Year-to-date to July 31, the Ninepoint Focused US Dividend Class generated a total return of 6.62% compared to the S&P 500 Index, which generated a total return of 10.11%.
Returns in the month of July were excellent on an absolute basis but slightly disappointing on a relative basis, with the Fund generating a total return of 2.50% while the benchmark generated a total return of 2.63%. Despite fears of a global trade war, earnings growth in the second quarter was outstanding, with growth coming in at approximately 23% year over year (for those companies reporting positive earnings). The Industrials, Health Care and Financials sectors outperformed while the Real Estate, Telecom and Energy sectors underperformed over the course of the month.
Admittedly, we are later in the economic and investment cycle but we believe that it is too early to position for an outright downturn. The economic data remains robust and, broadly speaking, earnings growth will be exceptional through the balance of 2018. Further, the current expectation for 2019 is another year of double digit earnings growth.
Our modelling indicates that the Canadian dollar should continue to weaken in 2018. Because a resolution to the ongoing NAFTA negotiations is looking less likely in the near term, we have closed out our currency hedging, returning to a neutral positioning relative to our benchmark.
Top contributors to the year-to-date performance of the Ninepoint Focused US Dividend Class included Mastercard (+133 bps), Microsoft (+126 bps) and CSX (+110 bps). Top detractors year-to-date included Facebook (-56 bps), Comcast (-56 bps) and MGM Resorts (-38 bps).
We firmly believe that wealth creation over time requires adherence to a disciplined investment process. In July, we enjoyed solid gains from stocks such as Marathon Petroleum (up 14.0%), Thermo Fisher (up 12.0%), J.P. Morgan Chase (up 9.9%), CSX (up 9.7%) and Alphabet (up 8.0%), all in CAD terms. When Facebook (FB US) scored highly based on our work, we built a position after completing our fundamental analysis of the Company. With several top social media platforms, a solid revenue growth outlook and a top tier return on invested capital we could see the merits of the investment case. However, with the release of the Company’s second quarter earnings, management downgraded revenue growth expectations from 42% in the quarter to “[a] decline by high-single digit percentages from prior quarters sequentially in both Q3 and Q4”. Given elevated spending on safety and security, we expect margins to decline over the balance of the year. Although Facebook may again score highly at some point in the future, we remained disciplined and disappointingly sold our position at a small loss.
The Ninepoint Focused US Dividend Class was concentrated in 29 positions as at July 31, 2018 with the top 10 holdings accounting for approximately 41.8% of the fund. Over the past year, 25 out of our 29 holdings have announced a dividend increase, with an average hike of 16.6%. We will continue to apply a disciplined investment process, balancing various quality and valuation metrics, in an effort to generate solid risk-adjusted returns.
Jeffrey Sayer, CFA