Quarterly Market Commentary

as of September 30, 2021


What's happened since the last report?

The following commentary represents the opinions and analysis of Doug Nelson, President, Portfolio Manager, Nelson Portfolio Management Corp. written on January 7, 2020. Market and index returns noted below are based on the price changes for each quoted item for the period ending December 31, 2019. Market Statistics: Source: https://ycharts.com.

  • Over the past 3 months (October 1st to December 31st) the Toronto Stock Exchange Composite Index (S&P / TSX Composite Index) increased in value by approximately +3.74% from October 1, 2019 through to December 31, 2019. Of this amount, the entire gain occurred during the month of November (November 1st- November 30th, 2019; 1 month return of +3.8%).
  • The market gain in the month of November represented most of the positive gain for this index over the past two years (See Chart 1 below).
  • Between April 3rd and October 30th (7 months) the returns for this index were mostly zero. Thus, the bulk of the returns for the year came in the first 45 days of the year (January 1st to February 15th (+10.58%) and for the month of November (+3.8%). This two and half month period of time generated a positive return of 14.4%.
  • The chart below shows the total market index returns over the past 2 years. In 2018 the S&P / TSX Composite Index declined by -11.6%. In 2019 the index increased in value by +19.0%. Over the past two years the total gain is +5.27%. This means that average annual two-year return is approximately +2.6% per year.

Chart 1: The S&P TSX Composite Index (the Toronto Stock Exchange) for the 2-Year Period Ending December 31st, 2019. Source: YCharts.

Now let’s look at the performance of the key U.S. indexes over the past 12 months. In Chart 2 below we see that the broad-based New York Stock Exchange Index declined by -11.2% in 2018 and then gained by 22.0% in 2019. The total 2-year gain is +8.62% or approximately +4.3% per year. The technology sector continued to be the dominant investment theme. In 2018 the Nasdaq Composite Index declined by only -3.9% but gained +35.0% in 2019. The technology index in the U.S. had a 1-year gain of +46.0% in 2019. The technology sector clearly contributed to the bulk of the U.S. market gains over these past two years.

Chart 2: The New York Stock Exchange Index, Nasdaq Composite Index and the U.S. Small Companies Index (symbol: XSU) for the 24 Month Period Ending December 31st, 2019. Source: YCharts.

In the table above, please note the following observations:

  • By comparing Chart 1 and Chart 2 we see that the Canadian market had a total two-year gain of +5.27% versus the broad-based New York Stock Exchange index with a two-year gain of +8.62%.
  • By comparing this information with the chart below (Chart 3), we see that the international markets have generated a slightly negative return over these past two years.

Chart 3: The MSCI EAFE Index (Europe – Asia – Far East), MSCI Emerging Markets Index and the value of Gold (symbol: GLD) for the 2 Year Period Ending December 31st, 2019. Source: YCharts.

To put the past couple of years into further perspective, Chart 4 on the following page includes the total two year returns of the NFC Tactical Asset Allocation Pool. The total return of the NFC Tactical Asset Allocation pool is +6.17% versus the Toronto Stock Exchange index of +5.27%.

Chart 4: The S&P TSX Composite Index (Canada), New York Stock Exchange Index (U.S.), MSCI EAFE Index (Europe – Asia – Far East) vs. the NFC Tactical Asset Allocation Pool for the 2 Year Period Ending December 31st, 2019. Market Data Source: YCharts. NFC Tactical Asset Allocation Pool Data Source: Croesus.

On the next page you will find an updated table of the quarter by quarter performance of countries, regions and sectors.

Table 1: Asset Class, Region and Sector Returns Over Past 4 Quarters and 2 Years. Source: YCharts.


  • It is interesting to see how the two-year time frame puts everything into perspective. The returns over the last 12 months were very strong, but not in the context of the past two years.
  • On the downside we see a two-year total return of -23.92% (Energy) and -8.46% (Preferred Shares).
  • At the other extreme we see a two-year total return of +21.0% for Healthcare and +43.0% for Technology.
  • In the middle we see the two-year return for Canadian financials at only +2.33% and U.S. banks at +2.70%.
  • Remember that these are the total returns. To calculate the annual returns, you would divide this number in half (approximately).
  • So, by comparison we are not unhappy with the returns we have generated over the past two years, other than our under-performance during the first 45 days of 2019. I will discuss this in more detail below.

