The following commentary represents the opinions and analysis of Doug Nelson, Portfolio Manager and Founder, NPMC- and Lynda Harris, Portfolio Manager, NPMC as of January 2^nd, 2025.  The market and index returns noted below are based on the price changes for each quoted item for the period ending Tuesday, December 31^st, 2024 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 September 30^th, 2024 through to December 31st, 2024:

• Over the past three months, the Toronto Stock Exchange Composite Total Return Index (TSX) gained +3.76%, driven mostly by strong gains in the Financials (XFN; +6.46%) and Technology (XIT, +17.55%) but were offset by a smaller gain in Energy (XEG, +2.35%) and declines in Materials (XMA; -4.85%) and Real Estate (XRE; -15.13%).
• In the U.S., the broad-based New York Stock Exchange Composite Total Return Index (NYA) declined by -1.67% over the past three months due mostly to declines in U.S. Health Care (ZUH, -9.56%). It was the U.S. Banking sector that saw some of the larger gains of +9.66% (ZUB).  Technology posted mixed returns over the past three months: Microsoft (MSFT; -1.85%), Alphabet (GOOGL; +14.27%), Amazon (AMZN; +17.74%) and the Semi-conductor Index (SOXX; -6.40%).
• In the last report we mentioned that we were seeing signs of greater market breadth (this is good!): For example, the “market weight index” (S&P 500 Total Return Index, SPX) gained by +5.89% while the “equal weight index” (S&P 500 Equal Weight Index; RSP) gained by +9.6% through the summer months.  This tells us that more companies are participating in the upward direction of the market, which is important for the market to continue to climb in value.  This trend continued until late November 2024.  From October 1^st, 2024 through to the end of November, the US Small Cap Index (XSU) generated more than double the return of the S&P 500 Index (SPX) and the S&P 500 Equal Weight Index (RSP) also generated a higher rate of return.  However, in December 2024 we saw some of these trends begin to change once again, so we will need to see what the first part of this year has in store.
• Internationally, over the past three months, the Europe / Asia Index (EFA) declined by -8.36% and the Emerging Markets Index (XEM) declined by -1.50%.
• Over the past three months the defensive investments were mostly flat to slightly negative while it was the U.S. Corporate Bond Index (XIG) that declined the most at -4.48%.
  

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 December 31^st, 2024) into perspective:

• In Table #1 above we see the S&P TSX Composite Total Return Index with gains of +21.65% over the past 12 months, where most of this gain occurred during the winter months (+6.62%, January 1st to March 31, 2024) and summer months (+10.54%, July 1 to September 30^th, 2024).
• We see similar returns in the United States with a 12 month gain of +15.79% for the broad-based New York Composite Total Return Index driven by gains in the U.S. Banking sector (ZUB, +33.44%) and Technology (IGM, +37%).

While all of this looks very good, the month of December was a little concerning:

• The New-York Composite Total Return Index (NYA) declined by -5.62% and the U.S. Small Company Index (XSU) declined by -8.89%.
• The S&P TSX Composite Index in Canada (XIC) declined by -3.48% between December 6^th and the end of the month while the Equal Weight U.S. Banks Index (ZUB) declined by -7.01%.

This is interesting as some of these declines may have been triggered by comments from the U.S. Federal Reserve.  After their last meeting in early December 2024, they noted that they expect to reduce interest rates in 2025 less than previously expected, due to economic growth and inflation considerations.

As a result, the price of 10-year U.S. government bonds dropped by -9.31%, pushing the long-term bond interest rate from 4.2% to 4.58%.  This is a very significant move, which would definitely impact stock prices, such as what we note above.

What is this potentially telling us?

This may be telling us that the U.S. markets are now viewing the future with some degree of concern.  While the Trump government may be promoting “pro-growth” U.S. policies, this growth may also result in higher inflation, which then also potentially means higher U.S. interest rates.  Higher future potential interest rates in the U.S. can also translate into a higher U.S. dollar (See Chart #1).

Chart #1: July 1^st, 2021 to October 14^th, 2022:  The value of the US dollar increased in a similar manner to the increases seen in the yield on the U.S. 10-year bond.

In the month of December 2024, the U.S. Dollar Index (DXY) increased by +2.55% and since October 1, 2024 the index has increased by a very significant +7.16%.  A strong U.S. dollar makes it more expensive for U.S. companies to sell abroad, which could impact earnings of U.S. companies, resulting in lower stock prices (See Chart #2 below). If the Trump policies also promote a more closed U.S. economy (through tariffs for example), this could also impact the earnings of U.S. companies by increasing input costs.

