April 19, 2023
Watch now: Jason Isaac webinar replay – NCM Global Income Growth Class
VP Regional Sales, Mike Miller, sat down with Jason to discuss why he’s bullish on equities, the opportunities he sees in Europe, a fresh take on tech stocks, the hot commodity to watch and more.
0:27 What does 2023 have in store for the market? Is a recession in the cards?
6:38 What is your current asset allocation and why?
12:42 How are you allocated from a geographical perspective?
18:52 What impact will banking concerns have on the global economy and are Canadian banks currently attractive?
22:34 Is ESG a part of your equity screens?
24:19 Have we seen the worst for the UK and European economies and what opportunities are you finding there now?
27:32 What’s your view on tech stocks and how do you think about value versus growth in the sector?
31:02 What are your thoughts on oil, gold and copper stocks?
35:30 What’s the internal yield of your fund?
36:05 What are the advantages of your style of active management?
Mike: Today is Wednesday, April the 19th, 2023, and this webinar is about global dividend investing, and we're happy to be joined with our portfolio manager, Jason Isaac, who manages the NCM Global Income Growth Class fund. I've got some questions that I was able to take from the field and that have been submitted, Jason, so I'm hopeful, nothing too shocking here.
So the first question is 2023 - it started out as a very volatile year with January having very good returns, largely on the FAANG stocks, plus a couple others. Since then, the markets have been choppy with a lot of stops and starts. In your opinion, what does the rest of 2023 have in store? And most importantly, do you think we'll have a recession either in Canada or other parts of the world?
Jason: That's that's a lot of questions wrapped up into one. And I was hoping to get yes or no answers. I'm going to break that apart a little bit. I'm looking at, you know, maybe start from the beginning there. January having good returns. January was a phenomenal month from an index perspective. There was absolutely no doubt.
The problem was many of the names that did well are names that don't fall into that quality dividend growth bucket. One of our research houses right in the middle of February kicked out something that said, you know, on average in Canada, I think there was about 25 or 30 stocks that were up about 17 or 18% in January. And the TSX itself was up about nine. And then you peel back the onion a little bit and all of those stocks that were up 18 and 19% were actually down on average 52% the year prior.
So we had a really big revision bounce. So a lot of the stuff that worked or held in in 2022 which we were invested in in the GIG just didn't get a bid in January. It was a lot of the stuff that was beaten down. The other thing, it's funny, the narrative out there, it's been a really, really volatile year and it has. But when you start looking at volatility indexes, be it, you know, the VIX for the equities, the MOVE for bonds or foreign currency, JP Morgan has an index, they’re all lower than they were at the beginning of the year.
So they did spike, but they spiked during the banking stresses and I'm sure we'll chat about that a little bit. They didn't spike at the beginning of the year the way everybody thinks. So people look at it and they hear it and they think that's all over the map. But it's actually been pretty moderate, pretty sanguine, like things have actually calmed down.
We're actually significantly lower on all of those indexes than we were just before the banking stresses in February and stuff like that. So the volatility, while it has happened, it's just not lingering. The only other thing that I would say is that we've had distinctly different markets and if the chart master can throw up Slide 40, by the way, I've got a chart book of about 50 slides. We are not going to go through all of them. I wasn't 100% sure what Mike was going to throw at me, so I've got a number of charts that we can throw up there, but this just kind of gives you an idea.
And you can see we break this up and I use the U.S. market because it's the tail that wags the dog. But we've got the Nasdaq there. We've got the Russell 2000, we've got the Russell 1000, which tends to be more larger cap. And then we've got Micro-Cap. And basically what we're seeing is there's been a clear distinction between what has performed and what hasn't performed. So you get as you go down in cap the 2000 and the micro cap, they haven't performed even since the October lows.
They've just kind of languished and stuff like that. It's been the bigger cap quality stuff, the stuff that's not really dependent upon bank financing, dependent upon any one jurisdiction. And more importantly is people are more worried about slowing economic activity. And the word on the quote unquote, recession, growth gets bid up. Well, one of the places you go for growth is technology growth. It is there. Technology is changing the function of basically every other industry in the world and exhibits growth and stability. So that's why the Nasdaq is getting bid up. So we're having a lot of moving parts and there's a lot of different things as we're settling into what's going on.
