Ninepoint Concentrated Canadian Equity Fund

January 2020 Commentary

The S&P/TSX added 1.7% as momentum and the “safety trade” led the market, with Information Technology (+9%), Utilities (+8%) and Real Estate (+5%) taking the market higher, while Healthcare (-2.5%), Consumer Discretionary (-2%) and Materials (-2%) declined.

Our portfolio detracted value with security selection gains in Financials being insufficient to offset security selection losses in both Energy and Materials, along with our sector underweight in Information Technology.

In Financials, Element Fleet Management (+15%) added value. Element Fleet continues along the path, which began with new management and Board in 2018, of turning around the company’s operations and investments, as the company achieves and exceeds the cost setting goals as set out in their turnaround plan.
Despite the move in the share price, we continue to hold our position, which was re-initiated last month (December).

In Energy, our positions in Crescent Point Energy (-25%), Ovintiv (previously Encana) (-32%) and Cenovus (-13%) detracted value. These companies declined with the fall in oil prices as concerns rise that the coronavirus could cause a significant reduction in oil demand, particularly from China. While no one knows with any certainty the magnitude or duration of the demand impact, the market seems to be not willing to wait around, and is pricing in a dire and prolonged downturn. OPEC has begun discussions about restricting supply, but the uncertainty surrounding the spread of the virus could cause further oil price weakness in the short-term. Specific to Crescent Point, the company announced reduced capex for 2020 while maintaining production levels, and Encana announced that shareholders had approved their reorganization, which included a name change to Ovintiv and a move to domicile the business in the U.S. (which resulted in significant index selling in Canada). We continue to hold meaningful positions in all three names as our intrinsic values remain unchanged.

Similar to the move in energy, the Materials sector declined on concerns that the coronavirus would reduce demand for base metal commodities. In the concentrated equity portfolio, Teck Resources (-24%), Hudbay Mining (-25%) and Methanex (-14%) all detracted value. For Methanex, the decline was in line with lower oil prices (as methanol prices tend to follow oil prices) as the company announced year-end results – reporting earnings in line with expectations on higher sales, but lower realized prices. There was limited news regarding finding a partner for their Geismer 3 expansion project, however they did indicate that they were in the process of searching for an investment partner. We continue to favour all three names based on their attractive valuations.

Our IT sector underweight hurt performance (outperformed by ~7%) as Shopify (+19% - do not own) rallied. We still view Shopify as extremely expensive (trades at 530X adjusted consensus 2020 estimates) as the company is not expected to turn a profit on a GAAP basis until 2022. We believe the market is grossly underestimating the risk of competitors in the online portal hosting space and the limits this competition will place on the growth needed to justify Shopify’s current valuation.

Comparisons to previous outbreaks of other viruses have been completed and shared on the street. While the SARS (2003) outbreak took the S&P500 down 15% over 3 months, it also occurred at the time that the U.S. was invading Iraq. When the Ebola outbreak struck in 2014, the market declined 7% over 1 month. On both occasions, the market seemed to recover just as the number of confirmed cases peaked. However, how does one know when this will happen? It is easy to understand with history and hindsight, but as we have said in previous commentaries, we do not try to time markets. Instead, we focus on our fundamental bottom-up analysis of underlying earnings, cash flows and book value, investing in companies that trade at a discount to their intrinsic worth (knowing that market fundamentals will reassert themselves at some point in time). We do see times like this as one that can provide real opportunities for buying excellent companies at discounted prices and remain committed to executing on our bottom-up, value investment approach.

With Regards,

Ratul Kapur

Vice President & Portfolio Manager
Scheer, Rowlett & Associates Investment Management Ltd

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at January 31, 2020; e) since inception (March 29,2018). The index is 100% S&P/TSX composite Index and is computed by Ninepoint Partners LP based on publicly available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: ADR risk; Concentration risk; Credit risk; Currency risk; Cybersecurity risk; Foreign investment risk; Inflation risk; Liquidity risk; Market risk; Regulatory risk; Securities lending, repurchase and reverse repurchase transactions risk; Series risk; Small company risk; Specific issuer risk; Sub-adviser 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 January 31, 2020 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