The following commentary represents the opinions and analysis of Doug Nelson, Portfolio Manager and Founder, NPMC as of April 1, 2025.  The market and index returns noted below are based on the price changes for each quoted item for the period ending Monday, March 31st, 2025 unless stated otherwise.  Throughout this report, whenever 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 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, 2025 through to March 31, 2025:

What an interesting three months this has been:

• Over the past three months, the Toronto Stock Exchange Composite Total Return Index (TSX) gained +1.51%, driven mostly by defensive holdings such as gold (GLD, +19%) (and the related materials sector index (XMA, 20.10%)), utilities (XUT, +4.8%) and energy (XEG, +3.81%). This was offset by declines in Financials (XFN; -1.39%) and Technology (XIT, -8.09%).  These changes are always very interesting, which is why we like to show you Table #1 below.  For example, over the past 12 months the Financial sector (XFN) has gained by +20.95%, but most of this gain occurred in the July 1 to September 30, 2024 time period (+16.77%), which has more than offset the small declines in the spring months of 2024 and the winter months of 2025.
• In the U.S., the broad-based New York Stock Exchange Composite Total Return Index (NYA) increased in value by +2.14% but by comparison, the S&P 500 Total Return Index and the Nasdaq 100 index both declined by -4.27% and -8.07% respectfully. The difference between these three indexes is the amount of exposure to companies like Microsoft (MSFT; -10.76%), Alphabet (GOOGL; -18.21%), Amazon (AMZN; -13.28%), Apple (AAPL, -11.2%), Nvidia (NVDA, -19.29%) and Tesla (TSLA, -35.83%).  These 6 companies represent 38% of the Nasdaq 100 Total Return Index and approximately 25% of the S&P 500 Total Return Index.  Therefore, as these companies rise and fall, so too will both of these indexes.
• By comparison, the NFC Tactical Asset Allocation Pool had an approximate 9% exposure to these same companies and indexes, which did have an impact on our returns this past quarter. For example, if 9% of the portfolio declines by an average of 10%, this will subtract approximately -.009% from our returns.  This is the difference between a +1.9% return vs. a 1.0% return, for example.
• The impact felt by the declines in these companies can also been seen in the Equal Weight indexes. For example, the “market weight index” (S&P 500 Total Return Index; SPX) declined by -4.27% over the past three months whereas the “equal weight index” (S&P 500 Equal Weight Index; RSP) declined by only -0.61%.  This tells us that the bulk of the downward move in the equity markets was concentrated in the largest companies, such as those mentioned above.
• Another really big story for the first three months of the year is the international markets. Over the past three months, the Europe / Asia Index (EFA) increased by +8.09% and the Emerging Markets Index (XEM) increased by +4.37%.
• Over the past three months defensive investments also had healthy gains with the Canadian Broad Bond Index (XBB) gaining +1.97% and the U.S. Corporate Bond Index (XIG) gaining +2.10%.

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

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

To put the last 12 months (ending March 31, 2025) into perspective:

• In Table #1 above we see the S&P TSX Composite Total Return Index with gains of +15.81% over the past 12 months, where most of this gain occurred during the summer of 2024 (+10.54%, July 1 to September 30^th, 2024).
• We see similar returns in the United States with a 12-month gain of +8.23% for the broad-based New York Composite Total Return Index driven by gains in the U.S. Banking sector (ZUB, +13.91%).
• Over the past 12 months, the technology index (IGM) gained only +5.47%. The S&P 500 Total Return Index gained +8.23% and the Nasdaq 100 Total Return Index gained by +6.44%.
• The 12 month returns for the technology leaders are as follows: Microsoft (MSFT; -10.10%), Alphabet (GOOGL; +2.93%), Amazon (AMZN; +5.48%), Apple (AAPL, +30.15%), Nvidia (NVDA, +19.99%) and Tesla (TSLA, +47.43%).

All of this is very interesting:  is this a story of just a few companies having significant declines but where everything else is ok?  Are the concerns about higher U.S. tariffs and a trade war over blown?  Will countries be able to negotiate lower tariffs and alternative trade deals?