And to the last part of your question, I believe it was about recession. I actually think once the numbers are all said and done, we've actually lived it. October is going to turn out to be the low. It hasn't been a general recession right through the entire economy. It's going to be pockets of recession as people have been struggling with what happened with the pandemic, various issues of supply side economics and not being able to get stuff and workers not being able to work and workers deciding they don't want to work and all of this sort of stuff. I think it's a disjointed recession and on a postmortem in maybe a year's time when you're really looking at the numbers and you don't have the revisions coming in, we'll have seen that, you know, the recession has probably already happened. The markets are a discounting mechanism and they're looking forward. People are talking about earnings coming in and everybody's worried about first quarter earnings and all that sort of stuff.
But you got to remember the numbers that we're getting on prints for companies today already happened. Like that's already happened. And I would bet nickels to dollars, for the most part, you know, the market's already looked beyond that. And we've seen that. You know, of course, you get some surprises here and there, Heineken and/or ASML or JP Morgan and stuff. They come in and they surprise and all that sort of stuff. There's all of those idiosyncratic issues with individual companies, but in general, companies are doing reasonably well.
So long story short, I think we've gone through the recession. I think we need to position for that. And we got to look at what the market is telling us and the market's telling us that, you know, while the bond market’s scared, the equity markets, the FX markets and the credit spreads are not saying there's a recession in the cards.
Mike: Okay, great, great. Well, based on your view, for the rest of 2023 and the fact that you have wide goal posts, and for those out there, I'll explain: Jay's mandate allows him to go from a minimum of 60% in equities to a maximum of 90% and a 10 to 40% swing in bonds. So I guess when it comes to asset allocation, Jason, what is your asset allocation and why?
Jason: Many of you would have heard this and I've said it before, I tend to be very aggressive on the allocation stance and very conservative when it comes to the individual investments that go in the portfolio. As it sits right now, I'm very aggressive. There's three things that I look at when it comes to the asset allocation.
First and foremost, and it's very, very simple. What's the 50 day moving average doing versus the 200 day moving average? Long story short, when the 50 day is higher than the 200 day moving average, you want to be overweight equities. That's all there is to it. It's always paid off. There have been volatile periods like we've seen before, but when you're looking at an equity investment, you're looking three and five years out and that has always paid to be aggressive on the equity side.
The canary in the coal mine for me is consumer discretionary. As a sector, what is consumer discretionary doing versus all the other GICS sectors, all the other sectors in the economy and the market in general? When consumer discretionary is doing well, that means generally risk appetite’s on the table. It means consumers are feeling good. It means companies are spending money and expanding production capabilities and things like that.
And generally good things happen to the market when consumer discretionary is doing well. Those things are both positive right now. So that means you want to be overweight equities. The third thing I look at is small time traders on the Nasdaq futures. So you'll all remember from your various finance classes when you do commitment of futures and trading going forward. Nasdaq basically it's the NASDAQ 100. You're betting what's what's going to happen versus what's happening today. If you're long, you're being aggressive. If you're being short or selling, you're being very, very defensive.
Generally speaking, small time traders and hedge funds tend to be very, very counterintuitive. When they're very, very aggressive, you want to get out of the market. When they're being very, very pessimistic, you want to get into the market. Right now that indicator’s not really calling for one way or the other. It's more neutral if Chart Master wants to put up slide 24, please, that would be great.
This is just basically where we are in the portfolio right now. So it's aggressive in the asset allocation and conservative in the securities selection. So the fixed income component of the portfolio, as Mike was saying, could be from 10 to 40%. Right now we're running a little over 11. There's about 15, there's usually between 15 and 20 positions. I'm running about 18 right now. The focus is on short duration and long credit. So doesn't make much sense to be in provincials or in governments when I can be in corporate issues that are really, really good. The fixed income portion of the portfolio is to provide stability and balance to the rest of the portfolio and not take on undue risk. So we've got a lower yield to maturity, a lower duration after it's all said and done.
