Year-to-date to April 30, the Ninepoint Focused Global Dividend Class generated a total return of -3.83% compared to the S&P Global 1200 Index, which generated a total return of -6.30%. For the month, the Fund generated a total return of 8.76% while the Index generated a total return of 7.67%.
The COVID-19 outbreak has resulted in a full-stop to the global economy in order to prevent the uncontrolled spread of the deadly virus. Recent economic data points have been almost unbelievably bad, with initial US Q1 GDP estimates coming in at -4.8%, non-farm payrolls dropping 20.5 million (implying an unemployment rate of 14.7%) and approximately 33.5 million Americans filing initial unemployment claims. The physical, emotional and financial costs are quickly rising and will likely get even worse for many in the coming months.
Given what we know today, it is unsurprising that the S&P 500 plunged 35% peak to trough in the fastest bear market in history, which is consistent with a sharp but short recession. But despite fears of a worst-case scenario and many investors’ skepticism, the market has now recovered more than 50% of its decline after bouncing from the March 23, 2020 lows. Admittedly, much of the rally has been driven by a few mega-cap tech and healthcare names but in recent weeks even the more cyclical sectors have ripped higher. So how can we reconcile the explosive market recovery versus the abysmal economic data?
Conceptually, we view the dynamics of the recession more like a natural disaster-induced full-stop than a monetary policy-induced slowdown. Therefore, we have been watching three pillars of the response to estimate the duration of the downturn and the probability of a successful restart. As we’ve discussed previously, healthcare, monetary and fiscal policy have now taken a what-ever-it-takes mentality, which has provided a tremendous amount of support to the economy and markets. Importantly, this implies that the economic data and even earnings estimates (current consensus is already calling for more than a 20% decline on a year over year basis) are unlikely to continue to accelerate more meaningfully to the downside. And so, the improvement in the second derivative of various growth metrics and the anticipation of an inflection point have acted as a powerful tailwind behind the recovery rally.
Despite the market rally and some early signs that the worst has past, we are mindful that risk remains elevated and a pullback could happen at any time. The biggest problem that we see today regarding the reopening of the economy is that the United States has “flattened” but not “bent” the curve of active cases. More widespread testing, more effective therapies or treatments and clear progress toward a vaccine will be required before we can hope to return to some form of normality. But once the cumulative number of cases in the US begin to decline, we will become more confident in a sustained economic recovery and, potentially, a sustainable rotation into more cyclical sectors of the market.
Top contributors to the year-to-date performance of the Ninepoint Focused Global Dividend Class by sector included Real Estate (+88 bps), Consumer Discretionary (+75 bps) and Information Technology (+69 bps) while top detractors by sector included Financials (-130 bps), Industrials (-120 bps) and Materials (-108 bps) on an absolute basis.
On a relative basis, positive return contributions from the Financials, Energy and Consumer Discretionary sectors were offset by negative contributions from the Health Care, Utilities and Materials sectors.
We are currently overweight the Information Technology, Real Estate and Health Care sectors, while underweight the Materials, Financials and Energy sectors. We are also holding a much larger than normal cash position (approximately 15%) given the difficulty in quantifying the impact of the COVID-19 outbreak on the economy as the tentative reopening begins.
At the stock specific level, top contributors to the year-to-date performance included Amazon (+132 bps), Microsoft (+103 bps) and Equinix (+82 bps). Top detractors year-to-date included FMC Corporation (-108 bps), NIKE (-102 bps) and Brookfield Infrastructure (-80 bps).
In April, our top performing investments included Amazon (+104 bps), S&P Global (+51 bps) and Microsoft (+50 bps) while Sanofi (-19 bps), Loblaw (-18 bps) and Brookfield Infrastructure Partners (-11 bps) underperformed.
From a stock picking perspective, we are thinking of our investable universe in four buckets. Certain businesses that will never return to prior levels, quality cyclical business that require a return to economic growth, secular growers that have de-rated relative to historic levels and certain businesses that can thrive in the current environment. Our performance through the downturn benefitted greatly from an outsized cash position and an emphasis on buckets three and four, as defined above. But as the economic inflection nears and earnings revisions bottom, we will rely on our investment process to identify more cyclical investment opportunities to add to our portfolios in order to keep pace with the recovery rally.
The Ninepoint Focused Global Dividend Class was concentrated in 26 positions as at April 30, 2020 with the top 10 holdings accounting for approximately 36.6% of the fund. Over the prior fiscal year, 17 out of our 26 holdings have announced a dividend increase, with an average hike of 9.1%. We will continue to apply a disciplined investment process, balancing various quality and valuation metrics, in an effort to generate solid risk-adjusted returns.
Jeffrey Sayer, CFA
1 All returns and fund details are a) based on Series F shares; b) net of fees; c) annualized if period is greater than one year; d) as at April 30, 2020; e) 2015 annual returns are from 11/25/15 to 12/31/15. The index is S&P GLOBAL 1200 TR (CAD) 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; Capital depletion risk; Capital gains risk; Class risk; Credit risk; Currency risk; Cybersecurity risk; Derivatives risk; Exchange traded funds risk; Foreign investment risk; Inflation risk; Interest rate risk; Liquidity risk; Market risk; Securities lending, Repurchase and reverse repurchase transactions risk; Series risk; Short selling risk; Specific issuer risk; Tax risk.
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