Year-to-date to December 31, the Ninepoint Focused Global Dividend Fund generated a total return of -8.64% compared to the S&P Global 1200 Index, which generated a total return of -10.78%. For the month, the Fund generated a total return of -3.93% while the Index generated a total return of -4.20%.
Ninepoint Focused Global Dividend Fund - Compounded Returns¹ As Of December 31, 2022 (Series F NPP964) | Inception Date: November 25, 2015
|S&P Global 1200 TR (CAD)||-4.2%||-10.8%||9.0%||8.3%||-10.8%||6.9%||8.3%||9.0%|
With the traditional positive seasonality failing to materialize in December, 2022 will go down in history as a miserable year for both equity and fixed income investors. Across the board, the performance stats are disappointing. In the US, the tech-heavy NASDAQ Composite declined 32.5%, the S&P 500 TR declined 18.1%, and Dow Jones Industrial Average declined 6.9%. Global equity markets weren’t much better, with the S&P Global 1200 TR (in CAD) down 10.8%. Canadian equity investors suffered less than most, given the relatively hefty weighting of the oil & gas sector, with the S&P/TSX Composite TR down “only” 5.8% as the S&P/TSX Energy TR sub-sector gained 30.3%. In a balanced portfolio, the offset to equity weakness is usually fixed income strength but even the Bloomberg Barclays Global Aggregate bond index declined 16.3%, with the Bloomberg Barclays US Aggregate down 13.0% and the Bloomberg Barclays Canada Aggregate down 11.3%. If you weren’t heavily overweight the Energy sector or cash, it was a challenging year to put it mildly.
Looking back at 2022, it felt like the news kept getting worse and worse as the year progressed. We started with the new Omicron Covid-19 variant, which led to widespread lockdowns in China due to the lack of an effective mRNA vaccine and low vaccination rates overall. We then had to face the Russian invasion of the Ukraine, with its horrific human toll and unimaginable suffering for those involved. From an economic perspective, the combination of these events led to massive supply chain disruptions and spiking energy costs. Consequently, the “inflation is transitory” narrative began to look overly optimistic, as inflation exploded higher with the US year-over-year CPI peaking at 9.1% in June. In response, the US Fed embarked on the fastest interest rate tightening cycle ever, hiking rates 425 bps from March to December 2022. Market participants sometimes refer to the phrase or mantra “don’t fight the Fed”, and this past year was a stern reminder of the impact of tightening monetary policy on various asset classes.
Importantly, higher interest rates percolate through the economy and the financial markets through various interconnected mechanisms. Overall growth slows as borrowing becomes more expensive, and consumer confidence weakens as job less mount. In turn, revenue growth slows or even declines, and margins weaken as pricing power softens and interest costs rise, resulting in multiple compression and negative earnings revisions. We can see how this played out in 2022, as the price to earnings multiple of the S&P 500 compressed from approximately 21x NTM estimates at the beginning of the year, bottomed at just 15x NTM estimates in October before rebounding to 17x NTM estimates today (according to Refinitiv). We have also seen a quite dramatic negative earning revision cycle, with 2023 S&P 500 earnings estimates declining from $255 at the end of Q1 2022 to $225 today, implying flat earnings growth this year, which may still prove to be optimistic once companies begin reporting 2022 financial results and potentially adjust guidance for 2023.
But despite the mayhem in the world, the difficult economic conditions, and the challenging equity markets, we can still find reasons to be optimistic going forward. First, back-to-back down years are very rare for the broad equity markets. In fact, the S&P 500 has only experienced two or more consecutive years of negative performance twice since 1957, once in 1973 to 1974 and once again in 2001 to 2003. Further, if we examine the 18 years of negative performance (including 2022), we can observe that the market has rebounded 14 times the subsequent year, a win rate of approximately 80% and an average gain of 15% (according to Macrotrends.net). Second, several academic studies have shown almost no correlation between earnings growth and equity market returns. Instead, we are focused on watching for the end of the negative earnings revision cycle as expectations reset to realistic levels. Finally, we are looking for the Fed to pause monetary tightening in 2023, with perhaps two more hikes of 25 bps each, reaching a terminal Fed funds rate of 5.0%, possibly as soon as March or May. We may not see a pivot to easing monetary policy in 2023 but we thank that a pause would be supportive enough for equity valuations.
To summarize our outlook, in an environment of moderating inflation but slowing growth through 2023, the most important drivers of investment performance will likely be valuation, balance sheet strength and the ability to consistently generate cash flow and earnings. Also, a greater component of total returns will likely come from dividend yields, which meshes nicely with our investment philosophy. 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 Energy (+142 bps), Communication (+92 bps) and Industrials (+55 bps) while top detractors by sector included Information Technology (-356 bps), Consumer Discretionary (-115 bps) and Financials (-97 bps) on an absolute basis.
On a relative basis, positive return contributions from the Communication (+384 bps), Consumer Discretionary (+257 bps) and Information Technology (+225 bps) sectors were offset by negative contributions from the Health Care (-93 bps), Energy (-94 bps) and Financials (-78 bps) sectors.
We are currently overweight the Consumer Staples, Health Care and Energy sectors, while underweight the Financials, Materials and Communication sectors. Given the global slowdown and commentary from the US Federal Reserve suggesting that interest rates will remain higher for longer, we have been focused on high quality, dividend growers that have historically been able to protect both revenue and earnings growth through the cycle. Although we expect the Fed to pause interest rate hikes in 2023, we are carefully watching for the negative earnings revision cycle to bottom and unemployment to peak to signal the start of a new equity bull market.
The Ninepoint Focused Global Dividend Fund was concentrated in 30 positions as at December 31, 2022 with the top 10 holdings accounting for approximately 36.2% of the fund. Over the prior fiscal year, 23 out of our 30 holdings have announced a dividend increase, with an average hike of 9.0% (median hike of 7.2%). 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 December 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 December 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