Basically the rule of thumb that I use there is if I'm prepared to be invested for more than five or six years, why wouldn't I be in an equity investment? It like it makes more sense to be in an equity investment versus a fixed income.
And then on the equity side, I can go from 60 to 90. There has been a few changes since the slide was made. So we're running about 86 and a half percent, not 87. And I bucket the portfolio. I've got a stable bucket that focuses on free cash flow and dividend growth, and I've got a growth bucket that focuses on higher revenue and higher earnings. Depending on what time of the cycle we're in, I'm either overweight, the stable bucket versus the growth bucket and vice versa. So for example, last June I was about 80% of the stable bucket and 20% of the growth bucket. Now we're about 55 stable, 45 growth.
And when you bleed it down, the equity portfolio, and these are my calculations based on my research and our research partners, but when you look at the equity component of the portfolio, the five year numbers and the bottom line is what I really looking at, the equity component of this portfolio is generating revenue growth per year for the next five years of 6.4%. It's growing earnings at just under 12, it's growing free cash flow. The free cash flow from this portfolio is growing at 12 and a half percent per year for the next five years. I'm expecting the dividends to grow. This doesn't mean the dividend is 13%. The dividend is just north of two, but that 2% is going to grow at 13% per year. And then the shares outstanding, companies buyback, that the companies are continually buying back stock, and that share outstanding, as we map it out for the next five years, is decreasing by 3.5%.
So if you were to look at one number off all of this, that's really, really important, it's that free cash flow number. When companies generate free cash flow, good things happen. You rightsize the balance sheet, you buy stocks back, you kick out a dividend or you kick out special dividends, or you have the opportunity to invest. So long story short, when it comes to looking at this equity component, that's the way I look at it. I don't focus on any one individual name.
So when we get back to your question, very aggressive on the asset mix, very aggressive on the asset mix, because we're above the 50 day moving, average growth and inflation are low relative to where they've been over the last one month, two month, and three month period. They're still high on an absolute basis, but you got to remember, the markets are more concerned with better or worse, not good or bad. Economists come out and they say and politicians say the market's good, the market's bad, the economy's good, the economy's bad, Markets don't care about that. They care about the rate of change. And if companies are able to make investments and the underlying environment in which they can make those investments is stable, it'll be positive for them. That's what they're worried about. So I am very aggressive with equity. I'm cautiously optimistic for the rest of the year.
Mike: Good. That's that's great. That's exciting. So I guess what piggyback on that question, since you have a large equity focus right now, can you break down your geographic allocation. For example, Canada, I have always espoused that you are a true global manager and are not afraid to go to Canada, and explain what you like from a GICS perspective of each region.
Jason: Okay. Um, all right. Slide 37 will help with this. So what I do is I tend to be not a stock picker per se. I tend to be a sector allocator. And what this chart is telling us is, again, this is the U.S., but it's very, very salient for the rest of the globe.
Basically what this is, is given where we're at with growth of inflation and what managers are expecting to produce and what they're expecting to pay for those production, those units going forward, where we're at six months out from now, this is the expectation that you are the historic returns of the various GICS sectors going back to 1964.
So just to kind of put a little bit of an explanation on this, the histogram or the height of the chart tells you typically if we look to the far left side, energy typically underperforms the market by about 11.6% six months out. Given where we are with growth of inflation. Conversely, if we slide all the way over to the far right side, consumer discretionary tends to outperform the market by about 5.3% six months from today, given where we are at growth of inflation.
So the height of the bar tells you what typically those sectors have done. So as you could see, you know, you've got some big calls on the left and the right, energy, real estate and utilities and on the left, staples, technology and discretionary. Then you got a bunch of sectors, kind of middling industrials, materials, comm services and financials just kind of, you know, they plug along.
What we've also done is we've force ranked how those sectors are doing versus the market today. And as you can see, information technology, consumer discretionary and health care are doing well. They're doing better than the market and energy, real estate, utilities is kind of neutral, but materials are doing worse than the market. So I look at this and I go, you know, this is kind of going according to plan, given where we are with growth of inflation.
