Ninepoint Focused Global Dividend Fund

Summary

• Ninepoint Focused Global Dividend Fund had a YTD return of 6.41% up to October 31, compared to the S&P Global 1200 Index's total return of 10.55%.
• In October, the Fund generated a total return of 0.33%, while the Index had a return of -0.07%.
• The year experienced weak seasonality, with disappointing performance in August, a challenging September, and an underwhelming October. However, relief was provided after the October 31 to November 1 Fed meeting, which indicated a pause in the tightening phase.
• Earnings reports in October were better than expected, with a blended year-over-year earnings growth rate of 3.7%. Several sectors are expected to report positive year-over-year earnings growth, ending the earnings recession.
• The Fund is currently overweight the Energy, Information Technology and Industrials sectors, while underweight the Materials, Communication and Utilities sectors.
• The fund was concentrated in 28 positions, with the top 10 holdings accounting for approximately 42.5% of the fund. Over the prior fiscal year, 21 out of our 28 holdings have announced a dividend increase, with an average hike of 8.8% (median hike of 7.8%).

Monthly Update

Year-to-date to October 31, the Ninepoint Focused Global Dividend Fund generated a total return of 6.41% compared to the S&P Global 1200 Index, which generated a total return of 10.55%. For the month, the Fund generated a total return of 0.33% while the Index generated a total return of -0.07%.

Ninepoint Focused Global Dividend Fund - Compounded Returns¹ As of October 31, 2023 (Series F NPP964) | Inception Date: November 25, 2015

Weak seasonality seems to have played out once again in 2023. The month of August was mildly disappointing, September was pretty nasty, and October wasn’t that great either. However, the October 31 to November 1 Fed meeting thankfully provided some relief to bonds, equities, and most other asset classes. After last hiking in July, members of the FOMC committee voted to hold rates steady at 5.25% to 5.50% and Chairman Powell’s press conference essentially confirmed that the tightening phase of the cycle is now done. Importantly, we believe that the Fed was satisfied with the idea that the final spike in the US 10-year bond yield to 5.0% has effectively tightened financial conditions to a sufficient degree. We had previously identified the rate spike as the primary culprit of weakness across various financial asset classes and because peak rates have likely been reached, short sellers covered positions and dip buyers stepped in aggressively.

As expected, after 525 bps of tightening since March 2022, the economic data is slowing but remains relatively resilient. Specifically, the October PMI data was consistent with a slowdown as the ISM Manufacturing PMI remained in contractionary territory at 46.7% and the ISM Services PMI registered only 51.8%, down from September’s reading of 53.6%. Further, October’s nonfarm payroll report increased by only 150,000 jobs and the unemployment rate ticked up to 3.9%. But signs that fear had begun to dissipate were evident in the pullback in the price of crude oil and the pause in the rapid appreciation of the safe-haven US Dollar. Incorporating all the pieces of information into future projections, the forward curve is currently indicating almost no chance of another rate hike through January 2024, and almost four rate cuts in 2024. Perhaps 100 bps of anticipated easing in 2024 suggests an incorrectly dovish scenario (growth would likely have to weaken dramatically for that amount of Fed easing, which wouldn’t be good) but the odds of a soft landing are improving.

Beyond our obsession with macroeconomic variables, investors have faced an onslaught of earnings reports during October. With 81% of the S&P 500 companies having reported actual results, the blended year-over-year earnings growth rate is 3.7%, an improvement over prior expectations of a slight decline. If earnings can remain positive over the remainder of the reporting season, it would mark the first quarter of growth since Q3 2022. An end to the earnings recession would be welcome news, and eight out of the eleven S&P 500 sectors are expected to report positive year-over-year earnings growth. Ranked in order, they include the Communication, Consumer Discretionary, Financials, Information Technology, Utilities, Industrials, Real Estate and Consumer Staples sectors. As always, we are continually searching for companies that have been able to post solid earnings growth but still trade at acceptable valuations.

In an environment of moderating inflation but slowing economic growth through the balance of 2023 and into 2024, the most important drivers of investment performance will likely be valuation, balance sheet strength and the ability to consistently generate cash flow and earnings. In keeping with our mandates, we are concentrating our research efforts on high quality, dividend growth companies and real asset investments given our positive assessment of the risk/reward outlook over the next phase of the cycle. As interest rates stabilize around fifteen year-highs and capital becomes more expensive, these types of investments look poised to benefit from a rotation out of the high-multiple, technology winners of 2023.

Top contributors to the year-to-date performance of the Ninepoint Focused Global Dividend Fund by sector included Information Technology (+366 bps), Consumer Discretionary (+168 bps) and Energy (+136 bps), while top detractors by sector included Health Care (-115 bps) and Utilities (-45 bps) on an absolute basis.

On a relative basis, positive return contributions from the Energy (+101 bps), Financials (+62 bps) and Real Estate (+19 bps) sectors were offset by negative contributions from the Information Technology (-266 bps), Communication (-133 bps) and Health Care (-77 bps) sectors.

We are currently overweight the Energy, Information Technology and Industrials sectors, while underweight the Materials, Communication and Utilities sectors. While the lagged impact of monetary tightening is still working its way through the economy, we believe that the threat of much higher interest rates has passed. We remain focused on high quality, dividend payers that have demonstrated the ability to consistently generate revenue and earnings growth through the cycle.

The Ninepoint Focused Global Dividend Fund was concentrated in 28 positions as at October 31, 2023 with the top 10 holdings accounting for approximately 42.5% of the fund. Over the prior fiscal year, 21 out of our 28 holdings have announced a dividend increase, with an average hike of 8.8% (median hike of 7.8%). 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
Ninepoint Partners