Quarterly Market Commentary
as of March 31, 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 April 12, 2017. Market and index returns noted below are for the period ending March 31, 2017.
Market Statistics: Source: https://ca.finance.yahoo.com.
- January 1 to March 31st: The Toronto Stock Exchange increased in value by only 0.94% over the past three months. If this same rate of return occurred over a 12 month period of time, the total annual return would be only 3.76%. In other words, the first three months of 2017 were quite uneventful in the Canadian markets overall.
- However, within the Canadian market we see some interesting extremes: The energy sector index (symbol: XEG) declined by -9.79%, the financial services sector (symbol: XFN) increased in value by 1.94%, real estate (symbol: XRE) +2.57% and the materials sector (symbol: XMA) increased in value by 3.85%, primarily due to the rise in gold this past quarter (+7.47%).
- The best defensive sector was the preferred shares, with a quarterly gain of 4.61% and a 12 month gain of +7.23%.
- In the US, the S&P 500 index (the 500 largest companies in the US) gained in value by a very solid +4.65%. This was the first time the US market out performed the Canadian market over the past 9 months. Even though the US out performed the Canadian market in the past 3 months, the 12 month returns still favour Canada (+16.58% vs. +14.35% in the S&P 500 index).
- The strongest sector in the US in the October to December time period were US financials (Symbol: ZUB) (+31.9%). Yet, in the first three months of 2017 this was one of the worst performing sectors (-.70%).
- The US Health Care Sector (symbol: ZUH) declined by -5.83% in the fall, but then had a very strong first three months of 2017 with a gain of +8.67%. Almost all of the gains for this sector over the past year occurred in the past three months. We have begun to rebuild our position in this sector.
- Technology also performed poorly at the end of 2016 with a return of +0.16% (symbol: IGM in the US) but then produced a significant gain of 11% over the first three months.
- We have also seen some some very positive changes in the global markets. In the last three months of 2016, we saw declines in both Europe / Asia (-2.37%, symbol: EFA) and the BRIC nations (-.744%, Brazil, Russia, India, China, symbol: CBQ) while seeing the opposite happen in the first three months of 2017: EFA: +7.23%; CBQ: +11.51%.
- From an overall seasonality perspective, history shows that the end of the year is typically strong for technology while the first quarter is good for energy. It is interesting to see that we have seen the opposite occur this year.
We reflect on things like this: Is this telling us something about the momentum or uncertainty of the current markets?
As per other previous reports, here is a table showing the most recent returns by sector and market.
Table 1: Historical Returns for Summer 2016 (July 1 to September 30th, 2016) vs. Fall 2016 (October 1 to December 31st) vs. Winter 2017 (January 1 to March 31, 2017) vs. the last 12 months (April 1, 2016 to March 31, 2017). Market returns source: ca.finance.yahoo.com, changes to the price index. NFC Tactical 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.
It is interesting to see the extremes. This reinforces to me the importance of i) being well diversified and ii) actively managing each of the investment holdings so that we can take profit pro-actively and protect against larger potential gains.
In the September 2014 to January 20, 2016 time period, we performed very well during this declining market. The TSX declined by approximately -23%. During this time, the NFC Tactical Pool (blended fees, cash basis) declined by approximately -1%, thus protecting client capital from almost 100% of this decline. We are very pleased with this outcome.
When the market turned in late January 2016, the energy and materials sectors in particular took off and generated significant gains between January 20 th and June 30 th , 2016. We were under-weight these sectors, resulting in a positive level of performance.
When we measure performance today we see that over the past 9 months we have met or exceeded our targets. More specifically, in the table below you see that in each of the past three quarters (since summer 2016), the pool return has exceeded 70% of the TSX return. Over the past three months this difference was quite pronounced: +2.29% return for the NFC Tactical Asset Allocation Pool vs. +0.66% (70% of the TSX). This has helped us catch up to the current 12 month return of the TSX (+16.58%); 70% of the TSX = 11.61% vs. the NFC Tactical Asset Allocation Pool returns of +11.40%.
I am pleased to see this.