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

• Over the past three months the NFC Tactical Asset Allocation Pool (the “Pool”) declined in value with a return of -0.68% (vs. the TSX Composite Total Return Index at +1.51%).
• Over the past 12 months, the Pool gained by +8.08% (vs. the TSX Composite Total Return Index at +15.81%).
• As a balanced investment pool, our goal is to generate a return greater than 70% of the return of the TSX Composite Total Return Index. Over the past three months 70% of the TSX Composite Total Return Index is +1.06% (vs. the Pool return of -0.60%) and over the past 12 months 70% of the TSX Composite Total Return Index is +11.07% (vs. the Pool return of +8.08%).
• This means to us that the Pool return (+8.08%) captured only 51% of the upside of the return of the TSX Composite Total Return Index over the past 12 months.

Why did this happen?

• The Pool surpassed the 70% hurdle level vs. the TSX Composite Total Return Index during the Spring and Fall 2024 time periods and only slightly under performed during the Winter 2025 time period. The bulk of the under-performance took place during the summer 2024 time period where the TSX Composite Total Return Index gained by +10.54% vs. a gain of only +3.68% for the Pool.
• Similar to some of the comparisons I have made above about the core technology companies, these companies also under performed during the summer of 2024 with Microsoft, Amazon, Google and Nvidia also producing negative returns, which in turn impacted the returns in the Pool.
• Over the past three months, only 35% of our holdings in the Pool declined while 65% of our holdings gained in value. We had 9 investments that declined by more than 10% over the past three months, which moved our total return downwards by an additional -1.4%.  The remainder of the holdings contributed to positive gains.
• As I mentioned above, looking back over the past three months we see that larger declines from a small number of companies have contributed to most of the negative returns for the quarter.

Digging a little deeper, over the past 12 months:

• The growth component of the Pool (equities) gained in value by +9.53% (vs. the S&P TSX Composite Total Return Index at +15.81% and the New York Composite Total Return Index at +8.23%). Our largest 12-month gains have been from Progressive Insurance Corp. (PGR, +47.87%), Goldman Sachs Group (GS, +41.50%), Apple (AAPL, +38.195%) and Costco (COST, +37.749%) while the lowest returns came from the transportation sector:  TFI International Inc. (TFII, -47.726%), Landstar Systems, Inc. (LSTR, -15.836%) and Canadian Pacific Kansas City Limited (CP, -14.8%).
• The defensive component of the Pool gained by +19.83%, far outpacing the broad Core Canadian Universe Bond Index (XBB, +7.47%). As interest rates declined, the market value of our individual bond holdings increased significantly, with the 12-month returns of several bonds and Preferred Shares gaining by +10% to +25%.
• Over the past three months, the growth component of the Pool (equities) declined by -1.71% (vs. the TSX Composite Total Return Index at +1.51%, the S&P 500 Total Return Index at -4.27% and the Nasdaq 100 Index at -8.07%. By comparison, the performance of our equities have done quite well.
• The Pool began the year with approximately 70% of its stock market exposure in the U.S. and 30% in Canada. If we calculated an estimated return for this mix (70% X -4.27%, S&P 500 Total Return Index) + (30% X 1.51%, TSX Composite Total Return Index) we would see a weighted equity return of -2.536% (vs. our equity returns of -1.71%).  This is good!
• This means that we outperformed the weighted index calculation, but because we were underweight Canadian equity market exposure, we underperformed relative to the Toronto Stock Exchange Composite Total Return Index.

Today our U.S. equity exposure is approximately 10% less than where we started the year.  We have trimmed a large portion of our U.S. equity exposure in favour of owning more short-term cash and bonds.  You can see these changes in Table #2 below where the growth component of the Pool has been reduced from 56% down to 46% and the defensive component has increased by a similar amount.  This is an 18% reduction in our exposure to equities.

Table #2:  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 (-0.68%) and 12 months (+8.08%), is generating a total distribution (interest and dividends) of approximately 4% annually and is now invested in a more defensive manner.  We have under-performed relative to some of our benchmarks due to our overweight U.S. equity position and due to some of the larger declines from a handful of holdings.