So six months out, if these are the sectors that are performing well today and these are the numbers that we're expecting, then I go, well, all things equal, consumer discretionary, technology and staples, and to a certain extent, health care will be sectors that I'm going to look for, for investment ideas. And if I need to look for funding those ideas, energy, real estate, utilities, and maybe to a certain extent industrials, although we can get into that a little bit different, I think industrials are going to play a little every every cycle is different.
And I think industrials are going to be a little bit different this time, just like financials are going to be a little I would expect industrials and financials to switch. But long story short, energy, real estate and utilities would be areas of the portfolio that I would look to finance those. Now, all things equal, I would never make an investment just because, “oh, discretionary looks like it's going to be good.” It's got to meet your metrics, it's got to have revenue growth. It's got to be in the right sector, it's got to be in the right industry. It's got to have the moat, it's got to have a dividend profile. It's got to do the right things for the equity part of the portfolio. But that kind of puts you down the right path.
The next thing I then go look out when it comes to your geographic question is, well, what area of the globe actually does that? So if we want to slide over to slide 41 now this is updated. Some of you may or may not know that there was a rejiggering at the end of I think it was at the end of March about the GICS sectors. Some names switched the most notable Visa and MasterCard moved from technology to financials and blah, blah, blah, blah, blah.
The long story short is these tend to be the four pools that we can swim in, or I do swim in, in the Global Income Growth mandate. So we got the U.S., we got Canada, we got Europe and we got Japan. And I look at them as a cohesive unit. Then I go, well, two thirds to three quarters of all of those individual regions are dominated by four, in some cases five, but mostly four sectors. And as you can see that here. So, you know, if I really want to overweight consumer discretionary, I find it very hard to believe that Europe and Japan won't outperform if consumer discretionary is actually working. Makes no sense. 20% of the index. So you can't have that index do poorly or that part of the index do poorly and still expect that market to do really, really well. So this further fine tunes where you want to look.
Look at the big elephant in the room with Canada: financials. One of the things as a dividend growth investor and being a Canadian investment vehicle, I find it very difficult to convince myself to go outside of Canada to find a lot of financial exposure. Financials in Canada tend to be low beta dividend growth type stories, whereas financials in every other jurisdiction tend to be cyclically orientated and not necessarily dividend growth. They're more of an earnings growth story, just something that you have to be aware of. But this is where, to your point, if I want to go to energy, Canada's got a great energy sector, might as well go here. If I want to go to materials, Canada's got a great materials sector, I might as well go here.
But as you can - if we slip back to the other chart - energy and real estate materials might be areas that we're going to be underweighting. So that's exactly what we've done. If we look at the equity component of the portfolio for the GIG in October, end of September, we were drastically overweight Canada, we were overweight energy, we were overweight staples, we were overweight health care. We are now overweight discretionary, we're overweight technology. We've moved mostly from Canada to Europe, which has done really, really well because a lot of the discretionary names that have added to the portfolio have been European in focus, you know. So that's that's I think that answers the question, was there anything else on that one?
Mike: I think that was very detailed on that. So I think though there is a bit of a follow up. You know, lately in the news week, a couple weeks ago, we had some issues with some regional banks in the States. So how big an impact to the global economy do you think it's going to arise out of banks scaling back their lending due to those recent issues? And are Canadian banks still good and say value here?
Jason: Start at the end, working back, yes, Canada has, you know, we love to hate our banks, and rightfully so. They sometimes don't treat us that well. But the Canadian banking system is very, very stable. You know, there's hedge funds in the states that have spent the last 25 years shorting the Canadian banks, and it hasn't worked out well for them. So the Canadian banks are fine. They may not be the best place to invest on the margin, but you are never going to go wrong with a Royal Bank or a TD or anything like that. You just leave them alone and they will be fine.
The regional banks in the States are a little bit of a different animal. The one thing that's different between now and the great financial crisis is that the great financial crisis, I was just watching a bunch of stuff on The Big Short just to kind of go, Oh, yeah, I did live that. And that's what happened. There was questions over the bonds that they actually had. The assets on the banks balance sheets went poof to zero.
That's not what happened here. Basically, the bonds got marked down in value because of, as we all know, when rates go up, your value of your bonds go down. So there was a question on the value of the assets on the banks’ balance sheets. And then there was a question with - it was a good old fashioned bank run.