In this environment, how has the NFC Tactical Asset Allocation Pool performed?

In the September commentary I talked about the pool returns since February 15th, 2019. To update these figures, this is what we see:

  • S&P TSX Composite Returns: February 15th to December 31st: +7.74%.
  • NFC Tactical Asset Allocation Pool Returns: Same time period: +6.14%.
  • Our goal is to capture 70% or more of the upside to the market. 70% of the TSX is +5.42%.
  • This means to us that we met our goal for this time period.

But when we look at this on an annual basis, we did not meet our goal:

  • 2019 return: S&P TSX Composite Index: + 19.13%. 70% of this amount is +13.4%.
  • 2019 return: NFC Tactical Asset Allocation Pool: +9.03%.
  • This is a difference of 4.37%.

If we outperformed our target from February 15th to December 31st, 2019, this means that we under-performed our target by 4.37% from January 1 to February 15th, 2019:

  • S&P TSX Composite Index Return: January 1 to February 15th, 2019: +10.6%.
  • NFC Tactical Asset Allocation Pool: +3.04%.
  • If we captured 70% of the upside of the index during this period, we would have seen a gain of +7.42%. But instead we had a gain of only 3.04%.
  • The difference? 7.42% – 3.04% = 4.38% of missed return.
  • This matches the figure noted in the previous paragraph for the 2019 calendar year: 4.37%.

So, while a 12 month return of +9.03% is quite respectable, it is also fair to ask: What might we do differently in the months and years ahead so as to better potentially capture these types of quick gains when the occur? More on this in the next section.

In the September 30th, 2019 commentary we took a look at the calendar year returns. I have updated this table for the full year.

Table #2: Calendar Year Returns of the NFC Tactical Asset Allocation Pool. Note: The 2013 figure is the period of time from September 3rd, 2013 to December 31st, 2013. The NFC Tactical Pool launched on September 3, 2013.

Source: Croesus software. YCharts.

This chart shows the degree to which we have met our goal over time of striving to capture 70% of the upside moves to the market while striving to protect against 70% or more of the downside moves to the market.

In the first row you see the total returns of the pool after all fees and expenses have been deducted for each calendar year. On the second row we see the calendar year returns of the S&P TSX Composite Index (the Toronto Stock Exchange). The third row calculates 70% of the upside move to the TSX index while the next row shows, in those years where the market declined, the 70% downside protection target.

So, how have we done?

  • 5 out of the past 7 periods we met our targets.
  • The two periods of time when we didn’t meet our target were those years that saw strong, concentrated moves to the upside. In 2016 this was the strong gain in the materials sector from January through to June and in 2019 this was the strong gain we saw overall during the first 45 days of the year.
  • Yet by comparison, in 2018 and 2015, the combined declines of the Toronto Stock Exchange were -22.73% (-11.64% + -11.09%) while the NFC Tactical Asset Allocation Pool declined by only -0.92% (-2.62% + 1.7%). During these two down years we protected against 96% of the downside move to the markets.
  • What do we learn from this? Our approach to managing risk seems very appropriate and prudent, but at times when we do see larger upside moves in the market we have typically lagged.

Therefore, from my personal perspective, this makes me wonder if we could be doing some things differently so that we continue to protect well against the downside yet are able to participate more fully when these larger moves happen to the upside. More on this in the next section.

What Have We Been Up to Over the Past Several Months?

In the September commentary I hinted at a core group of six Canadian and global Exchanged Traded Funds (ETFs) that have complimentary investment styles. If you look at your December portfolio statement, look for securities with the following symbols:

  • Low Volatility ETFs: ZLB (Canada) & XMW (Global).
  • Dividend Paying ETFs: HAL (Canada) & HAZ (Global).
  • Seasonal Rotation Strategy ETFs: HAC (North America).
  • Global Quality Strategy ETFs: ZGQ.

The returns for each of the ETFs noted above are shown in the table on the following page:

Table #3: Comparative Returns of Core Exchange Traded Fund holdings vs. Market Indexes Over Multiple Time Periods. Data Source: YCharts.

