Year-to-date to August 31, the Ninepoint Focused Global Dividend Fund generated a total return of -11.42% compared to the S&P Global 1200 Index, which generated a total return of -13.90%. For the month, the Fund generated a total return of -0.37% while the Index generated a total return of -2.06%.
After a nice summer rally from the June lows, with the S&P 500 rallying just under 20%, the market started rolling over by mid-August and the S&P 500 closed the month down approximately 8.5% from the intra month highs. Given the number of cross currents in the markets today, it is tough to find a concrete explanation for the moves, other than sentiment was likely horribly negative at the lows and likely overly optimistic at the highs. Investor positioning reflected this dynamic and the thin trading liquidity during the quiet summer months probably amplified some of the swings.
However, we would suggest that the thesis that the two consecutive negative GDP prints in Q1 and Q2 would allow the Fed to pause the tightening cycle earlier than expected or even “pivot” to interest rate cuts by early-to-mid 2023 was unrealistic. Chairman Powell essentially reaffirmed the Federal Open Market Committee’s firm commitment to price stability during his speech at the most recent Jackson Hole conference. The language was blunt and to the point: “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Unsurprising, the equity markets did not like hearing the message so clearly articulated and continued to slide into September.
Therefore, the risks of a monetary policy-induced, cyclical recession are rising since inflation continues to remain elevated. Looking at inflation, the most recent CPI report was unchanged in July (released on August 10) but over the last 12 months, the index increased 8.5%. The core CPI (all items less food and energy) rose 0.3% in July, a slower increase than in April, May and June but increased 5.9% year over year, still an uncomfortable level. Thankfully, weekly average gasoline prices have declined approximately 25% from all-time highs, which at least provides some meaningful relief to the consumer. But the futures curve is currently pricing additional hikes at the September, November, and December FOMC meetings, implying a Fed funds rate of approximately 3.75% by December. The probability of monetary policy easing in 2023, once suggesting almost 50 bps worth of cuts, has now almost entirely been priced out.
Despite the fear of an impending recession, the economic data has remained remarkably resilient. For Q1 2022, the actual EPS growth rate was 4.4% according to S&P Global and for Q2, the blended EPS growth rate (with >99% of the S&P 500 companies having reported actual results) was 6.3% according to FactSet. Encouragingly, earnings estimates have been stable at around $230 for 2022 and $245 for 2023 but, admittedly, the September conference season does provide an opportunity to reset expectations. But importantly, the labour market remains solid, with the August non-farm payroll report indicating the creation of 315,000 new jobs, according to the US Bureau of Labor Statistics. Some of the details of the report were supportive of the “peak-inflation narrative”, because although the unemployment rate ticked up to 3.7% from 3.5%, the labour force participation rate improved by 0.3% over the month (increasing slack in the jobs market should reduce the risk of a wage-price spiral and an even more aggressive response from the Fed). Perhaps the equity markets can best be described as oscillating between balancing decent but backward-looking data today with the threat of potential weakness tomorrow, trying to weigh soft-landing versus recession valuation scenarios.
So, given the incredible amount of noise, we are focused on watching for either the negative earning revision cycle to the bottom or a Fed pause to signal the eventual inflection toward a return to economic growth. In keeping with our mandates, we are concentrating our efforts on free cash flow positive, high quality, dividend growth companies and real asset investments given our positive assessment of the risk/reward outlook over the next two to three years.
Top contributors to the year-to-date performance of the Ninepoint Focused Global Dividend Fund by sector included Communication (+149 bps), Energy (+98 bps) and Industrials (+9 bps) while top detractors by sector included Information Technology (-364 bps), Consumer Discretionary (-294 bps) and Financials (-149 bps) on an absolute basis.
On a relative basis, positive return contributions from the Communication (+372), Information Technology (+145 bps) and Industrials (+141 bps) sectors were offset by negative contributions from the Energy (-73 bps), Consumer Staples (-34 bps) and Consumer Discretionary (-16 bps) sectors.
We are currently overweight the Energy, Industrials and Health Care sectors, while underweight the Financials, Information Technology and Materials sectors. Although the US economy has posted two consecutive quarters of negative GDP growth (meeting the technical definition of a recession), corporate earnings and the labour market have remained resilient. But with the US Federal Reserve clearly committed to regaining control of inflation (even at the short-term expense of the GDP growth and some pain for workers), we have been focused on high quality, dividend growers that have been able to consistently grow both revenue and earnings through the cycle. We are carefully watching for either the negative earnings revision cycle to bottom or a Fed pause to signal that global equity markets can move sustainably higher once again.
The Ninepoint Focused Global Dividend Fund was concentrated in 28 positions as at August 31, 2022 with the top 10 holdings accounting for approximately 36.0% of the fund. Over the prior fiscal year, 20 out of our 28 holdings have announced a dividend increase, with an average hike of 18.9% (median hike of 6.7%). 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 August 31, 2022; 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.
Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), and other expenses all may be associated with investing in the Funds. Please read the prospectus carefully before investing. The indicated rate of return for series F shares of the Fund for the period ended August 31, 2022 is based on the historical annual compounded total return including changes in share 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.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.
Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540