And, you know, you saw JP Morgan and some of these other banks coming out. They're kicking it, people are going upstream. Then the big money centers, they're just not taking the risk. So the regionals are going to be an issue. I've read a couple of you know, there's a Bloomberg article, there's an Economist article, there was a Goldman Sachs article, and I read them and they're all over the map a little bit. But all of them think that about a quarter, quarter and a half out that you're going to see about a 25 to a 40 basis point drag on GDP because these are the lenders that actually help small banks or small companies in the Russell 3000 in this micro-cap do their job. They're more dependent upon traditional bank financing.
You're going to see that's going to be a hit. That being said, it's going to be a headwind. There's way more tailwinds in the global economy coming out of the pandemic. I can't believe it's 2023 and we're still talking about that. But as the markets normalize and people right size their supply chains, there's much more macro forces pulling the economy forward than pushing it in the face.
This is going to be an issue. Don't get me wrong. It's not ideal, but it is nowhere near the global financial crisis issue that was and we're seeing that in the markets, like I just talked about, macro volatilities coming in. You know, we had what we call basically a banking crisis. And the S&P 500 did not even come close to testing the October lows.
Like if that wasn't the impetus to have a 15 or 20% haircut in the beginning of 2023, I don't know what will. Like that was right up there to people, you know, people in the capital markets tend to shoot first, ask questions later and a lot of people hung in. It's been surprisingly resilient. So that tells me there's more going on under, you know, housing inventories are low, inventory are low, employment is low. Like, you know, people are still spending. Consumer discretionary is doing well. So I think we are in for a good 2023.
Mike: Good, good. Jay, I apologize. It's going to go back. The question came in by me on the Q&A. When you're building your equity screens, your equity positions, is ESG a concern part of your equity buying? Do you look at ESG at any part?
Jason: The simple black and white answer is no. But at the same time as this is a global macro mega-cap investment, I got to believe and it happens and we do the ESG screens on the portfolio as a whole. And as you can see on the Morningstar reports, we're on the low end anyway. These companies have to be on top of their ESG scores.
So I let the companies manage what they're doing. If they're not on top of that, chances are the company is not a good enough company to be investing in. They have to be on top of their sustainability and their corporate governance and and their environmental issues. They have to be there. So while it's not a direct consideration, the fallout of all the stocks that I tend to buy, all have really decent and high ESG scores anyway.
So would I ever buy one that's got a bad score. Again, I would look at the portfolio en masse and I would look at what the aggregate values are. If you know that. But you don't have to flip to a chart master. But if you go back, if you guys can just think back to that other page where I've got that bottom line number of what revenue and earnings and dividends and free cash flow need to be. I wouldn't put a stock in that's drastically going to change the ESG score, but it's not something that I actively model for.
Mike: Okay. Okay, great. In terms of today's one headline we saw today, inflation doesn't seem to be getting under control in the UK. Have we seen the worst of the European and UK economies and are there pockets of good opportunities over there?
Jason: Yes, absolutely. But it's more continental Europe than the UK still hasn't gotten around their Brexit issue. They still that is an issue that's affecting them more than the rest of the continental Europe. So because of that, I'm actually looking more so to continental Europe. If we want to slide to slide 38, please. And this is, you know, going back to that other slide where I look at the individual regions that I can invest in, Europe looks better than the S&P 500.
You remember basically since 2011, the year the US was on an absolute rocket ship and the rest of the world just kind of languished. But basically since the October lows, Europe has actually trudged along and done really, really well. And this is in the face of multi-jurisdictional disputes, rising populism, a massive land war in the middle of Europe, and questions over the economic viability of their equity system, because now London has moved from being the center of what's going on there and a lot of stuff’s moving to Paris. It's still charging through so Europe looks really, really good. And that's the reason this portfolio has actually increased the European exposure. I believe six months ago we were about 11% and now we're 23 or 24% Europe. So I'm really liking it. The only direct exposure I have to Great Britain is Diageo. It's a spirits maker, you know, Crown Royal and names like that.
Mike: I'm helping out with the earnings.
