Ninepoint Convertible Securities Fund

Fund Overview

The Ninepoint Convertible Securities Fund (“Fund”) seeks to provide unitholders with income and long-term capital appreciation. To achieve the Fund’s investment objective, the Fund will look for opportunities to participate in the potential growth of the common stocks’ underlying convertible securities, while seeking to earn income that is generally higher than the income the common stocks would provide.

The Fund is advised by the Sub-Advisor, Columbia Management Investment Advisers, LLC (“Columbia”), an affiliate of Columbia Threadneedle Investments. Columbia Threadneedle Investments is a leading global asset management company that offers investors, investment strategies across- equities, fixed income, asset allocation, customized multi-asset solutions and alternatives, including real estate. As of September 30th, 2022, Columbia Threadneedle had 650+ investment professionals based in North America, Europe, and Asia Pacific, and manages approximately US$546 billion in assets on behalf of institutional and individual investors. The firm is co-headquartered in Boston, Massachusetts for its North American business and in London, United Kingdom for its EMEA and Asia Pacific businesses. Investment teams are predominately located in the United States and the United Kingdom.

Ninepoint Convertible Securities Fund returned -0.58% (net of fees) in the fourth quarter. The Fund underperformed the 0.18% return of its benchmark, the ICE BofA All Convertibles, All Qualities Index. (All returns in CAD).

Market Overview

Convertible securities produced narrow gains in the quarter, as most financial assets rallied on expectations that the U.S. Federal Reserve could be poised to shift to a more accommodative policy in 2023. The category was unable to keep pace with the stronger returns for either equities or bonds, however. The convertible market remained under pressure from its tilt toward growth companies, which was a headwind, given that the value style strongly outperformed. This continued a trend that was in place for the full calendar year, during which the index returned –12.80% and experienced its largest down year since 2008.

The new-issue market remained quiet. Only 21 new issues came to the market in the quarter, bringing the total for the year to 58. The value of new issuance for the quarter and year was $8.5 billion (USD) and $28 billion (USD), respectively, well below the total for the same time periods in 2021.

Notably, new issuance was not enough to make up for the total amount of convertibles that matured or were otherwise removed from the market in 2022. Although the decline in new-issue supply reflected the combination of difficult market conditions and the higher cost of capital, we also think reduced supply helps provide a stronger foundation for prices.

Quarterly Portfolio Recap

The Fund had a number of notable winners in the health care sector in the quarter, including two diabetes management companies. The securities of one of these companies rallied after the Food & Drug Administration (FDA) approved a new device for launch in 2023, and the second company continued to see robust growth from its own new device that was released earlier in the year. A health care company providing cancer screening and diagnostic text products, a biopharma technology platform company and a medical devices company were also strong performers in health care.

Elsewhere, a cloud platform for businesses to manage spending, was a top performer thanks to a takeover from a private equity firm. Holdings in a global cruise holding company and various airline issues were additional contributors amid rising optimism about the outlook for travel spending.

On the negative side, a position in the convertibles of an American pharmaceutical company that specializes in oncology treatment products was a significant detractor. The FDA didn’t approve the company’s key drug for new indications, forcing it to declare Chapter 11 bankruptcy. We expected the company would come back to investors to negotiate a restructuring, but the company instead surprised us by throwing in the towel. It is relatively rare for one of our holdings to default; this has only occurred about once a year on average over the past decade. Our position in an internet security company also detracted, as the convertible we hold has a high degree of equity sensitivity and was therefore hurt by a downturn in the company’s common stock. A semiconductor producer and a cloud security provider also detracted from results amid broader weakness in the technology sector.

Outlook

Although headlines and worries about Fed policy may continue to affect convertibles’ near-term returns, we believe the asset class can deliver improved performance in 2023. As we noted last quarter, a large percentage of the market is made up of securities whose prices have fallen below par. Providing the issuers don’t default, these securities will move back to par over time – meaning there should be an element of price appreciation to augment the category’s yield. Further, the convertible market’s equity sensitivity remains deep on the low end of the historical range, and not far above where it stood during the global financial crisis. This helps limit the category’s potential downside even if the broader environment remains challenging. We believe these factors, in combination with the favorable supply-and-demand conditions discussed previously, indicate that convertibles are well positioned to provide investors with an attractive risk/return profile in the year ahead.

Regards,

David King, CFA
Columbia Threadneedle Investments
Sub-Advisor to the Ninepoint Convertible Securities Fund