accelerators that we have. The only other way you could really accelerate a return is by buying an asset bubble and timing your time in and timing your time out, which obviously is very difficult.

Wan Kim:
Thanks Alex. Jason, same question to you. With respect to thoughts on inflation in '23, as a global manager, what are you doing to prepare in the portfolio if it happened or if it's happening?

Jason Isaac:
I would sing from the same song sheet that Alex was just talking about. I think we're already in it. The markets are a discounting mechanism. What we're seeing happening in the markets is already looking what's going to happen in January and March. We've already taken the worst of the hit. The nice thing in the GIG, we've already reacted to that. We've decreased the equity exposure, we've moved from cyclicals to defensives about six months ago. Right now, and it sounds counterintuitive, but like Alex said, we're closer to the bottom of an earnings recession than we are to the top. Now's the time to actually start looking to taking on risk.

There's three things that I look at specifically, and I know some of the advisors that'll be on the call I've talked to will know this, but they're very simple. What's the S&P 500 50-day moving average doing, the 200-day moving average? When the 50-day's above the 200-day, you're in a bear market, you want to be underweight equities. What is Consumer Discretionary doing as a market sector versus the rest of the globe? Right now it's not really winning, it's not really losing. I find Consumer Discretionary, when that sector's doing really well, the economy's doing really, really well and you want to be risk on. That's kind of a yellow sign as opposed to a red sign.

The other one, I'm looking at the NDX futures, and commercial hedgers are starting to get very, very long, meaning hedge funds and small traders are very, very short, and you want to be on the opposite side of the fence as that all the time. Last time that happened to the same degree that we're seeing it right now was the 2020 US Election, and we all know we went on a big run after that. We just went through the midterms, so we've taken the steps to dampen the volatility on the downside through the bear market. Now I'm really looking for that time to step in. We might be a little bit early, but we're talking maybe a month or two. This is truly a long term investment horizon, so at some point it's going to be time to put the pedal down again. That's what I'm looking for.

Wan Kim:
Awesome. Thanks Jason. This next question is actually a bit of an extension to the previous question, it comes from some advisors in Calgary, and it really is designed this way. A lot of the people, a lot of investors and advisors actually haven't started in the industry since 2010 onward, so there's a whole other group of people that started before 2010, another group of advisors and investors started after 2010, which is 12 years ago. As fund managers, and I think this is really important with respect to the “R”-word, recession, what lessons have you learned that you could employ in managing portfolios through tough markets? This is really geared for Mike and for Alex. Mike, why don't you kick that one off?

Mike Simpson:
Sure. I've been managing for many years and the good thing is I don't change my style for recessions or expansions. Recessions are natural, they come, so it starts with a focus on balance sheet. A company, it faces two macro events, an internal shock or an external shock. An internal shock may be a new competitor where your sales decrease or other factors. The external shock is what we're all looking for now, a recession. It starts with a good balance sheet, it starts with having your debt termed out. It starts with, in my genre, companies that can pay a dividend, can grow a dividend. It starts also with your payout ratio. Are you correctly reinvesting in the business? Are you paying a dividend? Do you have any excess free cash flow, which would serve as a buffer?

I've gone through many different iterations of recessions, some severe, some not so severe, some shallow. 2008, 2009 was a large deep recession, but what got us through there is, similar to earlier comments, we had good companies with good balance sheets and I was actually about 2%, only 2% cash in February of 2009. I missed the bottom by about a month, but no one's going to catch that perfectly. That's what you do, when things are on sale, you have a tendency to buy more. What happens usually during recessions or shakeouts in the market, the first chapter to be shaked out is the speculative stocks, so I don't play in that space, but it's just interesting to see how the money losing or the high valuation companies have a severe fall. I'm not doing anything different, which is great for unitholders. I just still have my same discipline and it's about preserving capital and growing dividends, growing cash flow patiently, slowly over time.

Wan Kim:
That's great. Alex, your fund Income Growth has actually been '08, '09 battle tested. It started at the early part of '06, and you've been the Lead Manager since inception. What lessons learned from that last recession and your career in the industry that you want to share with advisors and investors?

Alex Sasso:
It's a great question, Wan. The reason for every recession is that they're all different, but they all have the same outcome, so they all give birth to that next leg up in the market. We know over long periods of time, equity markets do well. In the US, it's a six plus percent rate of return over decades and decades. But you need those recessions to reset the economy to fight inflation, because inflation is one of the killers of wealth creation.

