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. as at June 29, 2017. Market and index returns noted below are for the period ending June 23, 2017.

Market Statistics: Source: https://ca.finance.yahoo.com.

  • The Toronto Stock Exchange peaked most recently on February 21, 2017. Since then the index has declined by approximately 3.5%. This means that since January 1 the market return has been only slightly positive (+0.44%). The 12 month return is approximately +8.66%. The bulk of this return was generated from July 1, 2016 through to December 31, 2016.
  • Since the last report, the Toronto Stock Exchange has declined by approximately -1.47%. All three of the major components of the Toronto Stock Exchange contributed to this decline: Financials (symbol: XFN: -1.66%), Energy (symbol: XEG: -13.49%) and Materials (symbol: -4.93%). To the upside, the real estate sector (symbol: XRE) was up 1.25% and the technology sector (symbol: XIT) was up 6.56%.
  • Since the last report, the S&P 500 (the 500 largest companies in the United States) increased in value by 3.37%. Some of the largest contributors to this gain were health care (symbol: ZUH: +9.57%), utilities (symbol: IDU; +4.34%) and technology (symbol: IGM traded in the US market: +8.05%).
  • Over the past 12 months, it is interesting to see how the leadership in the US market has shifted back and forth between different sectors. In the July to December 2016 time period, the market was lead by the financials, energy and materials sectors whereas over the past 6 months these have been some of the worst performing sectors. Since January the leadership has come from technology, health care and utilities. A good example of this is the Transportation Index (symbol: IYT). Over the past 12 months this sector has increased in value by approximately 25%, outperforming the overall US market. This is good as the Transportation Index, made up of shipping, trucking and airlines, is typically a good indication of the growth of the overall economy. We want to see this index doing well. However, since March 1 this index has stalled and has moved sideways.
  • Globally we have also seen very good performance out of Europe and Asia. Since the last report the Europe / Asia / Far East Index (Symbol: EFA) has increased in value by 6.42% and the BRIC Index (Brazil, Russia, India and China; symbol CBQ) has increased in value by 4.56%. The 12 month returns for EFA and CBQ are +15.11% and +27.58% respectively, both of which out-performed the Canadian market over the past year.
  • IShares Global Industrials Exchange Traded Fund (Symbol: XGI): One of the global exchange traded funds that we have been adding to over the past year is XGI. We believed that this would perform well in a growing global economy. Over the past 3 months XGI has increased in value by 5.27%. Over the past 12 months XGI has increased in value by 25%.

As per other reports, here is a table showing the most recent returns by sector and market.

Table 1: Historical Returns for Fall 2016 (October 1 to December 31, 2016) vs. Winter 2017 (January 1 to March 31, 2017) vs. Spring 2017 (April 1 to June 23, 2017) vs. the Last 12 Months (June 23, 2016 to June 23, 2017). Market Returns Source: ca.finance.yahoo.com. NFC Tactical Asset Allocation Pool source: Croesus software. The industry standard rate of return disclosure of 3, 6, 9 and 12 months is illustrated on your client specific investment statement. The time periods selected for the tables in this report were chosen so as to illustrate recent changes in the markets and with different types of investments.

If you have any questions or comments about these figures, please send me your thoughts.

Since the last report, what has happened with the NFC Tactical Asset Allocation Pool?

  • Since the last report, the NFC Tactical Asset Allocation pool has increased in value by 1.07%. By comparison to the Toronto Stock Exchange Index, the pool has increased in value by 1.07% while the TSX has declined by -1.47%.
  • From January 1 through to June 23, 2017, the pool has gained in value by approximately 3.4% (vs. the TSX at +0.44%).
  • Over the past 12 months the NFC Tactical Asset Allocation Pool (the pool) has increased in value by approximately 10.46%, while the Toronto Stock Exchange index has increased in value by 8.66%.
  • In general, we talk about striving to capture 70% of the upside of the market while protecting against 70% of the downside of the market over time. With this in mind, 70% of the TSX return is 6.06% (70% X 8.66% = 6.06%) vs. the pool return of 10.46%. The pool has done well over the past 12 months.
  • In late March we received from Fundata (www.fundata.com) the March 31st detailed analysis report on the pool. At that time, for the 3 years ending March 31st, 2017, the pool had the 23rd highest return and the 25th lowest level of volatility, measured against 150 other Neutral Balanced Funds available to Canadian investors in Canada. We receive this report on a quarterly basis. This means that the pool was ranked in the top 16% of this peer class over the past 3 years. We are very proud of these very significant results, both in terms of investment return but also risk management. If you would like to have a copy of this report, please let me know and I would be happy to send it to you.

