The S&P/TSX added 3.0% in May with Information Technology (+15%), Consumer Discretionary (+8%) and Health Care (+6%) leading the market while Real Estate (+0.2%), Utilities (+0.6%) and Financials (+0.6%) all lagged.
Despite strong outperformance late in the month, our portfolio slightly underperformed as security selection in Industrials and sector underweights (driven by our bottom-up value philosophy) in both Financial Services and Information Technology detracted value. These losses were mostly offset by gains from security selection in Energy and Materials, along with our sector overweight in Consumer Discretionary.
In Energy, both Cenovus Energy (+19%) and Ovintiv (+21%) rallied on the back of the increase in oil prices (WTI +88% and Western Canada Select +145%). While both companies have performed strongly in the last two months, they still remain 50%-60% lower on the year and we believe provide decent upside potential, hence our rationale to continue to hold the positions.
In Materials, our positions in Teck Resources (+7%) and Interfor Corporation (+15%) as well as not owning Barrick Gold Corp. (-7%) added value. Teck and Interfor rallied with the general improvement in economic sentiment, as economically sensitive commodities increased in the month (copper +3% and met coal +6% in Teck’s case and lumber +13% in Interfor’s case).
In Consumer Discretionary, our sector overweight (based on our bottom-up value philosophy in finding a number of attractive names including: Linamar, Sleep Country, Gildan Activewear) added value as the sector outperformed by 5%.
In the Industrials sector, our positions in Westshore Terminals (-2%) and ATS Automation (-3%) detracted value. Both Westshore and ATS Automation have performed well over the last few months relative to the market. However, with the rebound in asset values, they have lagged other stocks in the Industrials’ sector, which are more economically sensitive. We continue to find both names attractive and believe that decent upside potential exists.
In Financials, our sector overweight (based on our bottom-up security selection) detracted value as the sector underperformed by ~2%. However, our positions in CIBC (+7%) and CI Financial (+10%) both added value, offsetting some of the sector losses. CIBC and all the banks reported Q2 results. While there was a wide range in the provisions for credit losses taken (depended on management’s decision to take provisions quarter by quarter versus all at once), there were a number of positive surprises. These included strong Capital Markets activity, resilient Tier I Capital levels (range from 10.9% to 11.7% versus OSFI requirements of 9%), and as expected, no impacts on dividend payments. We remain overweight the banks with positions in CIBC, BNS, Royal Bank and TD Bank. CI Financial rallied because of the market recovery impact on its AUM. Quarterly results also provided the proof point that their re-organization is well under way and that CI will emerge stronger post COVID-19. Balance sheet and capital allocation continues to be managed conservatively. We continue to find CI Financial attractive.
Our Information Technology sector underweight detracted value. Shopify (+18% - no position held) remains extremely expensive (8400X 2020 estimates with GAAP profitability in 2024). While we acknowledge that Shopify has built an impressive e-commerce platform that is taking market share, a lot can change in the technology (software) space before the company sees any reasonable level of profitability. In addition, as such we are not prepared to commit client capital to a binary outcome like this.
Towards the end of the month, we had a number of strong days of relative outperformance as the market began to see through the current economic slowdown. It demonstrates that when the market gets more optimistic about the economic outlook, that performance can reverse pretty quickly. While we know that our positions are very attractive, we do not know when the market will start to recognize this, as we do not believe in trying to time markets. Instead, we focus on our fundamental bottom-up analysis of earnings, cash flow and book value, investing in companies that trade at a discount to their intrinsic worth (knowing that market fundamentals will reassert themselves over the long term).
Ratul Kapur, CFA
Scheer Rowlett & Associates - Sub-Advisor
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 May 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 May 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