Now, if you think of 2020, it was a supply-side recession. 2000 was a bubble in an isolated segment of the market, i.e. the tech market. The sixties and the seventies were characterized by stubbornly high inflation where the Fed increased interest rates to choke off inflation by putting the economy into a recession, but only to fan those inflation flames before the fire actually went out. They did this by trying to pull the economy back out of the recession, and they just kept creating this pattern of elevated inflation, put the economy in a recession to fight inflation, and so you had this really compact period of bull markets and bear markets until Volcker came around and then Volcker effectively put that fire out. Now for Powell, he's obviously well-attuned to this and he's going to have to pay attention to what Volcker did and what the previous Fed Governors did, because I think this period is somewhat similar to the 60’s and the 70’s and there's a lot that he can learn from there.

From a portfolio construction perspective, dividends, in my opinion, like Mike said, dividends are your best defense or one of your best defenses, and they're also a good offense for coming out of the recession. Dividends provide some downside protection, they're obviously a lot less volatile, and because you're getting distributions, it helps you recoup your losses much more quickly. Now importantly, dividends perform well over very long periods of time and they're that perfect compliment for that income-focused retirement strategy.

Maybe if I can get the moderator to show slide five, I've got a couple slides here I think play well into your question, this advisor's question. I'm going to take a second, I'll explain this. We're showing you three different buckets of investment strategies here. That straight line that goes from the left vertical 100 to the right vertical 100, that's the performance of the TSX over the past 22 and change years. So any strategy above that, i.e. the red line, is a strategy that'll outperforms. Any strategy below that is a strategy that underperforms. That red strategy, that's what we call a room for increase. That means that these are businesses that are paying a distribution but have a room to increase that distribution because their cash flow, the cash flow that the business is generating, is far greater than the needs of the business.

That strategy outperforms, and effectively that's a strategy that we've employed with the Income Growth fund over since the start of the fund, well before we ever saw this slide. But it just makes intuitive sense. And then there's a couple other strategies. There's the no-dividend policy strategy and we know that that doesn't necessarily do well over long periods of time. Likewise, companies that do pay a dividend and are very close to a hundred percent payout ratio, those strategies have difficulty as well.

Now if I can get the moderator to switch that slide and put up slide seven. The reason I'm showing this is because I believe we're at a unique period of time right now for the dividend payers. Why do I say this? It's because the dividend-focused strategies, at least in Canada, haven't performed well over the last couple years, as well as we would've expected them to perform. One of the reasons is because we've had a lot of these different fad investment themes that have done well, that have taken a lot of the capital that would normally go to those dividend-focused strategies and have gone towards those unprofitable tech companies, those story stocks, those stocks with extremely high valuations.

We're seeing that reverse. I say this is a unique period of time because as you can see from this chart here, what we're showing you here is that blue line, that's the Price/Earnings multiple of that dividend growers strategy. You can see that it's below one standard deviation from its regular price earnings level. The point being is that you can get two kicks at the can if our thesis plays out here, that dividends will perform well and resume their long-term outperformance. Those two kicks at the can or you're still getting those dividends, plus you might even get a multiple upgrade as we pass through these recessionary tough times that we may be in.

Wan Kim:
That's awesome, thanks Alex. I actually have a couple questions that have come in from the audience. This is from Regina, that actually is very important and ties into what we've been talking about. This is for all of you guys. The question is with respect to cash, and the second part of the question is, "How will disappointing earnings over the short and medium term affect dividend bias funds with its potential to grow or maintain?" Just a quick summary on cash if you guys could let everyone know. Just for the reference point, today is November 9th, so this is just at this particular point in time.

Jason Isaac:
Who do you want to go first?

Mike Simpson:
Who do you want to start?

Wan Kim:
I will ask J, you spoke first.

Jason Isaac:
That's a good question. Just put some cash to work in the fixed income space. I know that seems sacrosanct. Four years ago, that would've been deadly, but I've got a couple of bond managers that are pounding the table that there's some actual good bonds to buy. With the GIG, we're running at about a 7.5% cash, just a little over 13% in fixed income. That's probably going to squeeze up to about 15, undecided still, and then just between 78 and 80% in equities. That's that one.

Wan Kim:
Alex?

Alex Sasso:
Yeah, sure. Cash in Income Growth is around 15% and cash in the Small Companies fund is around 15%. As I mentioned earlier, I put the first tranche of that to work. I've divvyed it up in my mind into three tranches. I'll put the other two tranches to work as we progress through. I look for certain inflection points with bond yields and with the rate of change of earnings. But those are the three critical elements that I'm looking for.

