The following commentary represents the opinions and analysis of Doug Nelson, Portfolio Manager and Founder, Nelson Portfolio Management Corp. and Lynda Harris, Portfolio Manager, Nelson Portfolio Management Corp. as of March 31^st, 2024.  The market and index returns noted below are based on the price changes for each quoted item for the period ending Thursday, March 28^th, 2024.  Throughout this report, whenever I / we reference a specific market or sector, we use the data from a specific Exchange Traded Fund (ETF) that is meant to mirror the returns of the index.  When I / we do this, we are sharing with you the Symbol of that ETF so that you can do your own research and can mirror some of the analysis that we have done.  When we reference returns throughout this report, we are quoting all index returns as total returns which include both capital gains as well as any cash distributions, such as dividends or interest, unless otherwise noted. Market Statistics:  Source: https://ycharts.com 

Market returns from January 1^st, 2024, through to March 28^th, 2024:

• Over the past three months, the (TSX) gained by +6.62%, driven mostly by gains in Energy (XEG; +18.82%) and Industrials (ZIN; +7.43%). It is interesting to see that the worst performing Canadian sector from October through to December (the Energy sector:  XEG; -9.8%), was the best performing sector over the past three months (+18.82%).  The best performing sector in the fall was Technology (XIT; +18.62%), yet this same sector gained by only +5.28% for the past three months.  These are great examples of how markets, and sectors, can ebb and flow over time.
• In the U.S., the broad-based New York Stock Exchange Composite Index (NYA; +9.28%) also gained in value over the past three months. Over the past three months, similar to our Canadian returns, the top performing sector was Energy (IYE; +11.61%) while the worst performing sectors have been Telecommunications (IYZ; -3.68%) and Real Estate (IYR; -2.77%).
• Internationally, the Europe / Asia Index (EFA) gained by +5.99% and the Emerging Markets Index (XEM) gained by +4.45%.
• Some defensive investments declined in value, such as the broad Core Canadian Universe Bond Index (XBB; -1.33%) and U.S. Corporate Bond Index (XIG; -1.02%) while U.S. High Yield Bond Index had a small total gain (XHY; +0.84%). North American Preferred Stock Index (XPF) gained by +8.25%.
• By comparison, the growth component (equities) of the NFC Tactical Asset Allocation Pool (the ‘Pool’) gained by +11.36% (vs. the TSX at +6.62% and the New York Composite Index at +9.28%). This means that our equity holdings outperformed these indexes over the past three months.  The defensive component of the Pool gained by +1.88% vs. the Core Canadian Universe Bond Index (XBB) that had a decline of -1.33%.

Markets have had a broad start to 2024, continuing from the gains we saw in the last three months of 2023.  The 12-month returns have also been positive (see below), where most of this growth took place in the last 6 months.  In the table below you see gains in the first two columns (January 1, 2024, to March 28, 2024, October 1, 2023 to December 31, 2023), declines in column 3 (July 1, 2023 to September 30, 2023) and mixed returns in column 4 (April 1, 2023 to June 30, 2023).

Table #1:  Asset Class, Region and Sector Price Returns Over Past 4 Quarters and Last 12 .

Data Source: https://ycharts.com.  Data compiled by Nelson Portfolio Management Corp.

To put the last 12 months into perspective (ending March 31st, 2024):

• In Canada, the S&P / TSX Composite Index gained by +13.96%  driven mostly by gains in the Energy Sector (XEG; +28.54%), the Financials sector (XFN; +17.47%), the Technology sector (XIT; +35.87%) and the Industrials sector (ZIN; +16.33%).  Our best performing individual stocks over the past year (in the Pool) are Constellation Software (CSU; +45.93%, Technology Sector), Canadian Natural Resources (CNQ; +44.3%, Energy Sector), and TFI International (TFII; +35.58%, Transportation Sector).
• The broad-based New York Stock Exchange Composite Index (NYA) gained by +22.02% over the past year, which helps to demonstrate that market gains were quite broad based. While the Health Care sector lagged in returns (ZUH; +2.64%), it was the Banking (ZUB; +33.08%) and Technology (IGM; +52.98%) sectors that created the gains.  Our top performing U.S. individual stocks (in the Pool) during this time period are Nvidia (NVDA; +228%, Semi-Conductors), Advanced Micro Devices (AMD; +84.70%, Semi-Conductors), Amazon (AMZN, +75.0%, Industrial), Applied Materials (AMAT; +68.70%, Semi-Conductors), Costco (COST; +51.0%, Consumer Staples), and Progressive Insurance (PGR; +46.0%, General Insurance).  Our two top performing U.S. banks are Goldman Sacks (GS; +31.0%, Financials) and Bank of America (BAC; +35.0%, Financials).
• By comparison, the growth component of the Pool (equities) gained in value by +21.50% (vs. the TSX Composite Index at +13.96% and the New York Composite Index at +22.02%).
• Over the past 12 months, the broad Core Canadian Universe Bond Index ETF (XBB; +2.02%) generated a positive return while the North American Preferred Stock Index (XPF) gained by +12.08%.
• By comparison, the defensive component of the Pool gained by +12.40%, far outpacing the broad Core Canadian Universe Bond Index (XBB).

