Commentary: NCM Pension Portfolios

TRANSCRIPT

Good afternoon. I'm John Poulter. I'm the manager of the NCM Pension funds. Today is Monday, February 12th, 2024. And I'm going to tell you about some of the trades that I've been doing in our pension funds and provide a little bit of the market outlook that's driving these changes.

I've been pretty active since the beginning of the year and will likely remain somewhat active as we move through this first quarter. And some of this has to do with what we're seeing in markets in general and some of it has to do with some sector moves that have been made by the managers at NCM.

But, you know, it's hard not to see price risk building in certain areas of the equity markets and we see this as we watch the Magnificent Seven now drive indices higher. This activity has led me to lower the exposure to these types of companies, and I've lowered my exposure by selling something called the Nasdaq 100 ETF or better known as the Triple Qs. And this is an ETF that follows the biggest companies on Nasdaq. And by virtue of that fact, the Magnificent Seven sits pretty much at the top of that particular index, meaning that particular index is developing price risk based on those companies.

So I had bought the Nasdaq 100 last year to try to create some higher market beta, and I certainly did positively experience that with this particular instrument. And I reduced our global holdings in order to go into the Triple Qs and another trade that I did at that same time, which was in the second quarter of last year, was also buy the S&P 500.

So I'd now move the Triple Qs out and are now looking very closely at moving the proceeds of that particular trade back into the global arena and specifically the NCM Core Global fund. The fund has also seen some trimming in some Canadian names, and these are Canadian positions that are followed by other managers at NCM. And I'm simply following them by eliminating or trimming back primarily energy holdings.

So, you know, we're taking profits here, but we're also trying to stay invested. Generally lower rates and a decent economy or the anticipation of lower rates and a decent economy coupled with strong earnings reports are all supporting equity markets, particularly in the USA.

And also worth noting, in my ETF package, I've also trimmed cybersecurity and global water. These are two different thematic ETFs that I own that represent the new economy, which is cybersecurity and a host of other ETFs. And then, of course, global water is an infrastructure exposure that we have. Both have seen decent moves, and I've added some of those proceeds into something called global agriculture, another one of our secular themes. But the primary proceeds of all of the trading that I've been doing, which has primarily been selling, have been getting redirected back into the NCM Core Global fund.

And if you look at the fund itself, overall, the allocation in the pension funds are generally neutral, meaning that the split between stocks and bonds is kind of at a higher or at its average levels, if not a little bit of a tilt towards equity as far as an exposure goes. So speaking with some of our other PMs, it seems that most are interested in taking some profits and most are interested in taking profits in the Magnificent Seven type names.

But even given the profit taking, we are still maintaining some level of exposure here not to completely exit from the growth exposure that we have in the portfolios, but the diversification will lead us to the fact that our global portfolios also hold meaningful weights in health care and staples. And as I said, these are for the purposes of diversification, not necessarily trying to move significantly to a defensive positioning.

We've also, through all of last year in our global position been tilting more towards cyclical names and these are names that are going to benefit from decent economic conditions, which is part of our forecast in our allocation team. Equities today are anticipating central bank easing, which we believe is imminent sometime this year.

And then there's another thing that we keep an eye on, and that's credit spreads. And these are the the spreads, the interest rates that high yield indices produce. And these indices have been performing very well. And they're also indicating an appetite for higher risks even in credit markets. And that's another vote of confidence for economic conditions and again, specifically economic conditions in the USA. So the strong earnings reports we're seeing in many of our companies are also demonstrating that decent and solid economic backdrop.

And we've enjoyed some relatively good performance in a number of our companies that have seen very positive earnings surprises on the upside and Meta, which made a record on the Nasdaq a week or two ago, is one of those examples.

So overall, the valuations in our portfolio have moved a little higher with the market, but we still trade at a little bit of a discount to the market on valuations and the quality level of the individual companies that we hold also remain comfortably at a higher quality level than the market in general. And so I'd like to think that we've got a portfolio that's got a great potential and ultimately, because of its profile, has less risk than the market in general or specifically the Triple Qs and also those Magnificent Seven, what they could potentially mean to the S&P 500.

So I'll switch gears a little bit here and just give a couple of very, very quick comments on fixed income, because that is part of the program in all of the pension portfolios. Our portfolio and our fixed income are allocated to reflect that we think the long end of the yield curve has normalized to some extent and might even be presenting a little bit of elevated risk. So that means on a trade basis we’re maintaining relatively short term fixed income vehicles in the credit portion of our portfolio.

We think there's great prospects for the normalization in the short end of the curve, and that almost guarantees a decent result in instruments at the shorter end of the curve. And that's because we all bonds that are discounted priced or have discount prices. That means that they were issued at $100 and they might be trading at $92 now. So there is a potential for a price gain either from the curve correcting or just a simple pull to par in a relatively short amount of time because they are short maturity bonds. Pull to par means that they simply move from $92 back to their hundred dollar mark.

So we've calculated a 4% capital appreciation potential or pull to par potential. We know that our coupon on average is 5.5% in the portfolio, so if we get a curve normalization this year, it is quite possible we might see returns at just the fixed income part of our portfolio between, you know, 8% and 9.5%. Now, there's no guarantees here, and that's just an estimate, but it's how the portfolios’ bonds are currently positioned.

And then finally, we think strong economies are supporting high yield issues and credit spreads continue to narrow. So we remain with a reasonable exposure to high yields in the pension portfolio fixed income allocations.

So that concludes my comments on my outlooks and my detail on some of the repositioning that I've been doing. Thank you very much.

Disclaimer:

John Poulter is a Portfolio Manager, with Cumberland Investment Counsel Inc.(CIC). CIC is the sub-advisor to its affiliate, NCM Asset Management Ltd. The information in this video is current as of February 12, 2024 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.