Wan Kim:
Awesome. And Mike, cash and Dividend Champions?

Mike Simpson:
Sure. About a month ago in the Dividend Champions, we are about 12.5/13%. Today it's about 8.5%, so I'm selectively buying to the viewer's question. Earnings happen every three months, so of course all three managers are on top of them. When there's an overreaction in the market to a name that I like or own, I take advantage of that. That's where my cash is.

Do I feel we're finished with the rate tightening cycle? No, but there still are opportunities. If you go to slide eight, just speaks to valuation and cash, how cash and valuation are tied together. When valuations get low, historically the one, two and three month return, this is TSX from BMO research, is quite favorable. I know we all preach long term, but all of us or some investors live in the present, in the here and now. When things get beaten up, I put cash to work. Never going to catch the bottom, but that's how I've worked for more than 20 years, so that philosophy has served me well.

Wan Kim:
Awesome. Mike, you did answer that part about if there's disappointing earnings, so I'm going to pivot back to Alex and Jason just to follow on the question that's coming in from the guests. If there is disappointing earnings, how do you think that's going to impact the funds, and is that a good or bad thing?

Jason Isaac:
I'll let, Alex, you go.

Alex Sasso:
I can go. We're in the middle of earnings season right now, and it's a bit of a mixed bag. I would say the majority of the companies we've invested in have beaten, guided up, but it doesn't necessarily lead to share price outperformance when that happens, because the market is a forward-looking machine, it's looking six months ahead. So even though the earnings are good, the market is saying, "Okay, well macro right now trumps earnings." We're seeing a little bit of that.

I would also say that for the few companies that have disappointed, it's been a mixed bag. It depends on management's expectations for the next couple quarters. When some companies are missing and the stocks are flat or up, and some companies are missing and the stocks are off quite a bit, and the difference being is what is that guidance and what is the reason for the lower guidance? If the reason for the lower guidance is competition and/or inflationary pressures where they can't push through price increases, the stocks are getting hit. If it's a miss or a guide down and the market views it temporarily, then the stocks are holding in just fine. You really want to focus in on those dividend payers that have pricing protection.

The other thing I would say is in the Income Growth, we really focus in on companies that have a 50% payout ratio. The payout ratio is for every dollar that they earn, how much goes to financing the dividend versus how much goes to financing growth in the business? We prefer the 50% payout ratio as a portfolio because it's a defensive attribute, but it's also offensive as well. It's defensive because they've got lots of room to protect the dividend with a 50% payout ratio during tough times, but it's offensive because you're investing in a business that's reinvesting in itself for growth. And really you want, amongst all the dividend strategies, and there's a whole bunch of different dividend strategies out there, the dividend growing stocks, those businesses that can continually grow their business and grow the distribution tend to outperform the most. But what I would say is that given that even in the Small Companies fund where the majority of the positions pay a distribution, pay a dividend, it helps protect on the downside if this tends to be a much more difficult, hard landing than the market is expecting.

Wan Kim:
Awesome. J, do you want to add?

Jason Isaac:
The only thing I would add is, you do your first level finance class and anything, and they all say capital structure and dividends don't matter, but dividends matter. Companies are very, very loath to cut, so companies that have established a very strong dividend stream and the ability to protect that stream that Alex was talking about, tend to, I don't have a quantitative number, but they tend to just get hit less than a company that is all based totally on capital return and share price appreciation. So, when you've got a very systematic and disciplined dividend policy in a company, there's that sweet spot. Now let's talk through it. You don't want to be a yield pig going after a name that's kicking out 8%, but at the same time, you want a company that's kicking north of 1%. But I would much rather be in a stock that's kicking out a 2% dividend and growing at 8 or 9 or 12% a year than something that's kicking out 4 or 5 or even 7% and not growing it at all.

When it comes to disappointing earnings, if you're not growing your dividend stream, you're going to get hit. But if you're growing your dividend stream... Because people look past the markets, look past the chasm. And you can have a bad quarter here, you can have a bad quarter there, you go through a recession, but what is the discipline of the company? To the question, I've got religion on this whole dividend growths philosophy and it works. There's a reason it works and you get the best of both worlds. You get the capital appreciation, you get your money working for it and you get less volatility, so it's like checking all the boxes.