By comparison, the Canadian dollar, relative to the U.S. dollar, has declined by -6.32% also since October 1, 2024 such that we are now seeing the Canadian dollar trade at under 68 cents to the US Dollar.

What’s the take away?  There is a greater range of future outcomes which means that we need to be cautious.  It is difficult to know the extent of some of the Trump policies, the timing of their implementation and the ripple effect on other things.  This does not mean that the growth side of your portfolio can’t do well in 2025.  2025 could be another strong year in the markets, but we will want to be watching closely the change in the value of the US Dollar as well as the yield on the 10-year U.S. government bond.

Chart #2:  During this same period of time (July 2021 through October 2022), stocks declined:

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”) gained in value with a return of +2.91% (vs. the TSX Composite Total Return Index at +3.76%).
• Over the past 12 months, the Pool gained by +16.34% (vs. the TSX Composite Total Return Index at +21.65%).
• 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 +2.632% (vs. the Pool return of +2.91%) and over the past 12 months 70% of the TSX Composite Total Return Index is +15.16% (vs. the Pool return of +16.34%).
• This means to us that the Pool return (+16.34%) captured 75.5% of the upside of the return of the TSX Composite Total Return Index over the past 12 months.

Digging a little deeper, over the past 12 months:

• The growth component of the Pool (equities) gained in value by +24.10% (vs. the TSX Composite Total Return Index at +21.65% and the New York Composite Total Return Index at +15.79%). Our largest 12-month gains have been from Progressive Insurance Corp. (PGR, +65.0%), Goldman Sachs Group (GS, +65.0%), Amazon (AMZN, +57.5%) and Amphenol Corp. (APH, +54.0%) while the lowest returns came from the Real Estate sector Prologis (PLD, -11.20%) and Dream Industrial REIT (DIR.UN, -10.76%).
• The defensive component of the Pool gained by +20.4%, far outpacing the broad Core Canadian Universe Bond Index (XBB, +3.98%). 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 over +30.0%.
• Over the past three months, the growth component of the Pool (equities) gained by +3.9% (vs. the TSX Composite Total Return Index at +3.76%.

Our equity holdings under-performed over the summer months but out-performed over the fall months as well as over the past 12 months.

Now let’s take a closer look at the month of December 2024 where the Pool declined by only -1.576% vs. the S&P TSX Composite Total Return Index (the Toronto Stock Exchange) declining by -3.59%.  This means that the Pool protected against almost 60% of the market decline.  Also, by comparison, the Balanced – Growth ETF sample model portfolio declined by -2.76% in December 2024 showing again how our Tactical approach is beneficial during times of market declines.

The current asset mix of the Pool remains at approximately 44% defensive and 56% growth. Therefore, we continue to be tilted more towards growth today. This is similar to where the asset mix was 12 months ago.

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 and 12 months, is generating a total distribution (interest and dividends) of approximately 4% annually and yet is invested today in a neutral – balanced manner.

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 we executed 2 sell orders in the Pool where we exited these positions either to protect the downside or deploy money into other sectors or securities where we see more positive trends and growth potential:

• Lumine Group Inc. (LMN.V) was a spin-off from our Constellation Software (CSU.TO) holding. We decided to sell Lumine as we saw continued declines from the last quarter (-13.0% from July 1, 2024 to October 23, 2024). As we have exposure to the same business in Constellation Software (CSU), which is a longer standing company, we decided to use these funds to top up other existing securities in the real estate sector, materials and consumer staples. We invested $350,000 into Lumine in April 2023 and sold it for $750,000 in October 2024.
• We exited NovoNordisk (NVO) after a decline in the stock due to their late-stage trials on their weight loss / obesity drug had disappointing results and lagged other competitors. We saw possible further downside risk as well, so we decided to exit the position and capture our 80% gain over the last couple of years by taking that profit. We have a good exposure to the Health Care sector therefore we would hold this cash and use it over time to add to existing holdings or new opportunities as the New Year unfolds. We invested $382,000 USD and sold this position for $634,000 USD.

Equity Buys:  We executed 20 buy orders in the last three months:

• Boyd Group Services Inc.: We added one new equity position in the past three months. Boyd Group Services Inc. (BYD) is a Canadian company which operates automotive collision repair centers in North America.  They provide collision repair, glass repair and related services.   This company was recognized by the research team at BCV Asset Management as an undervalued company with strong upside potential.  Over the past 12 months the stock price has declined by -20%, creating an interesting investment opportunity.