Jason: Haha, yeah, they do tend to be recession resistant. So it's a really good company and it's just chugging along. So pardon the pun. And then, you know, the other slide that just shows the regional differences or the sector differences between the various regions. So you know, financials, tech, I'm shying away from financials in Europe generally speaking, although we do have one in the portfolio, Rilba, which is basically a Danish bank. It's the Royal Bank of Denmark.
The nice thing about Denmark is, well, it's part of Europe and benefits from Europe. It's not a big enough economy for a lot of the huge European banks to actually even make an effort to try. It's very similar to what we've got going on here in Canada with the telecoms and the banks. You know, U.S. banks would love to come in here, but they'd have to be a schedule two bank could only lend against the assets they have in Canada. Just can't make it. We just saw HSBC fully bail out of Canada. The Canadian banks have done a really, really good job of keeping their oligopoly. Rilba does the exact same thing in Denmark.
And then technology is an opportunity and industrials. China's starting to wake up and Europe's got a lot of trading relationships with China. So that's actually done pretty well. But the consumer discretionary is where we’ve really taken some opportunities in the European space.
Mike: Jay, just a question just came in here and somebody is asking, what's your view on technology? So since you mentioned it I’ll plug it in here, what's your view on technology as a sector and how you categorize companies from value versus growth perspective with this environment?
Jason: Oh, I think technology is changing. 15, 20 years ago was cyclical and it was very, very high beta. Technology has moved to almost take the place or supplant what industrials are in the economy. You would never look at the Bank of Nova Scotia or, hey NCM, as a technology leader by any stretch of the imagination. But this Zoom the ability to get on Bloomberg, the ability to work remotely, anything that helps companies do things better is a good thing.
I do think there's basically two stories in the technology. There's the innovation, Cathie Wood story and then there's the Microsoft , semiconductors, Cisco type story that just basically helps the infrastructure in the backbone of what people do. You know, like I don't know anybody who's in any type of finance that doesn't use Microsoft Excel, right, like, it's just necessary. As you move to a fee based system and generating that like, you know, Microsoft is the one that I like to use for an example that I've got modeled out here.
You know, it's where we got it here. So over the next five years, you're growing your revenue at 11%, you're growing your earnings at 12%, you're growing your free cash flow 12%, you're growing your dividend at 10% and you're buying back 1 to 2% per shares per year. Like it ticks all the boxes of what you want. It's steady, it's stable and it's necessary. It's almost moving to a defensive.
Now, I am not slagging on Cathie Wood or the innovation or the application aspect or the disruption aspect of the economy or of what technology's all about. But I think what you need to do is when you're going to invest in technology, you have to ask yourself, what is the role that I need this portfolio to do? And that will push you towards the technology companies you want in your portfolio.
I fully believe I look at Cathie Wood's portfolio and it's going to be a winner ten years out. But you may go through some dark times for five or six years. It's a long duration asset, they're buying securities and stocks that are going to change the world. And, you know, Bill Gates has the best quote out there where most people, you know, overestimate what's going to happen in the next two years and drastically underestimate what's going to happen in the next ten.
This portfolio, the GIG is a dividend growth income based equity portfolio, very conservative. So the technology names that I'm investing in are the ones that establish a steady revenue profile, a steady free cash flow profile, a steady dividend profile. Now, not every name in the portfolio needs to have a dividend, but the portfolio en masse has to have a dividend.
So I, this would be, you know, like a CRISPR would not be something that I go in here, a biotechnology company or a Roku or something that's fundamentally changing the way people are interacting with their media interfaces. That's not what this is about. I'm sticking with the backbone technology that is necessary for business to be conducted.
Mike: Okay, great answer. I have a question here that came in earlier, but I'm going to tie it into a question that just came in the Q&A. In terms of commodities, what are your thoughts on oil, gold, copper stocks? So those ones and then buying into it, somebody asked what sectors are your long term focus and which ones will you avoid and for how long? So I don't know if commodities will tie into that, but that's a great question.
Jason: I think we're looking - commodities is the big question. We live here in the Republic of Alberta. Everybody's interested in what oil is doing. I think there's been a drastic underinvestment in oil and energy infrastructure for the last ten years. I think long term, it's a really, really good investment. Over the next 3 to 9 months, maybe even 12 months, it's facing a headwind given the economic cycle that we're in with low growth, low inflation relative.