How Has the NFC Tactical Asset Allocation Pool Performed During This Time?

• Over the past three months the Pool gained in value with a return of +6.92% (vs. the TSX Composite Index at +6.62%).
• Over the past 12 months, since April 1^st, 2023, the Pool gained by +14.40% (vs. the TSX Composite Index at +13.96%).
• As a Balanced investment pool, our goal has been to generate a return greater than 70% of the return of the TSX Composite Index: 70% X 13.96% = 9.772%.
• This means to us that the Pool return (+14.40%) captured more than 100% of the upside of the return of the S&P TSX Composite Index (+13.96%), while significantly exceeding the 70% upside target.

Over the past three years (ending December 31, 2023), the Pool achieved the 8^th highest return compared to 128 other similar neutral balanced funds in Canada, with the 11^th lowest level of volatility. (Source:  Quarterly Performance Analysis Report, Fundata Canada Inc.).  Similar to our quarterly results in June and September 2023 – no other fund in this analysis generated a higher return with the same level of volatility for this time period.  This is excellent!

Table #2:  3 Year Historical Risk & Return Ranking: NFC Tactical Asset Allocation Pool (Class A)

Source:  Fundata Canada Inc.

Digging a little deeper, over the past 12 months:

• Since April 1^st, 2023, the growth component of the Pool gained in value by +21.498% (vs. the S&P TSX Composite Index at +13.96% and vs. the New York Composite Index at +22.02%).
• Since April 1^st, 2023, the defensive component of the Pool gained in value by +12.46% in outpacing the broad Core Canadian Universe Bond Index (XBB: +2.02%).
• Both the growth component and the defensive component of the Pool outperformed relative to these broad indexes in 2023 and in the first quarter of 2024. This is good.

The current asset mix of the Pool is approximately 44% defensive and 56% growth; therefore, we continue to be tilted more towards growth today.  On March 31, 2023, the cash component was 4.31% whereas today it is hovering around 1.0%.  A year ago, the defensive component was 49% while today it is less at 44%. We have continued to reduce our defensive component and increase our growth component since October 2023 and during this first quarter of 2024.

We have continued to move the Pool more towards growth in the past 3 months with additional cash from new deposits being allocated to equities (the Pool has now surpassed $108 million in assets).

Table #3:  Historical Asset Mix of the NFC Tactical Asset Allocation Pool:  Source:  Croesus

Note:  We reference the Pool returns throughout this document because the Pool will either represent 100% of your portfolio or approximately 60% of your portfolio and it is a good proxy for your overall portfolio returns depending on your fees and risk profile.

In summary, the core of your portfolio, the Pool, has performed well over the past three and 12 months, is generating a total distribution (interest and dividends) of approximately 4% – 4.5% annually and yet is invested today in a neutral – balanced manner.  This is good!

What have we been doing over the past few months?

So, what have we been doing over the past three months?

• Equity Sells: Over the past three months, in the Pool, we executed nine sell orders, so as to i) take profit on positions that looked like further declines were due to occur in the near future or where we could capture the growth and add to other positions and ii) exited positions where we wanted to realize a capital loss for tax purposes or utilize the funds for opportunities where we wished to top up or add new positions. We took profit on positions such as Progressive Corp. (PGR) where we captured the growth and used it to add to new securities. We trimmed some of the semiconductor positions such as AMD and AMAT so that we could add to the iShares Semiconductor ETF. We want to hold the basket of semi-conductor stocks in this ETF so as to have a more broad-based exposure to this sector.  We exited CNR so as to add to CP Rail, where with their purchase of Kansas City Southern railway, we see an established, growth-oriented investment opportunity. Other exited positions included: Brookfield Renewable Energy Partners (BEPC, to take advantage of the capital loss), Brookfield Infrastructure Partners (BIP.UN, to take advantage of the capital loss), Walmart (WMT, due to our preference for Costco), Canadian Apartment Properties REIT (CAR.UN, to simplify our Real Estate exposure) and iShares Energy Index (XEG, so as to simplify our Energy exposure).
• Equity Buys: We executed 22 buy orders in the last three months, topping up current positions in companies such as Visa (V, 12 month return +24.96%), Home Depot (HD, 12 month return +33.34%) and Waste Connections (WCN, 12 month return +24.73%).  We added new positions in companies such as UFP Industries (UFPI, 12 month return +56.61%) which is a supplier of lumber on the manufactured housing industry, Reliance Inc. (RS, 12 month return +32.1%) which is a metal solutions provider in the steel industry and Brookfield Corp. (BN, 12 month return +29.49%) which is a diversified conglomerate with exposure to Renewable Energy, Infrastructure, Insurance and Real Estate.  We sold our sector positions in the two other Brookfield holdings so as to consolidate our investments at the overall holding company level.

