Ninepoint Enhanced Equity Strategy

December 2018 Commentary

Global equity markets exhibited considerable downside in December with the S&P 500 almost 15% lower only to rally back in the post-Christmas sessions to down just over 9% on the month. In our view, financial markets quickly moved from fears over slowing global growth (and therefore earnings growth) to starting to discount a pending recession as fears over a growing trade war and slowing economy in China took hold. Confidence in equity valuations was further undermined by Federal Reserve member statements that initially seemed to be less concerned about negative market price action than many had initially hoped (the removal of the Fed “put”). Early January saw a considerable rally on the reversal of central bank hike “angst” as several fed officials offered more dovish comments on forward rate hikes leading the market to regain much of the December decline. As we noted last month, our general sense has been that 2019 earnings estimates for the S&P 500 are starting to look much more achievable at ~5% growth given our expectations for the broader economic environment. We still expect a bit of caution during quarterly conference calls for 2019 guidance as companies manage a stronger US dollar and weakness in emerging market growth, however we think markets are much more appropriately priced to absorb these risks. Several factors suggest to us that near-term upside resistance on the S&P 500 at 2800 or 16x 2019 earnings is likely until either trade negotiations or global economic data show signs of improvement.

December capped an extremely frustrating year for our strategy. While our hedge book had a meaningful positive contribution during the sell-off, our equities performed considerably worse than we had forecast would be the case during a downdraft, especially in the Enhanced Equity fund. Energy and Financials have been our largest weights given their compelling value and strong underlying business fundamentals. Although they continued to report solid results over the course of the year, overarching fears of a global recession and momentum seeking trading programs continued to sell these sectors despite their low valuations. As the market decline accelerated into Christmas, our financial and energy positions bottomed out first, allowing our curve to flatten out and enabling a much more limited downside capture. During the period from December 17th-24th, the worst of the equity sell off, when the S&P 500 traded down 8%, we were able to manage to only an ~1.3% loss, with several days of positive performance when the market was deeply in the red. During this sell off, we were able to take some profits on a portion of our hedge book by rolling our downside protection to lower strikes. This allowed us to maintain a similar projected downside curve and still lock in some gains. After this most recent rally into earnings season, we have increased our hedges somewhat.

Since the lows, many of our financial and energy stocks have rallied back, improving some of the downdraft we experienced relative to the market’s performance and what we projected our downside curve to be. In terms of several of our financials, news that Value Act, a value oriented activist asset manager, was putting activist pressure on Citi’s management team pushed Citigroup’s equity value higher. We noted in a recent webcast the considerable discount that Citigroup and Bank of America, two of our largest holdings are trading at relative to regional bank peers despite in-line to considerably better cost improvement and “core” retail return metrics (Graph 1). Both have recovered meaningfully so far in January but remain extraordinarily good value. Manulife during the lows of December, traded down to ~6X FWD earnings. This price implied investors were getting most of the North American business for very little to nothing once you adjust for the value we believe exists in the Asian business.

Graph 1: Citi Group and Bank of America Relative Operating Performance vs. Peers (Dec 3rd 2018)

 Source: Bloomberg, BMO Capital Markets, Ninepoint Partners

Parex Resources, our top energy holding, has rallied back ~40% from the lows reached in late December as the company announced strong production growth and the initiation of a stock buyback program for 10% of its outstanding shares. Parex continues to grow production at over 20% YoY and we expect reserves to continue to increase even faster. The company sells into the Brent market (over $60/barrel), funds its capex out of cash flow and produces free cash flow on top of capex of over $300M at current crude prices. Despite all of this, the company continues to trade at a substantial discount to its already cheap energy peer group.

In summary, although growth is definitely slowing back toward trend, we do not see either a U.S., Canadian or global recession on the horizon. The Fed will likely remain on “pause” until it sees further evidence of accelerating growth or inflation and is unlikely to hike rates further until then. Absent a severe misstep on either US/China trade or Brexit, both of which are of course possible, it is hard to see what would derail a decent year in equity markets. As much as the much better performance for our strategy so far in January has been welcome, we remain focused on achieving long term performance more in line with our historical rate, which is considerably higher than what has occurred over the past three years. We don’t see any reason why we can’t achieve that and 2019 (so far) has been a good start.

Until next month,

The Enhanced Team

Ninepoint Enhanced Equity Class - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 3.7% 12.5% 5.1% 2.3% -5.5% 2.5% 1.4% 4.4%
Index 4.0% 16.7% 9.8% 12.4% 14.4% 13.5% 11.0% 13.9%

Ninepoint Enhanced Balanced Class - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 1.8% 6.5% 3.0% 0.8% -4.0% 2.3% 1.5% 2.2%

Ninepoint Enhanced Balanced Fund - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 1.7% 6.1% 2.9% 1.1% -3.4% 2.6% 1.7% 3.8%

Ninepoint Enhanced US Equity Class - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR Inception
Fund 1.8% 8.2% 3.0% 2.4% 0.3% 4.1% 1.6%
Index 4.0% 18.2% 9.5% 9.8% 13.5% 14.9% 11.6%

Ninepoint Enhanced Long Short Equity Fund L.P. - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR 10YR Inception
Fund 3.3% 6.8% 3.7% 1.2% -5.4% 2.2% -0.1% 1.9% 2.2%
Index 4.0% 16.7% 9.8% 12.4% 14.4% 13.5% 11.0% 13.1% 8.4%

Ninepoint Enhanced Long Short Equity RSP Fund - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 3.3% 6.4% 3.4% 0.5% -6.8% 1.2% -0.6% 1.2%
Index 4.0% 16.7% 9.8% 12.4% 14.4% 13.5% 11.0% 12.3%

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 December 31, 2018; e) inception date for Ninepoint Enhanced Equity Class is 04/16/12.2 50% of S&P/TSX Composite TRI; 50% of S&P 500 TRI CAD and is computed by Ninepoint Partners LP based on available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: capital depletion risk (series T and series FT securities only); capital gains risk; class risk; commodity risk; concentration risk; credit risk; currency risk; cybersecurity risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; interest rate risk; market risk; regulatory risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; tax risk.

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 December 31, 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.

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