Table #2: NFC Tactical Asset Allocation Pool Returns vs. 70% of the TSX: As a general target, we strive to generate returns that are greater than 70% of the upside of the Toronto Stock Exchange index during rising markets while protecting against 70% of the declines during declining markets.
In the December 31 st , 2016 commentary I wrote: “When I see different types of investments perform differently during different stages of the market cycle, I will consciously invest in each, recognizing that in a highly volatile market environment, you will never know until after the fact which is the best investment. Since the market sentiment and direction can change quickly, to help reduce risk and increase returns, we see value in holding different types of complementary investments. So even though market volatility can be on the rise, a well diversified portfolio with complementary investments can go a long way to generating a consistent and smooth investment return. This is our goal. Regardless of the Good or Bad scenario for the months and years ahead, it is our view that these types of diversification strategies can play a key role in investment success.”
When we compare the market data in Table 1, and how the returns have come from some very different sectors over the past 6 months, with the NFC Tactical Asset Allocation Pool results over each of the past four quarters (+2.38%, +3.55%, +2.71+ and +2.29%) we can see some of this consistency bear out. I am pleased to see this.
The NFC Tactical Asset Allocation Pool is a good proxy for illustrating what we have been up to and how the portfolios have been performing. For example: (Disclosure: The NFC Tactical Asset Allocation pool results, source: Croesus software, returns are based on blended fees and calculated on a cash basis):
- The 12 month return, ending March 31 st , for the pool was +11.4%. This is in a market environment where the Toronto Stock Exchange gained in value by 16.58%.
- In general, we strive to achieve 70% or more of the upside move in the market while protecting against 70% or more of a downside move in the market. Note: this is not a guarantee but is a general reference point that we reflect on over time.
- With this being said, 70% of the TSX return would see a return of +11.61% (vs. the pool return of +11.4%). I am pleased to see that in each of the past three quarters we have surpassed the 70% relationship. Therefore, a slight under performance over the last 12 months is something that illustrates the under performance we saw in the April to June 2016 time period (TSX +4.64% vs. NFC Tactical Pool +2.38. 70% of the TSX is 3.29%).
Over the past three months the allocation between defense and growth have remained similar to the last 6 months. However, we have continued to increase our total foreign exposure.
Table 4: NFC Tactical Asset Allocation Pool: Asset Mix for the period ending as displayed: Source: Croesus software.
- During the rising market period of January 20 th through to December 31, 2016, we have continued to tilt the NFC Tactical Pool toward more growth oriented investments.
- At the end of March 2016 the pool was 53% defensive whereas by December 31st, 2016, the pool was 43% defensive.
- Today the NFC Tactical Asset Allocation Pool remains at 43% defensive, but with a greater emphasis on global investments than in the recent past.
In addition to increasing our foreign exposure, we have also been adding many stop loss orders. The stop loss orders are used to trim positions where we have generated a significant amount of profit. In the event that markets begin to decline, the stop loss order would be triggered and we would realize the profit we earned on this trade. If markets continue to rise, we would increase the price level as to where the stop loss order would be triggered. We have had a few stop losses orders triggered over the past quarter, and may see more of this profit taking occur in the coming weeks or months, depending on the direction of the market.
So what may happen in the near future?
- At this time we continue to watch to see if some of the leading sectors continue to lead, if they become extended or if we begin to see a change in leadership.
- At this time the market is fully valued, so we remain somewhat cautious on what the future upside may be.
- As we approach May and June, we would typically begin to be slightly more cautious and look for opportunities to take profit.
- We have begun to take profit in several areas and have a slightly more defensive stance today.
As always, we take it a week at a time, using a disciplined buy and sell strategy, focusing on risk management first.
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. Thanks, as always, for your continued trust and confidence.
We continue to grow as firm, adding new people to our team, and investing in new technology.
All the best!
Disclosures: Douglas Nelson is the portfolio manager for Nelson Portfolio Management Corp. and is responsible for making all final decisions regarding client accounts and the NFC Tactical Asset Allocation Pool. Doug is the author of this report, but any reference to “we” or “our” represents the collective efforts and contributions of various members of the Nelson team. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any opinions expressed in this newsletter are just that, and are not guarantees of any future performance or returns.
"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."