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 June 30^th, 2024.  The market and index returns noted below are based on the price changes for each quoted item for the period ending Friday, June 28^th, 2024 unless stated otherwise.  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 April 1^st, 2024, through to June 28^th, 2024:

• Over the past three months, the Toronto Stock Exchange Composite Total Return Index (TSX) declined by -0.53%, driven mostly by declines in the Financials (XFN; -1.34%), Technology (XIT; -4.39%) and Real Estate (XRE; -6.26%) sectors.  The best performing sector was the Materials sector (XMA; +7.15%) which had a high correlation to the gain in the price of gold (HUG; +4.52%).
• In the U.S., the broad-based New York Stock Exchange Composite Index (NYA; -0.98%) also declined slightly in value over the past three months while the Technology sector, once again, drove most of the gains (IGM; +9.48%): Microsoft (MSFT; +6.42%), Apple (AAPL; +23%), Alphabet (GOOGL; +20.82%), Amazon (AMZN; +7.13%) and Nvidia (NVDA; +36.74%).  These companies have contributed to well over 50% of the gain in the S&P500 Index over the past year.  This can be seen in the difference in returns of the “market weight index” (S&P 500 Total Return Index, SPX; +4.28%) and the “equal weight index” (S&P 500 Equal Weight Index; SPW; -2.62%) over the past three months as well as over the past year (+24.63% 1 year index return vs. +11.63% 1 year returns for the equal weight index).  Since Microsoft, Apple, Alphabet, Amazon and Nvidia make up over 30% of the market weighted S&P 500 index, when they do well, so does the index.  It is because of this concentration that I often quote the New York Stock Exchange Composite Index because it, in my view, is a better representation of the overall market.
• Internationally, the Europe / Asia Index (EFA) declined by -0.18% and the MSCI Emerging Markets Index (XEM) gained by +5.20%.
• Over the past three months the defensive investments mostly increased in value, such as the broad Core Canadian Universe Bond Index (XBB; +0.91%), the U.S. High Yield Bond Index (XHY; +1.20%) and the North American Preferred Stock Index (XPF; +0.32%).

Over the past three months, markets have moved mostly “sideways”, with either small gains or small declines. 

Table #1:  Asset Class, Region and Sector Total 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 June 30^th, 2024):

• In Canada, the S&P / TSX Composite Index gained by +12.13% driven mostly by gains in the Energy sector (XEG; +30.11%) and the Financials sector (XFN; +13.74%).  Our best performing individual stocks over the past year (in the Pool) are Constellation Software (CSU; +44.0%, Technology Sector), Canadian Natural Resources (CNQ; +36.5%, Energy Sector), and TFI International (TFII; +33.0%, Transportation Sector).
• The broad-based New York Stock Exchange Composite Index (NYA) gained by +15.8% over the past year. While the health care sector lagged in returns (ZUH; -1.44%), it was the Banking (ZUB; +33.64%) and Technology (IGM; +45.53%) sectors that created the gains.  Our top performing U.S. individual stocks (in the Pool) during this time period are Nvidia (NVDA; +202.0%, Semi-Conductors), Advanced Micro Devices (AMD; +47.0%, Semi-Conductors), Amazon (AMZN, +53.0%, Industrial), Applied Materials (AMAT; +69.5%, Semi-Conductors), Costco (COST; +67.3%, Consumer Staples), and Progressive Insurance (PGR; +63.0%, General Insurance).  Our two top performing U.S. banks are Goldman Sachs (GS; +48.5%, Financials) and Bank of America (BAC; +46.5%, Financials).
• Over the past 12 months, the broad Core Canadian Universe Bond Index ETF (XBB; +3.69%) generated a positive return while the North American Preferred Stock Index (XPF) gained by +14.1%.

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 +1.86% (vs. the TSX Composite Total Return Index at -0.53%).
• Over the past 12 months, since July 1^st, 2023, the Pool gained by +15.26% (vs. the TSX Composite Index at +12.13%).
• As a Balanced investment pool, our goal has been to generate a return greater than 70% of the return of the TSX Composite Total Return Index: 70% X 12.13% = 8.5%.
• This means to us that the Pool return (+15.26%) captured more than 100% of the upside of the return of the S&P TSX Composite Index (+12.13%), while significantly exceeding the 70% upside target.

Over the past three years (ending March 31^st, 2023), the Pool achieved the 6^th highest return compared to 127 other similar neutral balanced funds in Canada, with the 12^th lowest level of volatility. (Source:  Quarterly Performance Analysis Report, Fundata Canada Inc.).  No other fund in this analysis generated a higher return with the same level of volatility for this time period.  This is excellent!  See Table #2 below.