• Topping Up Current Positions: Based on some of the corrections we saw through the summer months we topped up 16 different equity holdings. Some of these included Stella Jones (SJ, treated lumber), Abbvie (ABBV, Pharmaceuticals), Accenture (ACN, Technology consulting), Reliance Metals (RS, Aluminum products), UFPI Industries (UFPI, lumber products), Cintas (CTAS, uniforms and office supplies) and Rollins (ROL, pest control).  When stocks fluctuate, we take advantage of this volatility to add to current positions.  We also continued to add to our Real Estate Investment Trust holdings with the belief that as interest rates decline, these investments should do well.
• Additionally, we added to Alimentation Couche Tard (ATD) in the Consumer Staples sector. ATD is one of the largest convenience store operators in the world (Mac’s, Circle K) who are in the process of attempting to acquire the 7-Eleven stores.  They have over $7 billion in annual revenue and 149,000 employees.  Over the last three years ATD has generated a return of +15.0% per year, double that of the S&P TSX 60 Total Return Index.
• Private Markets: Adding to Private Equity: This past quarter we added a new allocation to Trez Capital US Opportunity Fund, which we had decided in August 2024 to start this new investment as a longer term hold inside of the Pool.  This is a new land development project with an anticipated annual return of 12% per year. We exited our previous Trez holding: Trez Capital Yield Trust in early September 2024 to fund this purchase with capital over the next couple of months.
• Private Markets: Exiting Frontenac Mortgage Investment Corporation (WAR111): This past quarter we received news of the wind up of Frontenac Mortgage Investment Corporation which has been a long-term alternative (private lending pool) holding of ours. The windup is occurring after a strategy review of their business and their wishes to move forward in a different direction. We attended the Shareholders meeting on December 18, 2024 and voted to pass resolutions related to the wind up and payout of the fund.  On December 20, 2024 we received the first payout into the Pool and each client portfolio for one third (1/3) of the value of each investment. We will be reallocating this cash to a fixed income security in the month of January as we review the portfolios overall and will continue to do so with each repayment throughout 2025. The anticipated full payout is expected to be completed by November 2025.

Summary:  Over the past 12 months, the Pool’s assets under management have continued to increase, due to both returns and new deposits, from $100 million at the end of December 2023 to $122 million at the end of December 2024.  With these increased deposits, we have added more to growth-oriented investments and some to defensive / income-oriented investments.  We have kept the Pool tilted slightly more towards growth and our asset allocation remains the same this quarter with 56% growth oriented and 44% defensive.  Comparatively, at the end of December 2023, we were 54% growth oriented and 46% defensive.  The Pool is generating a yield exceeding 4%, which provides an excellent foundation for future total returns.

Where Do We Go from Here?

A change in government can often result in a change of direction both politically and economically.  Change is typically good in that it provides a counterbalance to previous ideas while providing fresh energy, enthusiasm and hope.  This is good!

However, with the recent change in the U.S. and the uncertainty as to the degree to which the Trump administration will act on its stated goals, the range of potential future outcomes is now greater than what had been expected with a re-elected Biden / Harris government.  With this greater uncertainty comes greater volatility, such as what we saw as the contrast between October / November positive returns and the rather sharp declines that we saw in the month of December.

Returning back to our comments regarding Charts #1 and #2, back in 2022 the correction to the S&P 500 index looked as follows (Chart #3 below), leading up to October 2022.

Chart #3:  S&P 500 Index price chart for the 5 years ending October 2022:

Back in 2022, markets peaked on January 1^st and then declined through much of the year.  The S&P 500 index declined by approximately -15% throughout 2022.

By comparison, today we see that the S&P 500 index is still in its uptrend, which means to us that while we wish to be watchful and mindful of changes in the direction of markets due to a rising US dollar and U.S. interest rates, this has not impacted the direction of the market just yet.

 Chart #4:  S&P 500 Index price chart for the 5 years ending December 31, 2024:

So at this time, our thoughts shift to the month of January.  Will January returns be positive and thus suggest a positive direction for the year or will we see the opposite?  This is something that we will be tracking closely throughout the month of January.  If we see continued weakness, we will be trimming some of our current positions and increasing our cash weight.  In this environment we could see the value of both stocks and bonds decline, therefore, exposure to the private markets and other alternative income strategies may be the best approach.

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.