Wan Kim:
That's awesome. The next question, actually it came from the field, I'm going to answer it. The question with respect to sales and NCM funds, "Are we flowing net positive?" Who's got two thumbs and is net positive as a fund company year to date? This guy. I'm also pleased to report that each of the fund managers on the call, Michael Simpson, Alex Sasso's Income Growth and Jason's Global Income Growth are also flowing net positive, which is really important as a fund manager to see more money coming in, in a tough market. Whoever asked that question, I did not set that up, but I'm happy to answer that question. Very proud of that.

Okay, I'm getting a whole bunch of questions about sectors and energy and a whole bunch of other things like that. That's actually one of the questions that came in from Toronto. Really, this is just a quick question to each of you. Looking into '23, and so it's for Jason, Alex, and Michael, can you share your thoughts on your favorite sector or country or company or idea, anything that you think is something to keep an eye on? I'll kick it off with Jason.

Jason Isaac:
I will say, given the growth and inflation metric that we have right now, we look at them as a quadrant, I think there's a little bit of a short term headwind for energy. That being said, living here in the republic of Alberta, we've gone through what is arguably a four or five year recession in energy. There's a lot of tailwinds in the energy space and I'm a big fan of it. Being a global asset manager, I don't have to go outside of Canada if I don't want to, if there's good quality companies here, so there's a lot of energy names that actually speak to me, and a lot of them are going to pay off their market cap in the next two years, even at $70 barrel of oil, there's no doubt.

I think there's two competing factors. There's a short term tailwind, we're past peak inflation, inflation's still high, that's hard for energy. But we set our portfolios up not for the end of November, but for the end of March and for a year from now. I think energy's definitely a place to be.

If I were to look at one theme in energy, I like the clean energy, I like the uranium space, I think there's a lot of legs there. I think there's a lot of geopolitical events that have just suggested origin of supply and generation of electricity is a problem, so I think there's some long, long term tailwinds there.

One other theme that I'm looking for is one of the things that you saw with the pandemic, this whole just-in-time inventory has called into question, and now we're moving to just-in-case. There's a lot of the industrial complex in the United States, and to a certain extent in Europe, that are going to start to onshore a lot of that manufacturing again. We're going to see a big push. You've seen a lot of the bills come out in from the government in the US and even in Canada to bring manufacturing and added value services back and do it in the United States, onshore, so you're not subject to jurisdictional or geopolitical issues or pandemic issues. That is one of the things that's happened from a sector perspective. If we're truly in a recession, you would not expect Industrials to do well, but on a GICS perspective, globally, Industrials have been sneaky strong, very, very strong. Aerospace and defense is a part of that, but there's been other services and distributors and stuff that have done really, really well. So that whole onshoring would be a thing that I'm looking for.

Wan Kim:
That's awesome. Alex, what are you looking at in '23?

Alex Sasso:
I was going to say onshoring as well. Now if you think of the last two big events that's hit the markets, February 2020, February 2022, these were both massive supply shocks to the economy. We haven't seen that. In one case it's led to a recession, in the other case it might lead to a recession, we might be in that recession. As Jason properly stated, as a business owner, put yourself in the shoes of a business owner and you probably didn't sell nearly as much product as you wanted in '21 and you probably didn't sell as much product as you wanted in '22. That's because even though you've contracted to have that shipped over from Asia, it probably took forever to get here, and then it probably sat in the port of Los Angeles on a boat for a long period of time, and you probably paid a whole heck of a lot of money to have it transported over. So your margins are completely different than what you budgeted your margins to be for the product that you did sell.

Anyways, long story short, there's going to be a massive amount of onshoring that's happening and is going to continue to happen. I can tell you that being on dozens of conference calls this quarter, it is a question that management teams get asked all the time and it is something that they are planning on putting in place. We're already seeing it happen.

The second thing I would say from a thematic perspective is that other supply side shock was Russia, and Russia's invasion of Ukraine and the threat that they pose to their neighborhood means that every country on the planet is thinking about their energy supply relationships, they're thinking about their metals and material supply relationships, they're thinking about their agricultural supply relationships, and of course their defense supply relationships. Puts Canada in a great place.

Wan Kim:
That's great. Awesome. Mike?

Mike Simpson:
Canada has strengths in energy and agriculture, so I'm looking for industries that can be first derivatives, helping out with the agricultural process, moving, transporting, perhaps providing the growers of food with seed, with nutrients, et cetera, et cetera. If there's some companies in a particular niche because we know we're all aging, there's companies involved in transportation of healthcare, supplies, vaccines, logistics, et cetera, that would be good. And also, companies such as the waste management industry where they have the ability to pass on inflation. I'm on the camp that inflation will be sticky, so if you've got built-in escalators within your contracts with your customers, that's a good thing. So really, 2023 plays into a lot of what Canada does very well.