Remember, I'm not saying that inflation's low and growth is low. I'm saying the rate of change of month over month and quarter over quarter of growth and inflation versus themselves is lower than it was. Energy traditionally does poorly. So it's not going to be a sector that I overweight. That being said, there are some names that I like and I'm going to hold. It's a question, do I hold it a 4% or do I hold it at 2%?
CNQ would be a perfect example of that great quality company, probably one of the best oil and gas companies you can get out there. Just leave it alone. It's like I'm looking at it right now and it's going just because they're generating so much free cash flow, they're going to be buying back a significant chunk of stock over the next couple of years. They're buying about 5% of their outstanding stock back over the next five years. Nothing but good things could happen to shareholders from that perspective. But I don't want to be making an overextending my play in energy. So that being said, so long term oil is good. Long term natural gas is good. Over the next 3 to 6 months, which tends to be a very volatile period. I would shy away from it, but I would not be reducing. I would be market weight oil after it's all said and done.
Gold, that makes me sigh. I'm a dividend investor. You don't get into dividend to be in gold. It's kind of a useless precious metal. And on any given day it fluctuates between being an inflation hedge, a risk trade or trade against the US dollar. And you never know on what day it's going to be. So I tend to just shy away. If it's a diversifier, I can get behind it. But I have a tough time allocating a significant chunk of capital to an asset that's not producing an income stream, be it a bond, be it a dividend. I just I have a tough time with that.
And generally speaking, most of our advisor partners already have a diversified portfolio for them and maybe a precious metal or a gold exposure outside. So I tend to shy away.
Copper, well, copper is the metal that has a Ph.D. in economics. What's copper doing? That's what the economy's going to do. Copper’s breaking out, you know, I've got Freeport in the portfolio.
One of my colleagues, the CEO of NCM, did a big in-depth review of copper, I believe it was about six weeks ago. We can revisit that if you want. There's no point me reinventing the wheel here. But he just basically, Alex was just basically pounding the table and saying copper is the commodity that everybody needs. This speaks to what I was talking about a little bit earlier with the supply chains.
What we're going to see is we're going to see three dominant areas in the economy. We're going to see Fortress North America, Fortress Asia and Fortress Europe so that people actually bring a lot of their supply chain issues back home. There is going to be a build up of infrastructure in distribution centers and logistic planning to a certain extent, you see with semiconductors and stuff in the announcements in the states. That's going to require copper and various other industrial metals to actually build that out.
It's going to be painful. It'll probably take five years, but it's that's a boon for the metals. So I am structurally bullish on copper and industrial metals as the three major areas become trading blocks cohesive in themselves and then they're going to trade. And then Africa is going to explode too.
Mike: Okay, great. What's your internal yield of the fund? So I'm assuming the question is about dividend yield.
Jason: Yeah, it's a little over four and a quarter when you include the bonds. The equity itself is about 2.1%. So it's a little light given the monthly distribution. But the idea is that the growth in the dividend and the fact that we're in equities will more than make up for that. So that's the way we're playing it.
Mike: Okay, great. I don't see anything else here. Well, there might be one I'll get to if we have time, because I want to be cognizant of time. So lastly, in an era where advisors are moving more to passive investments such as ETFs, talk about the advantages that you and your truly active style bring to the Global Income Growth Fund.
Jason: Full disclosure, I'm an active manager, so like I've got religion on the fact that I do believe active management can add value to any type of investment strategy, but you need to be around for a full market cycle.
The problem that I have with index investing is sure, you get all the good companies, but you get all the bad ones too. And you don't have any control over what you want and what types of exposures you're going to get. If we want to put up Slide 46, please I was ready for this one.
So basically what this is the dotted line is an index portfolio of the type of strategy that we run in the GIG. So it's basically 75% global equities and 25% fixed income and what we want to do is establish that, while the return has been pretty decent, active management outperformed by not getting hit in the teeth. And this is where you see, like, look at look at the last part of 2021 and 2023 there. You know, we ran up and we outperformed great, you know, pat ourselves on the back.
