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October 30, 2023

Commentary: NCM Pension Portfolios

On October 30, 2023, Portfolio Manager John Poulter, CFA shared his latest views on equity and fixed income markets and how he is currently positioning the NCM Pension Portfolios.


Hello. My name's John Poulter. It's October 30th, 2023, and I'm the portfolio manager for the pension funds, the NCM pension funds. And I'm here to provide a little bit of a market review as we as we roll through or into the fourth quarter of 2023.

And I guess I'll start off with just giving a little bit of valuation background on the market. We are witnessing that capital markets don't like uncertainty and of course the growing conflict in Gaza and the ongoing conflict in Ukraine, and the self-imposed political bottleneck down in the US last month has created a little bit of a dismal fall for capital markets in general. And the great strong first half that we saw in 2023 has unfortunately given up some of those early gains. The S&P 500 is still in positive territory, but Canada's starting to edge into the negative for the year.

So uncertainty is certainly ruling the day right now. But what I find most frustrating about this is if you look through the political turmoil and focus on market fundamentals, things don't actually look all that bad. Recent earnings reports have been generally pretty strong. For example, in the reports that we've had for the third quarter, almost 80% of the companies in the S&P 500 that have reported are reporting higher numbers than what analysts had expected. So they're beating the expectations.

So, you know, quite simply, strong earnings reports should be, in my mind, supporting stock prices a little more. And if you couple that with the increasing expectations that central banks are moving towards the end of their tightening cycles and pauses are now expected by most market strategists and of course, pauses will lead to a cycle of easing. But unfortunately, the timing of the easing cycle too is uncertain. And it's partially because of the strength that we're seeing in the economy and the fact that inflation has been a little bit more stubborn. But we fully believe that we're going to have a reasonably good economic future going into 2024. And we also believe that the tightening that's happened will have its intended effect on inflation.

But there's no doubt that the first half of the year, people looking, watching the equity markets were starting to get more and more concerned about valuations getting stretched. And at the end of the second quarter, we did see weighted PE ratios move well through 20 times forward earnings, and even with the lower stock prices that we've seen over the last couple of months, the average PE for the ten biggest companies in the S&P 500 are, on average over 35 times earnings.

So that's not exactly cheap for those biggest companies. But as I often argue, the numbers that we see at the headline level for the S&P 500 are usually heavily skewed by the fact that the top ten companies in the S&P 500 make up a third of the market value. And of course, these top ten companies tend to be very tilted towards growth oriented names and those companies naturally trade with higher PEs.

But I also often make the point that the S&P 500 provides a very wide range of valuations and a little bit of an example there is that there's 70 companies in the 500 that have PEs of over 30 times, but there's 120 companies that have PEs below 12, and those 120 companies only add up to 4% of the market cap of the index. So to me that says there's some decent value to be surfaced. You just have to be focusing on the companies that are trading at the valuation levels that we think are more supportive of higher prices going forward.

And there's also the fact that investors will start looking out into 2024 as we wind down this year. And if you believe the people at Yardeni Research with their forecast of earnings for the S&P 500 at $250, that gives us a forward PE based on looking a little further out of 16.7 times. So I think that's a manageable number.

And, you know, all in all, equity markets, we believe that you should see some stability going forward. You combine an easing cycle for interest rates, maintain decent fundamentals, and if the economy remains as resilient as it is, it should, at least in my mind, create some decent support and ultimately higher stock prices across the board.

So focusing in on the Pension Portfolios, the pension funds specifically, we currently hold a neutral balance between equity and fixed income, maybe a small tilt to bonds in the conservative income portfolio and balanced income, but it’s very small. Within the equity portion of the portfolios, the funds continue to be a diversified mix of growth oriented investments and very specific ETFs, and then those are balanced with more value oriented investments found in our NCM Core Global fund and the Canadian Income and Growth Fund.

It's our expectation that our growth investments will provide very attractive excess returns as the rate cycle turns and the higher value embedded in the NCM funds should provide a pretty good defensive backstop given the uncertainty that's still colouring the markets these days.

The timing of major changes in fixed income markets means that we're going to remain with our defensive short term positioning, which means that we're continuing to grow at higher coupons from our high yield ETFs while still holding short term fixed income that are in quality investment grade positions. Generally speaking, short term fixed income are far less volatile when yields fluctuate and we're still not out of a yield fluctuation possibility given again, the uncertainty with what's going on with the credit cycles and our central bank activities.

But we believe that the barbell approach that we're taking with high yield and investment grade has been very beneficial through this year and it's helped us support some higher relative returns from this portion of our portfolio.

So that concludes my comments on what the NCM Pension Portfolios look like today as well as my outlook and expectations for the markets for both fixed income and equity markets in general. Thank you very much.


John Poulter is a Portfolio Manager, with Cumberland Investment Counsel Inc.(CIC). CIC is the sub-advisor to its affiliate, NCM Asset Management Ltd. The information in this video is current as of October 30, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.



John Poulter, CFA

John oversees key strategic asset allocation decisions across the firm and manages the NCM Pension Portfolios