Wan Kim:
That's great. We're coming to the end, we just have a few questions left, but this question comes from Edmonton. I don't know why all a lot of western questions. I think it's because it's minus 8 million in Alberta, and everyone's watching NCM zoom, so thank you for tuning in. The question is really simple. Looking back in '22, what's your mulligan? This is for all three of the managers, so Jason, Alex, and Mike, and we'll just go back in that order. J, what's your mulligan in '22?

Jason Isaac:
If I had to do it over again, I would've reduced my hedge against the US dollar. I knew it was going to strengthen a little bit, but I did not see it strengthen the way it did. It just went through the roof. That I would change. As all listeners know, we do put a dynamic hedge on the GIG, when we expect the Canadian dollar to be strong versus the US dollar, we increase the hedge. When we expect it to the fall versus the US dollar, we reduce the hedge. The Canadian dollar has actually done reasonably well versus the rest of the world against the US dollar. It's just for the last three weeks, it's come off the boil a little bit. But it's just gone parabolic. I did not see that doing that. I would've probably had less of a hedge on. It was running about between 25 and 50%. That would be my take back if I could.

Wan Kim:
Alex, your mulligan for '22?

Alex Sasso:
It would be getting off some tech names sooner. The tech issue was in front of us, and I would say if I could do it over again, I would've gone zero tech a lot sooner in the year than I did.

Wan Kim:
And Mike?

Mike Simpson:
I would just say, invested in a company that relied on getting some of the key supplies from Asia, and realizing that there were issues with delays and congestion at ports, I should have got off the position sooner. It's still a decent company, but they've also been impacted in a big way by rising input costs, and some of their contracts are with large entities that don't always come like clockwork. That's my mulligan for '22.

Wan Kim:
There's three questions left, and I get to ask the final three questions that I put together. The first question is actually for Mike, and it's with respect to the Dividend Champions. First off, huge shout-out, happy birthday, two years with the fund this November 12th. That's amazing. I'm looking at Morningstar right now, and Mike, you're crushing it. Year to date, you’re positive 2% in your peer group, and your peer group is negative, -9.41%. So just amazing. But this question is my question. The Dividend Champions, amazing name, how is that different than a Dividend Aristocrat?

Mike Simpson:
It stems from my earlier comments about how balance sheet is important, how payout ratio is important, how the growth of dividends is important. Dividend Aristocrats, it's a great well-known index, however, in some cases, many cases, the dividends being paid are looked at just somewhat in a stale fashion. What I mean by that is they're not looking at the balance sheet, they're not looking at the payout ratios. We're factoring in all those and we're also factoring in, we want to invest in Dividend Champions within the context of a diversified portfolio. Balance sheet's key, payout ratio is key, the ability to reinvest in the business is key. Also, to keep growing your dividends is essential, it's crucial. All of that makes a different approach from simply buying a stale basket, a stale basket.

Wan Kim:
That's awesome. This question is for Alex, and I talked earlier about Income Growth going back, it started December 31st, 2005, so really Jan 1, '06. I always make this comment, the fund is older than the iPhone. Back then, people were rocking this. I dug this out, this is my vintage Blackberry. It does not work, but people were rocking this. I'm picking this on purpose because this was what people were using back then, it never paid a dividend, if you remember Research in Motion. Alex, dividends are very important to Income Growth. Maybe can you explain why that's so important to you and your investing style?

Alex Sasso:
I love those Blackberries, Wan. I missed that QUERTY keyboard, brings back memories.

With regards to your question on dividends and the importance of dividends, Income Growth was something that was really near and dear to my heart because inflation, to me, is the enemy of wealth creation. If you think about the negative compounding effects of inflation and what it does to a portfolio over time, it's tough. It's tough to beat that. If you think of a 1% inflation rate, then it's not that big of an issue because your dividend yield on the TSX is 3%, and with the Income Growth it's 4 and change percent. But if inflation's 5% or inflation's 10%, think of what that does over long periods of time, and how do you fight that? The only real way to fight it is to fight it via a dividend strategy.

But within that dividend strategy world, there's a whole bunch of different... You can't just go out there and buy a whole bunch of dividends and think that your strategy's going to prove worthy in all different kinds of markets. For us, we prefer, and we've always preferred, to focus on the direction of the dividends as opposed to the absolute yield level. The biggest, heaviest, juiciest yield stocks tend not to do well, and they tend not to protect well in a recession. Dividend payers in cyclical industries tend not to protect well in a recession. And then REIT utilities and pipelines, they tend not to perform as well coming out of the recession into a bullish equity market. That's why I've always said that Income Growth was designed differently, it was designed to be a compliment to those advisors that buy individual large cap dividend-paying stocks, or it's designed to complement some of the biggest AUM dividend funds out in the marketplace. Because as I said, we do things a little bit differently.