What Have We Been Up To Over The Past Several Months?

  • Over the past three months our goal has been to keep the client portfolios slightly tilted toward more growth oriented investments. We have done this primarily by increasing the exposure to equities in the NFC Tactical Asset Allocation Pool. This is described further in the next section.
  • At the same time, we have noticed how a number of our holdings have started to rollover and begin to change their trend from positive to negative. When this begins to occur we will look at trimming the position and taking profit. If the trend continues we will look at exiting the position at certain key points.
  • Over the past three months we have trimmed or completely sold 13 different holdings and added or topped up 17 other holdings. These transactions were all conducted within the NFC Tactical Asset Allocation Pool. However, if a client also owns the same position that we are trimming or selling in the pool, the same or similar transaction takes place in the client account.
  • One of the research themes that we have been exploring these past few months is a theme related to different areas of the technology sector. For example, we have seen a significant rise in the value of companies such as Apple, Facebook, Amazon and Google, but due to the popularity of these holdings, these companies have risen to values of which we do not feel comfortable. Therefore, our preference is to invest in other areas that are considered to be of better value.
  • Some of the themes we’ve been exploring include: Cybersecurity companies, Robotics and Medical Device technology. So far this approach has produced some interesting results. For example, over the past month the broader technology exchange traded funds (Vanguard Global Technology: VGT; Ishares North American Technology ETF: IGM-N) have seen negative returns while the new technology sub-sector investments have produced positive returns. This is the outcome that we were striving to achieve. So far, so good.
  • As we enter the summer months, health care and biotechnology are sectors that typically out- perform the broader market at this time of year. We took a position into a broad basket of pharmaceutical stocks that has increased in value by 10% over the past month.

What changes have been made to the NFC Tactical Asset Allocation Pool?

  • Table 2 below illustrates the changes to the overall asset mix of the pool, over the past 2 years. Note that the pool is still tilted towards growth, but has remained in a similar overall risk profile since last September. Given the growth of the pool over the past 12 months, relative to the Toronto Stock Exchange, the change toward a more growth oriented mix has served us well.
  • Table 2 also illustrates the geographic weighting. You will notice how the Canadian exposure has continued to decline while exposure to the US and Global markets has continued to increase. Today the Canadian exposure is approximately 71% whereas in March it was closer to 74%. 12 months ago the Canadian exposure was 81%. Over the past 12 months the US exposure has increased from 15% to 22% and the global exposure has increased from 5% to over 7%. The change in global asset mix has also been a positive contributor to the performance of the pool.

Table 2: NFC Tactical Asset Allocation Pool: Asset Mix for the period ending as displayed. Source: Croesus Software.

Where Do We Go From Here?

At this time we do believe that there is plenty of evidence to suggest a growing global economy. Central banks are increasing interest rates and stock markets around the world continue to grow.

However, we believe that the original hope and optimism regarding the Trump presidency may be beginning to slow. This is a concern because it creates the risk that we will see markets pull back from current levels. Combined with this is the fact that we are also entering into the slower months of the year (source: alphamountain.com). This is a time of year when we typically expect markets to remain sideways or decline.

With this in mind, we continue to use an active stop loss strategy. If we identify a security that is at risk of declining 10% or more, then we will typically set a level whereby some, or all, of that security will be sold. This helps to achieve two outcomes: i) it helps to ensure we don’t give too much profit back to the market and ii) it helps to reduce the volatility of the portfolio. At the same time, we then look for levels at which to re-enter this same security and / or buy a new investment with better valuations and trends.

Regardless of how the markets evolve over the summer, we will continue to actively review our current holdings and look for new opportunities.

If you have any questions or concerns about your personal portfolio, please let me know. I would be happy to meet with you at any time.

I hope you have a wonderful summer!

All the best!

"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."