Summary:  Over the past 12 months, the Pool’s assets under management have continued to increase, due to both returns and new deposits, from $90 million to $108.8 million at the end of March 2024.  With these increased deposits, we have added more to growth-oriented investments and some to defensive investments.  We have tilted the Pool slightly more towards growth and today have an asset allocation that is 56% growth oriented and 44% defensive. Comparatively, at the end of March 2023, we were 50% growth oriented and 50% defensive.  The Pool is generating a significant yield exceeding 4%, which provides an excellent foundation for future total returns as well.

Where Do We Go from Here?

The questions today remain the same as they have been previously:  2022 and 2023 were years of increasing interest rates so as to ideally push inflation lower.  The table below shows the change in the annual U.S. inflation rate over the past 5 years.  In 2020 and 2021, the annual inflation rate was approximately 2%, which is the ideal goal:  steady and consistent economic growth.  Due to the pandemic, where governments produced a lot of currency to support the economy and due to disrupted supply chains, amongst other factors, annual inflation rates increased to a high of almost 9.06% in June 2022.  Due primarily to increasing interest rates through 2022 and 2023, as well as improved supply chains, the annual inflation rate in the U.S. has now declined by approximately 3.15%, as of January 2024.  This is good!  Or is it?

Chart #1:  U.S. Annual Inflation Rate:  April 1^st, 2019, to January 31, 2024:

In the chart below, over the past 12 months, we see that the interest rate for long term U.S. government bonds increased from 3.48% to 5% between April 1^st, 2023, and October 19^th, 2023.  Turning our attention back to column 3 in Table #1 (investment returns July 1^st, 2023, to September 30^th, 2023), this increasing interest rate on long-term debt contributed to the lower stock market returns.  Yet, when interest rates declined from October 19^th, 2023, through to December 26^th, 2023 (where long term U.S. government bond interest rates dropped from 5% to 3.89%), stocks rallied (as we see in Table #1, column 2:  September 30^th to December 31^st).

Interesting.

Chart #2:  U.S. 10 Year Treasury Interest Rate:  April 1, 2023, to March 31, 2024:

So, turning our attention now to the last 90 days, it is a very positive sign to see a period of rising interest rates (from 3.89% to 4.33%) while at the same time seeing positive stock market returns (Table #1, column 1:  January 1, 2024, to March 31, 2024).

But looking ahead, what do we need to be mindful of?

• First, we need to be mindful that in Chart #1 above, the year over year inflation rate has been somewhat sideways. The question is:  will inflation continue to decline?  Hopefully, we will continue to see moderate declines in the annual inflation rate.  If we do, then we may see interest rates level off, and stock prices may continue to rise.
• But what if in Chart #1 we see annual year over year inflation continue sideways or even increase? What may we then see in Chart #2 above?  Would we then likely see long-term rates continue to increase?
• If we see rates continue to increase, what would this mean for stock prices? Would we then potentially see stock prices decline?

Looking ahead, we need to be mindful of the trend year over year inflation as well as changes to interest rates.  Now, we I talk about changes in interest rates, there are two types of changes that we watch:

• The Short-Term Rate: This is the rate controlled by the central banks (The Bank of Canada, The U.S. Federal Reserve, The Bank of England, etc.).  If inflation remains sideways or begins to trend higher, we would expect central banks to keep interest rates as is.  Stocks could still continue to rise in this situation, but markets would likely be a little choppy.  If inflation continues higher, interest rates may then also go higher.
• The Long-Term Rate (Chart #2 above): This is the rate influenced by the markets.  If this rate continues to rise, then the price of bonds will decline, and stock prices may then decline as well.  This is the ebb and flow of what we have seen over the past few years.

With these thoughts in mind, we need to be mindful of valuations of individual stocks in our portfolio.  It is great to report to you the gains that we have seen in many of the companies in which we have invested, but given the emerging concerns noted above, we also need to stay focused on taking profit when it is prudent to do so.

The current upward trend may remain in place for another few weeks or months or years, but in the meantime we will be looking ahead, looking at those companies that may have the greatest downside risk, considering the time and place to take profit.  From our perspective, this is a very normal time and place in the market, as we move closer to the end of the winter seasonal phase of market growth and move into a historically softer summer phase of market growth.

Should you have any questions, please reach out to myself (dnelson@nelsonfinancial.ca) or Lynda Harris, Portfolio Manager (lharris@nelsonfinancial.ca).  If you wish to book an appointment for a portfolio review, please connect with Riley Chard (rchard@nelsonfinancial.ca) and should you have any administrative questions or needs, please contact Jennifer Johnston (jjohnston@nelsonfinancial.ca).

Thank you for the opportunity to do this important work for you.  All the best!

Doug & Lynda

Announcements:

• Book Value vs. Market Value on Your National Bank Independent Network (NBIN) statements: The book value information on your NBIN 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 NBIN statements and believe that the difference is your investment return.
• Discrepancies between the Nelson portfolio reports and the NBIN monthly statements: We see that in some cases there are some small discrepancies between the total portfolio value seen on the Nelson 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 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 you with 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.