Ninepoint Enhanced Equity Strategy

June 2018 Commentary

Print

Market leadership swung quietly back to technology in May and June with the S&P Info tech sub index up >7%, after experiencing a momentum meltdown in April. We used the sell-off as an opportunity to add to Microsoft and Facebook as discussed in our April commentary.

Energy equities experienced a pullback in late May on risks of OPEC production increases only to rally back in June. We remain bullish on energy equities and believe that current already well anticipated production increases only shift supply forward and don’t much change the aggregate tightness the market is likely to experience in the coming years (barring a global recession).

Financials, an area of the market we believe offers good value at current levels, underperformed this month on rising concerns over the growth impact of recent trade spats, deposit beta’s and broad risk off sentiment. We believe the recent CCAR results are quite positive as they offer banks the ability to release substantial capital back to shareholders. While we acknowledge that positive earnings revisions for 2019 for financials are less likely at this juncture, we see double-digit earnings growth, sustainable capital returns and low relative valuation offering an attractive risk reward.

The last several months have seen an acceleration in political turmoil in Europe as well global trade concerns. With the formation of a government last month in Italy, markets have de-risked some of the European monetary Union concerns near-term. We think headline risks remain elevated but an exit of Italy from the EU is a very low probability tail risk anytime soon. On the other hand it is becoming clearer that trade conflict is likely to continue escalating as the first round of U.S. tariffs on Chinese goods hit the first week of July, prompting an immediate response from China. Trump has already looked to initiate an additional $200B worth of import tariffs in a tit-for-tat response to China’s tariffs.

Increased trade tension has lead to a considerable sell-off in industrials given their global supply chains along with other cyclical sectors such as financials. We had already lowered our weight in industrials in March/April largely due to our concerns over peaking near-term PMI’s and stretched valuations, with the trade risks an additional negative dynamic that we knew was certainly brewing in the background yet difficult to price. However, coming into this quarter we have increased our exposure to industrials again using call options as stock replacements, viewing the risk as more balanced on the recent decline in share prices. This position offers us similar upside to a plain long position on a 4-6% move but with downside limited to just the premium invested.

If a trade war continues to evolve ahead of expectations the sector likely has considerable downside and we will only lose the moderate premium we have added coming into the quarter. However, if no escalation in trade rhetoric occurs we suspect that a sharp re-rate is possible near-term.

We also see broad market equity options currently priced at a level where upside optionality on the SPY ETF appears much more attractive to us relative to several months ago with upside implied volatility near the lows of the last several years (chart 1).

Chart 1

Source: Bloomberg

We re-initiated this position in early July as trade concerns set-in and the market sold off. We can effectively replace and add some of our upside market exposure cheaply with call options, with only our premium at risk. If the wall of worry we are climbing leads to some further equity upside as economic data could potentially continue to improve vs. expectations in the coming months, the move could be quicker than many imagine. As discussed this still manages the risk of a larger correction given only our premium is on the table.

 The Enhanced Strategy Team

 

1 All returns and fund details are a) based on Class/Series F shares/units; b) net of fees; c) annualized if period is greater than one year; d) as at June 29, 2018; e) inception date for Ninepoint Enhanced Equity Class is 04/16/12. The index for the Ninepoint Enhanced Equity Class; Ninepoint Enhanced Long Short; and Ninepoint Enhanced Long Short RSP is 50% TSX & 50% S&P 500 (CAD) Blended Index and is computed by Ninepoint Partners LP based on publicly available index information. The index for the Ninepoint Enhanced US Equity Class is S&P 500 TR USD and is computed by Ninepoint Partners LP based on publicly available index information.

The risks associated with investing in a Fund depend on the securities and assets in which the Fund invests, based upon the Fund’s particular objectives. There is no assurance that any Fund will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Fund will be returned to you. The Funds are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Fund’s prospectus or offering memorandum before investing.

Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), other charges and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. The indicated rate of return for series F units of the Fund for the period ended June 29, 2018 is based on the historical annual compounded total return including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners LP is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540

Investment Team

Related Funds