In the table above, please note the following:

  • Different styles produce different results at different times. When I refer to styles, I am referring to the complementary styles noted above (low volatility vs. dividend strategies vs. seasonal rotation vs. high balance sheet quality vs. Canada vs. global), but there are many different ways to rank and sort different investment options.
  • Over the last 12 months, the “Low Volatility strategies” (ZLB, XMW) generated returns of +18.92% and +12.26%. By comparison, the Global High Quality and Canadian Dividend strategies generated returns of +27.4% and +24.19%.
  • By comparison, in 2018, when markets declined, it was the Low Volatility strategies (XMW) that generated a positive return of +3.83% while the more aggressive dividend strategies declined by -9.2% and -6.62%.
  • The conclusion? We want to build a basket of complementary strategies that we can feel comfortable buying and holding over time, through good markets and bad. It looks to us like this basket of six is doing just that.
  • When we look at the average return for all 6 of these ETFs, in 2019 the basket generated a positive return of +19.79%, which compares well with the overall market returns. In 2018 the average return of all 6 ETFs. was only -3.35% vs. -11.0% to -16.0% for the market indexes.
  • When we add up the returns over the past 24 months, we see that this basket of 6 ETFs has a positive return of +15.6% versus the market indexes of +5.27% (Canada), +8.62% (U.S.) and -1.24% (Europe / Asia).
  • This is significant and a very healthy balance between both risk and return.

So, what have we done with this information? We have adopted these 6 ETFs as a core component for all client portfolios. Our goal is to equal weight them in your portfolio so that you have approximately the same dollar amount in each of the 6 ETFs. Our next goal is to monitor the returns of not only the individual ETFs but also the performance of the basket overall. We have rebalanced most client portfolios over the past few months so that these six holdings are equally weighted in your portfolio.

Our next step, as I mentioned in the September commentary, is to then select the best basket of 60 stocks from these same ETFs (10 from each). This is to potentially create a basket of stocks that generates a higher return with similar or less risk and hold these 60 stocks in the NFC Tactical Asset Allocation Pool. We are most of the way through this rebalancing process today.

So, what do we learn from this? We have learned that our typical approach protects your capital well over time. We have also learned that when there is a larger upside move to the market over a shorter period of time, our approach typically lags. Therefore, to potentially create higher returns with similar levels of risk, we are taking the next step of incorporating this core basket of 6 ETF’s consistently throughout each client portfolio. By incorporating this basket approach, we will be able to more effectively monitor the performance of the overall basket during times of market decline and market growth with the goal of capturing more market upside when this occurs. As a portfolio manager, we can also rebalance this basket for every client at the same time, if or when we need to.

Where Do We Go from Here?

The world continues to be an interesting and dynamic environment. The news of the today focuses on the uncertainty around trade with China, Trump’s pending impeachment trial, trade wars and tariffs with Europe, continued tensions in the Middle East and questions around the Canadian economy and bigger infrastructure projects. The extent to which these issues will have on the market remains to be seen.

In the past I have talked a lot about the declining slope of the yield curve. The yield curve became fully inverted in late August 2019 but has since become more positive sloping once again as the U.S. Federal Reserve has cut interest rates 3 times during 2019. This is good. However, ironically as the yield curve has improved and as interest rates has come down, the Purchasing Managers Index (PMI) has continued to decline. This is an index that measures economic activity in the manufacturing sector in the U.S. The index is now showing a negative reading, which is not a positive sentiment for the economy. The index has declined by -13.0% over this past year, ironically at a time when stocks have seen strong gains. Something doesn’t seem to be in sync. It is also interesting to note that the Transportation Index has seen a two-year return of only +1.0% per year. The transportation index is often considered a leading indicator of economic growth: When items are being shipping across the oceans, in airplanes, trucks and rail, then we see the companies in this index doing well. But when the index does not appear to be doing well, when the Purchasing Managers Index is also declining, these may be warning signs about the U.S. economy that need some real consideration.

I very much appreciate the opportunity to be of service to you in this very important area. I appreciate the trust, confidence and responsibility that you have placed in my team and I. As a result, I write these more detailed commentaries so that you can be aware of the types of things we are looking at, how we are evaluating our performance / decision making and how we are always looking for ways to improve what we do regardless of the market environment.