What have we been doing over the past few months?

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

Buys and Sells:  Over the past three months we executed 26 sell orders:

• NFC Tactical Asset Allocation Pool: Over the past three months we moved approximately $13 million from equity holdings to defensive holdings.  We trimmed some of our holdings that have done very well (Costco, Progressive Insurance, Goldman Sacks, CIBC and Brookfield Corp.) while also trimming and selling some of our “trading positions” (the S&P 500 Total Return Index, the Nasdaq 100 Index, IShares Semiconductor Index (SOXX), Ishares U.S. Small Cap Index ETF (XSU)).  77% of all of our sells were related to U.S. equities.
• Client Accounts: At the client account level, we sold 4 securities:  Bank of America (BAC), Landstar Systems (LSTR), Dream Industrial REIT (DIR.UN) and Topaz Energy (TPZ), for those clients who owned these securities.  With the proceeds we added to our international exposure by purchasing the Europe / Asia index (EFA), Tourmaline (a natural gas company) and Stella Jones (a company that manufactures railway ties and telephone poles).

Equity Buys:  Over the past three months we executed 16 buy orders, where 84% of the dollar value of our transactions have been allocated towards defensive investments.

• Topping Up Current Positions: Based on some of the corrections we saw through the winter months we topped up 3 of our current equity holdings:
  • Comfort Systems (FIX): Comfort Systems provides HVAC systems for data centres.  As the expansion of data centres continue, Comfort Systems can play a significant role. We have been building our position in this company very gradually given its “higher valuation multiple” (ie: it has been expensive to buy).  At this time it is 38% off of its all-time high, so we have been gradually adding to it during this period.
  • Stella Jones (SJ, treated lumber): We believe that Stella Jones is somewhat recession resistant and given that it is 28% off of its 52 week high, we continue to add to it.
  • TFI International (TFI, transportation): TFI corrected very quickly this past quarter, dropping 37% since January 30^th.  We have held this position since 2017, seeing 5 year compounded returns of 31% per year.  Thus, with this unfortunate decline, we have been adding to this position, believing that the correction in this security is overdone.

• New Positions:
  • Gold: In early February we added a Gold ETF (Global X Gold, HUG) that is a currency hedged version of owning gold.  Since that time our position is up by 10% (in two months).  While I am pleased with the gain, this also looks like the return is quite stretched and could decline if it looks like the tariff issues will be resolved in the shorter term.
  • Short Term & Mid-Term Bond ETF’s in both Canada and the U.S. These are short-term holdings today that we could sell at any time and deploy into equities if markets begin to reverse their current course.  Alternatively, if markets continue to decline, we can remain in these holdings for some time and potentially see some reasonable capital gains.

• Private Markets: Adding to Private Infrastructure: This past quarter we added a new allocation to the Hamilton Lane Global Private Infrastructure Fund (https://www.hamiltonlane.com/en-us/strategies/infrastructure) that invests into energy production, transportation and telecommunications.

At this time our bias continues to be defensive until we have a little more clarity on the direction of the U.S government as it relates to trade and tariff policies.  A more aggressive stance towards high tariffs runs the risk of slowing the global economy, creating a recession and reducing stock prices.  A resolution around the uncertainties could trigger a rise in the equity markets.  However, I am not convinced at this time that this rise would continue over a longer period of time.

Where Do We Go from Here?

At this time we have no choice but to go from week to week and month to month, assessing the impact of each new piece of news and information along the way.

I do like our current position as we are able to quickly add to those holdings that have declined the most, or that has the most upside potential moving forward.

Today the Trump administration announced increased tariffs for most of their trading partners, adding various levels of tariffs.  This is creating some uncertainty over the shorter term.  The key at this point is to i) maintain holdings in quality companies, ii) add more to other quality companies that have been oversold, iii) make methodical portfolio changes one step at a time and iv) maintain a tilt towards defense so as to err on the side of caution as events unfold.

Should you have any questions, please reach out to me (dnelson@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

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.