Year-to-date to September 30, the Ninepoint Focused Global Dividend Class generated a total return of 5.03% compared to the S&P Global 1200 Index, which generated a total return of 11.85%. For the month, the Fund generated a total return of -4.97% while the Index generated a total return of -3.92%.
September has lived up to its reputation as a particularly difficult month for investors. Several interrelated factors, that had generally been ignored until now, suddenly weighted on investor psyche and triggered a long-awaited correction in risk assets. We would characterize the drivers of the selloff into three main buckets: concern regarding the Fed tapering bond purchases or raising interest rates, anxiety regarding supply chain issues (and the ensuing inflationary pressures) and worries regarding political gridlock in Washington.
As we’ve discussed before, the path to monetary policy normalization was always going to be a tricky one, despite being well-telegraphed. Although Chairman Powell’s recent comments have been quite dovish, other members of the FOMC have been more hawkish. But the September 22nd FOMC meeting provided some clarity, with the official statement suggesting that the economy was making progress and “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted”. The subsequent press conference confirmed the prevailing view that asset purchases would be gradually reduced likely starting in November and that the tapering would continue through the middle of 2022. Powell, once again, took the time to articulate that a reduction in asset purchases is not intended to signal impending rate hikes, essentially confirming the Fed’s stance that tapering is not tightening. However, the statement and press conference were enough to finally push the US Treasury bond yield above 1.50%, which negatively impacted long-duration assets.
The second issue pressuring markets are the supply chain issues that have been impacting global manufacturing, thus creating transitory inflation across a wide range of industries. The extent of the problem can be seen by examining the semiconductor industry, where shortages are particularly noteworthy because of the almost ubiquitous nature of the component. The fallout from the semi shortage has hit the automotive industry hard, with US September light vehicle sales down 25% to just over 12 million units. Inventories have dropped to only 1 million units or approximately 25 days of supply, which has boosted the average transaction price 19% above last year’s level. Adding to the pain, commodity prices and shipping rates have spiked. We have seen a similar domino effect across various segments of the consumer discretionary and industrial manufacturing sectors. So, from an equity investor perspective, we need to be aware of the threat of margin compression and weaker profitability for certain industries. The situation, whether temporary or not, simply doesn’t help investor confidence today and the sectors and individual stocks most impacted have been understandably weak.
Finally, despite the optimism surrounding the new administration in Washington, infighting and partisan politics seem to be leading to gridlock at an inopportune time. Although Congress managed to pass a continuing resolution to avoid a government shutdown, we are still waiting for the debt ceiling to be raised, the Bipartisan Infrastructure Bill to be passed into law and negotiations for a broader social infrastructure spending bill to be concluded. The debt ceiling is the priority, with the potential for a default by mid to late-October, obviously an unpalatable scenario. However, we have been down this road before and most expect a resolution in a timely manner. In terms of the fiscal spending packages, it is disappointing that the Bipartisan Infrastructure Bill has not yet been approved, but we still expect a positive outcome due to the essential nature of the spending. Regarding the proposed $3.5 trillion social infrastructure spending package, signs of a compromise already seem to be emerging, but negotiations should be expected to continue right up to the self-imposed October 31 deadline. Uncertainty is never good for the equity markets but if we can get through this period, or even show some progress towards a positive outcome, the markets should respond in kind.
Despite the market setback in September, we remain generally optimistic regarding the investment outlook once we get through what could be a choppy October. Looking at valuations, with long-term interest rates still well below 2.0% (the US 10-year Treasury bond yield is now trading around 1.50%) and consensus earnings growth of 8% in 2022, forward earnings multiples should be expected to gently trend lower over time but remain elevated relative to historic levels. We are not expecting the onset of a meaningfully deeper correction, or a bear market, given that vaccination rates are up, Covid-19 hospitalizations and deaths are down, and the global economy is slowly reopening. Essentially, we think that this environment bodes well for the relative performance of our dividend and real asset strategies over the medium term.
Top contributors to the year-to-date performance of the Ninepoint Focused Global Dividend Class by sector included Financials (+258 bps), Industrials (+188 bps) and Communication (+131 bps) while top detractors by sector included Materials (-41 bps), Utilities (-25 bps) and Real Estate (-20 bps) on an absolute basis.
On a relative basis, a positive return contribution from the Industrials (+87 bps) sector was offset by negative contributions from the Information Technology (-175 bps), Energy (-89 bps) and Materials (-76 bps) sectors.
We are currently slightly overweight the Financials, Consumer Staples and Consumer Discretionary sectors, while slightly underweight the Information Technology, Materials and Industrials sectors. We have maintained relatively neutral sector allocations but have positioned for the middle phase of the investment cycle, where above-average earnings, cash flow and dividend growth should compensate for some degree of multiple-compression. Given the current environment, we have narrowed our focus almost entirely to businesses with at least a five-year track record of dividend growth or a significant share buyback program, both important mechanisms of returning excess cash flow to shareholders.
The Ninepoint Focused Global Dividend Class was concentrated in 30 positions as at September 30, 2021 with the top 10 holdings accounting for approximately 36.8% of the fund. Over the prior fiscal year, 24 out of our 30 holdings have announced a dividend increase, with an average hike of 7.1% (median hike of 7.0%). We will continue to apply a disciplined investment process, balancing various quality and valuation metrics, in an effort to generate solid risk-adjusted returns.
Jeffery 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 September 30, 2021; 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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