I would be delighted to meet with you at any time should you have any questions or concerns about your portfolio. I can also prepare for you at any time a more comprehensive analysis of your personal portfolio.

Thank you and all the best for 2020!



Welcome Leslie Frobisher! Leslie joined our team in late October, coming to us with close to 18 years of financial services industry experience. Leslie’s primary role will be the day to day portfolio administration and client service activities. We are excited to have such an experienced individual join our team. Should you have any questions about making new deposits or withdrawals, changing your monthly deposits or income amounts, setting up a new account or gaining on-line access to your NBIN statements, please contact Leslie.

Nicole Ross and her evolving role: With Leslie coming on board, this will free up some of Nicole’s time to work on some more proactive client service projects. You will find Nicole reaching out to you proactively to either set up a meeting with Doug or Lynda, to discuss with you the option for increasing your monthly contributions, to top up your RRSP each year and / or to assist with TFSA contributions. Our goal is to continue to be more and more proactive in our outreach to you.

New Agreement With NBIN: In the coming weeks our new agreement with NBIN will begin to take effect. Due to our growth over these past several years, NBIN has reduced our trading costs by 20% to 40%. We also now have access to a high interest savings account option where no trading costs will be incurred when we buy or sell this investment. The deposit and withdrawal costs for the NFC Tactical Asset Allocation Pool will also decline from a flat fee of $25 per trade down to $15 per trade. These savings are very significant and expect them to add up over time.

Evolving Quarterly Statements: Currently, Nelson Portfolio Management Corp. (NPMC) provides to you a Quarterly Statement package that combines all of your individual accounts into one consolidated portfolio package. As a result, NPMC does not prepare or provide Quarterly Statement(s), for each of your accounts. At this time, we are working on a new agreement with National Bank (NBIN) and once completed, it will enable NPMC to rely on NBIN to provide your Quarterly Statement(s) for each of your accounts. What this means to you is very little as NBIN will continue to send to you the same statements as they have in the past and NPMC will continue to provide to you a Quarterly Statement on a consolidated basis for each Client and Household. However, what this means to us is that we will have greater flexibility in providing to you a truly customized statement. In the months ahead, we may raise this question with you: What would you most like to see in a Quarterly Portfolio Statement? What information is most important to you and when would you most like to receive it?

Both NPMC and NBIN are responsible for the delivery of complete, accurate and timely reporting to you. If you have any questions about the information contained in any of your client statements, please contact us.

Book Value vs. Market Value On Your National Bank statements: The book value information on your National Bank statement is not your net invested value. Rather, the book value is the total of your invested value minus withdrawals and plus any dividend income received. Thus, part of your investment return over time will show up as part of your book value. Therefore, please do not compare the book value and market value on your National Bank statements and believe that the difference is your investment return.

Discrepancies between the Nelson portfolio reports and the NBIN (National Bank Independent Network) monthly statements: We see that in some cases there are some small discrepancies between the total portfolio value seen on the Nelson Portfolio Management Corp. statements and the NBIN monthly statements. In most situations these discrepancies are caused by the timing of when the NBIN statements are produced and when the data concerning the quarterly distribution for the NFC Tactical Asset Allocation Pool is provided to NBIN. This is a timing issue and not an error. Should you have any questions or concerns, or if you identify other discrepancies, please let us know immediately.

Paper vs. Secure E-Mail Link: It is NPMC’s preference to provide to you this quarterly portfolio package by e-mail. However, if you would like to receive this package in paper format, please let us know and we will accommodate your preference accordingly.

"IMPORTANT DISCLOSURES: The comments above are for information purposes only and do not constitute specific financial advice regarding your specific situation. Please consult a professional financial advisor who is familiar with your personal situation before acting on any information presented above. Every effort has been made to ensure this information is presented responsibly and accurately. However, important details may have been missed or these details may have changed since the publication of this note. All facts and opinions noted above must be reviewed to ensure their accuracy is still relevant based on today’s specific situation, whatever that may be. Nelson Financial Planning Corp is not responsible for any action you take regarding this information."