Ninepoint Focused US Dividend Class

August 2018 Commentary

Year-to-date to August 31, the Ninepoint Focused US Dividend Class generated a total return of 9.25% compared to the S&P 500 Index (CAD), which generated a total return of 14.07%.

Returns in the month of August were excellent on an absolute basis but slightly disappointing on a relative basis, with the Fund generating a total return of 2.47% while the benchmark generated a total return of 3.60%. Our investments in the Information Technology, Healthcare and Financials sectors performed well and offset weakness in the Energy and Industrials sectors.

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, current expectations for 2019 are calling for another year of double digit earnings growth.

Our modelling indicates that the Canadian dollar should continue to weaken in 2018. However, with Mexico agreeing to some form of bilateral trade agreement with the United States, currency volatility has picked up. Although Canada reportedly missed a month end deadline, we are hopeful that a more equitable, negotiated trilateral agreement can be reached shortly. We have therefore added some USD/CAD currency hedges to reduce volatility in the Fund.
Top contributors to the year-to-date performance of the Ninepoint Focused US Dividend Class included Mastercard (+173 bps), Microsoft (+157 bps) and Apple (+156 bps). Top detractors year-to-date included Comcast (-57 bps), Facebook (-47 bps) and MGM Resorts (-40 bps).

The race to attain a $1 trillion market capitalization has been won by Apple and the shares continued to power higher in August. The stock has clearly benefited from positive earnings revisions after the release of the Company’s Q3 fiscal 2018 results. In the quarter, Apple posted revenue of $53.3 billion (an increase of 17%) and earnings per diluted share of $2.34 (an increase of 40%). Importantly, Service revenue grew 31% on a year over year basis to $9.5 billion (or 18% of total sales), which is supportive of the ecosystem over hardware debate. Because of the solid execution, the forward NTM P/E multiple has expanded from a low of approximately 12.5x in 2016 to 16.25x today.

Based on prior trading patterns but excluding the potential impact of any company-specific tariffs, we would expect share price strength through Apple’s next product event, scheduled for September 12, 2018. We will likely hear details about the latest iPhones, rumoured to come in 5.8, 6.1 and 6.5-inch sizes, in multiple colours and with higher quality OLED screens in possibly two of the three new models.

The Ninepoint Focused US Dividend Class was concentrated in 30 positions as at August 31, 2018 with the top 10 holdings accounting for approximately 43.5% of the fund. Over the prior fiscal year, 26 out of our 30 holdings have announced a dividend increase, with an average hike of 28.9%. 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