Digging a little deeper, over the past 12 months:

• The growth component of the Pool (equities) gained in value by +21.56% (vs. the TSX Composite Index at +12.13% and the New York Stock Exchange Composite Index at +15.8%).
• The defensive component of the Pool gained by +16.40%, far outpacing the broad Core Canadian Universe Bond Index (XBB). As interest rates leveled off and declined (slightly), the market value of our individual bond holdings increased significantly, with the 12-month returns of several bonds gaining by +10.0% to +30.0%.
• Flashback to 2022: In 2022 we saw the opposite happen.  When interest rates rose the prices of bonds declined in value, which impacted our returns for that year.  Yet, over the past 12 months, we have seen many of these same bonds regain what was previously lost.  In 2022 we experienced a “paper loss” because we did not sell these bonds, knowing that at some point (such as the past 12 months), the value of these bonds would return.
• Both the growth component and the defensive component of the Pool outperformed relative to these broad indexes in 2023 and in the first half of 2024. This is good. 

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

Source:  Fundata Canada Inc.

The current asset mix of the Pool is approximately 44% defensive and 56% growth; therefore, we continue to be tilted more towards growth today.

This is slightly more growth oriented than where the asset mix was 12 months ago.  This time last year the Pool was 5.5% cash, 44% defensive and 50% growth vs. the 2% cash, 42% defensive and 56% growth position today.

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 40% to 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!  Positive returns with relative lower risk.

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 several sell orders related to two specific companies.  We exited JNJ to protect against further downside.  JNJ is now 16% off of its most recent high of July 2023 and the trends appear to be continuing downwards.  We have trimmed this position a few times over the past year as the trend continued to be down.  With the proceeds we added to another company in the healthcare sector in AbbVie Inc. (ABBV). We see continued growth and innovation with this pharmaceutical company in the areas of immunology and oncology. We also exited Open Text (OTEX, Software technology) for similar reasons.  Since its most recent high in January 2024, OTEX has also continued to decline and is now 28% off of its high.  We trimmed this position gradually over the past months as well and our feeling overall is that management is not as clear as we would like them to be on their future direction.  We chose to exit this position believing that this money could generate a better return elsewhere.
• Equity Buys: We executed 17 buy orders in the last three months, topping up current positions in companies such as AbbVie Inc. (ABBV: pharmaceutical, 12 month return +28.20%), Marsh & McLennan Companies (MMC; General Insurance, 12 month return +14.35%), Home Depot (HD; 12 month return +10.65%) and our Semiconductor Exchange Traded Fund (ETF) (SOXX; 12 month return +49.08%).
• Private Markets: As mentioned in other quarterly market commentaries, we have exposure to the private markets. The private markets are now an estimated $20 trillion in market capitalization consisting of exposure to private lending, private real estate, private infrastructure, and private equity. Source: 2024: CAIA   This past quarter we added the Merchant Opportunities Fund in the private lending space.  This fund provides short term loans (typically 12 months or less) for small businesses and consumers across various sectors.  The Vancouver based Merchant Opportunities Fund (Merchant Opportunities Fund)  provides a targeted net return in the 8.0% – 10.0% range and monthly distributions.  Not only do we feel that this is a good investment, but we are also pleased to provide capital to the Merchant Opportunities Fund team and support the fund in its role to help small businesses continue to grow and thrive in Canada.
• Preferred Share Buys: We have also continued to add to our preferred share holdings, adding new preferred shares of Great-West Lifeco Inc. (GWO.PR.I), which pays annual dividends today in the 6.00% to 6.50% range and we believe have upside growth potential of 40.0% +.

Summary:  Over the past 12 months, the Pool’s assets under management have continued to increase, due to both returns and new deposits, from $94.2 million to $112.7 million at the end of June 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 June 2023, we were 50% growth oriented and 50% defensive.  The Pool is generating a consistent yield exceeding 4%, which provides an excellent foundation for potential future total returns.

Where Do We Go from Here?

In the March 31^st, 2024 commentary, we wrote the following:  “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 (now updated) 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 2.0%, which is the ideal goal:  steady and consistent economic growth and moderate inflation.  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 to approximately 3.27% (vs. 3.15% as of January 2024).”

Chart #1:  U.S. Annual Inflation Rate:  April 1^st, 2020, to April 31st, 2024:

Our concern continues to be the direction of inflation.

If inflation begins to move below the 3.0% level, this is good.  Ideally, at that time, central bankers will be reducing interest rates so that they are more aligned with the direction of inflation.  This could be positive for the economy and stock prices could rise.  The current trends suggest that this is indeed taking place.

However, if unemployment rises a lot during this time, and interest rates are not cut by the central bank soon enough, then the economy could slow more quickly, a recession could occur, and stock prices could fall.  This is something that central banks, in general, wish to minimize or avoid.

In the March commentary we wrote:  “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.”  This continues to be our focus.

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.  We all hope that you have a truly wonderful summer!

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.