But where active management, really where the rubber hits the road is when things are questionable you can get out of the way. You know, I've been as low as 70% equities just because in 2022 and I've been as high as 22% fixed income and 15% cash I think after it was all said and done. Just briefly, but when you're not sure what's going on and in October, you can just step out of the way.
The problem with that, I actually don't think it's a problem, but it's something that you need to actually be aware of and cognizant, is when the market finally turns that first couple of months when the market's ripping, you're going to underperform because you're in a cautious stance.
And that's exactly what we've done here for the beginning of the year. The market's ripped up. We've just kind of steady Eddie. It wasn't until the end of January where it's, you know, we talked about my three signals, 50 day moving 200 day moving average, the consumer discretionary, and what the Nasdaq futures are doing. When those hit, that's when you get aggressive. And that's exactly what I did.
Up until the middle of January, when we still weren't sure how the market was going to turn, everybody was calling for a test of the October lows and stuff like that, I was cautious and yet the market was running. So it's like I'm prepared to lose a little bit on the upside as long as you don't catch it in the teeth of the downside. And that's exactly what we've done.
If you flip to the next page, this just shows what we've done from an active return perspective over the last three years since basically May 1st, right after the end of the pandemic in 2023, the return on the fund has been 12.7% versus the typical Canadian equity global balanced portfolio has done 9%, and the benchmark, the ETF, quote unquote, has done 11.9%.
What you look at, the big one to look at is the beta. The beta is through the roof. You get all the good days, you get all the bad days, you live with it. Where we've really, really added value is those days where the market's taking it in the teeth. Standard deviation’s lower, downside deviation is lower, which means we just don't go down as much as the rest of the market. And yet the tracking error is really close.
And just to kind of sum it up in a nutshell, the tracking error is a really good number to give you an idea that the risk exposure for the asset that you're looking at is very similar to the benchmark that you're looking at. So the Income Growth benchmark has a really low tracking error with global equity balanced funds. So basically the same investments, you don't have to worry about somebody going into Chinese A-shares or buying a whole bunch of high yield securities or sitting in a whole bunch of cash. You have the same factors exposed.
But what we really want to do, and if you look down to the bottom three year characteristics, the max drawdown and the best months and the worst months. You can see best months, worst months tend to be right in the middle of the upside capture. So for every day that it's going up, I'm up 116%, for every day it's going down, I'm going down less than 100%. So this is where active management really, really plays into it, when you start to factor in the risk exposures and what you're trying to do.
Plus you can actually structure a portfolio that's more attuned to what you're looking for. Going back to that slide, way back, talking about the dividend growth and the revenue growth. You can't do that with an ETF. You can't go in and say, I want - there's certain ETFs you can buy and all that sort of stuff that might be able to do that - but this is much more flexible where we've got between 40 and 50 names. It's very focused. It allows these companies to do what they do and stick to their knitting. And the only time we make a change is if something drastically changes with the company.
But the best part about active management is you just don't get kicked. Yeah, this is the you just don't get kicked in the teeth and then you can kind of go, you know, right now I'm increasing the growth bucket versus the stable bucket because growth is what's getting paid for and that's what we're we're going to so I think that was it, got a little verbose there.
Mike: Always good you make it so that we have more than enough content in these sessions. I think we're going to cut it off there. And Jason, I want to thank you. That was, as always, tremendous. I think you'll see why for those of you watching why I'm so passionate about this fund and why I think this is a great core solution to your portfolios.
I also want to thank the chart master and to you, our advisors who took the time to watch us today. There were a couple of questions I didn't get to. I encourage you to reach out to your NCM wholesaler, but if you do need any more information on NCM, please reach out to us or send a note to firstname.lastname@example.org.
And at this point, I'd like to wish you all to have a great day and we'll see you on the next webinar, which is in about a month from now. Jason, again, thank you for your time.
Jason: Thanks Mike, thanks everybody.
Mike: Thank you.
Jason: Have a good spring. Bye.
Jason Isaac 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 19, 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.
Jason Isaac, CAIA, CFA
Portfolio Manager, Global Equity - Cumberland Investment Counsel Inc. An affiliate of NCM Asset Management