If I could just do one more selfish plug, the great thing about Income Growth is we designed it so that it's a hundred percent Canadian, so that it's Canadian-eligible dividends, which are taxed more favorably, and then it's in a corporate class, so we use the expenses of the corporate class to help offset some of the interest income. So from an after-tax rate of return perspective, it has some advantages as well.

Wan Kim:
You had me at dividend. So J, this question is for you. Your fund can go anywhere in the world, you describe yourself as an aggressive asset allocator, but a conservative stock picker. Can you explain further?

Jason Isaac:
Sure. I guess that needs a little bit of elaboration. I'll start with the last part. On the conservative stock picking, just go to the fundamental aspects of picking good quality stocks, looking at stocks that have good revenue, good earnings, free cash flow and dividend growth. I map out every security in the portfolio on a weighted basis. I go, "This is what we expect over the next five years." Revenues to do, earnings, you want earnings growing faster than revenue, that means you've got positive margins. You want free cash flow to grow faster than earnings, which means you've got excellent free cash flow generation.

That actually bleeds into what Alex was talking about 10, 15 minutes ago about dividends, you protect the dividend stream, and that's where you go. The portfolio on a weighted average basis, the dividend is growing at about 10% per year. That's the best way to combat inflation.

Now, taking a step back, aggressive asset allocator, we'll make big calls on whether we want to be in fixed income, whether we want to be in cash, whether we want to be in equities. My original background was institutional asset management, and a big call in the institutional asset management world was going from 55% equities to 57% equities. That's not going to make a hill of beans of difference. This portfolio has the ability to go from 60% equities to 90% equities, and all things equal, and in most markets, you want to be overweight equities. But when you don't want to be overweight equities, we're running just under 80% now, that was bumped up from about 75 earlier.

And then we make very, very aggressive calls in the sector tilts. At the beginning of the year, we were overweight Tech, we were overweight Consumer Discretionary, we were overweight Communication Services. Now we're overweight Energy, we're overweight Staples and we're overweight Healthcare. We just go to where the sectors that are going to perform, given the market.

But to your other point, if Mr. Moderator can throw up, I think it's slide 11 or 12, slide 12, this is where I can swim. These are the developed markets. You've got the US, you've got Canada, you've got Europe, and you've got Japan. This little data, this is from I think the beginning or the middle of October, and this is just the weights of the various indexes and the various sectors. As a global fund, if Consumer Discretionary is the place I want to go, then I'm going to be looking at Europe and Japan because it's very hard for Europe and Japan to outperform if Consumer Discretionary is not working. Same with Tech. If we get to the point where tech is the place that you want to be, then the US has 27, 28% in Technology. And also throw in the fact that Google and Amazon are in Communication Services and Consumer Discretionary, those are techy-esque-type names, that's where you want to go.

When you're a Canadian investor, if you really like Financials, it's really tough to go outside of Canada to get really good quality Financials. Same with Energy. I just like to lay the framework here and just say that depending on what sector you want to be in dictates what developed market you go to. You just take it as you go. If we are truly in the teeth of a bear market, then I would expect Europe and Japan... Bear markets don't bottom on good news, so we're going to hear some good news or bad news, and then that's the time to step in. As Alex said, we've got a war going on in Europe, and yet there's some things in Europe that are actually working. Hope that answers your question.

Wan Kim:
I want to end this with a huge thank you to Alex and Michael and Jason. A bigger round of thanks to the advisors that submitted some really good questions, thank you so much. I would encourage you if you're watching this to register for our Expert Insights on our website. All you have to do is just give us your name and email address and every time we get a new update, a new insight, a new marketing piece from our fund managers, you will be notified and you can read it and watch it at your leisure. It's a brand new website, really designed to be engaging and helpful. I'm Wan Kim, Senior Vice President at NCM. I really appreciate your time, thank you so much. If you have any further questions, please email at sales@ncminvestments.com. Thank you very much.

Disclaimer:

The information in this video is current as of November 9, 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. Jason Isaac is a Portfolio Manager, with Cumberland Investment Counsel Inc.(CIC). CIC is the sub-advisor to its affiliate, NCM Asset Management Ltd.