Year-to-date to August 31, the Ninepoint Focused Global Dividend Class generated a total return of 18.38% compared to the S&P Global 1200 Index, which generated a total return of 11.87%. For the month, the Fund generated a total return of 2.72% while the Index generated a total return of -0.69%. Despite an extremely volatile month, with President Trump continuing to escalate the US-China trade war, plunging bond yields were generally supportive for our defensive positioning.
The month of August, typically a quiet period for the equity markets, began with a mid-afternoon tweet from Trump threatening to impose 10% tariffs on a third tranche of Chinese imports worth approximately $300 billion. Details were later clarified by the US Trade Representative, with tariffs on about $112 billion worth of goods effective September 1 but tariffs on the remaining $160 billion worth of goods delayed until December 15 because of “health, safety, national security and other factors”. In the days that followed, the vicious cycle continued. China retaliated with tariffs on $75 billion worth of US imports and Trump petulantly announced incremental tariffs of 5% on all three tranches of Chinese imports, impacting almost $550 billion worth of goods.
The broad equity markets were obviously unimpressed and promptly plunged in thin trading, with the S&P 500 down almost 5% from the close on July 31 to the lows of the move on August 5. However, fear of an imminent recession was most evident in the bond market, with panic buying rapidly pushing the US 10-year Treasury yield below 1.45%. Importantly, the US 2-year to 10-year Treasury yield curve briefly inverted, which historically has been a good predictor of an economic downturn within one to two years, assuming a normal interest rate and inflationary environment.
In response, both the ECB and the US Fed reiterated their willingness to ease monetary conditions and support economic growth. Based on US Fed funds futures, we expect at least another 50 bps of interest rate cuts by December 2019 but continue to believe that the current environment will prove to be a mid-cycle slowdown. However, accommodative monetary policy and easing trade tensions will now be required for robust economic growth. At this stage of the cycle, we will be watching the US consumer extremely closely but, if signs of stress don’t materialize, US economic growth should remain positive.
During August, the portfolio benefitted from our barbell investment strategy, which blended steady, consistent yield with steady, consistent growth. Our holdings in the traditional bond proxy sectors, such as Utilities and Real Estate, rallied as dividend yields compressed, thus directionally maintaining the spread to US 10-year Treasury bond yields. Similarly, our holdings in secular growth sectors, such as Consumer Staples and Information Technology, rallied as price-to-earnings multiples expanded, thus correctly incorporating the lower risk-free rate of return.
Top contributors to the year-to-date performance of the Ninepoint Focused Global Dividend Class by sector included Information Technology (+510bps), Industrials (+393 bps) and Communication (+216 bps) while no sector had a negative contribution on an absolute basis. On a relative basis, positive return contributions from the Industrials, Information Technology, Real Estate, Communication, Utilities, Energy, Health Care and Financials sectors more than offset negative contributions from the Materials, Consumer Staples and Consumer Discretionary sectors. Note that the underperformance in the Materials sector was primarily due to a sector allocation decision as opposed to individual stock picks.
We are currently overweight the Health Care, Real Estate, Industrials and Information Technology sectors while underweight the Financials, Materials, Consumer Discretionary, Energy and Communication sectors. Again, we are relatively defensively positioned given the ongoing US-China trade war but would look to shift the portfolio toward more economically-sensitive sectors should we see some form of progress in the negotiations.
At the stock specific level, top contributors to the year-to-date performance included Mastercard (+201 bps), Microsoft (+193 bps) and American Tower (+131 bps). Top detractors year-to-date included Anthem (-56 bps), Citigroup (-51 bps) and Amazon (-39 bps).
In August, our top performing investments included Equinix (+34 bps), American Tower (+31 bps) and Northrop Grumman (+25 bps) while Synchrony Financial (-26 bps), Citigroup (-14 bps) and Amazon (-13 bps) underperformed.
One of our top performing stocks in August, Medtronic PLC, rallied after reporting a solid beat-and-raise quarter on August 20. Recall that as one of the world’s largest medical technologies companies, Medtronic operates in several complex segments of the market under the following divisions: Cardiac & Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group and Diabetes Group.
For the first quarter of fiscal 2020, the Company reported that revenue of $7.5 billion increased 1.5% (or 3.5% in constant currency), operating margins expanded 90 bps to 28.2% and reported EPS of $1.26 increased 8% (or 9% in constant currency). Based on the excellent start to the fiscal year, management updated guidance for fiscal 2020, reiterated revenue growth of 4.0% on an organic basis and raised fiscal 2020 EPS guidance from a prior range of $5.44 to $5.50 to a new range of $5.54 to $5.60 (including a negative impact from FX rates of approximately $0.10 per share). Confident in their outlook, the Company’s board of directors increased the quarterly dividend by 8% to $0.54 per share on August 23.
Importantly, management expects revenue growth to accelerate through the balance of the year and into fiscal 2021 as the Company’s strong pipeline translates into new product launches. We are particularly excited to hear more about Medtronic’s new soft tissue surgical robot system with further details expected at the Company’s analyst day on September 24, 2019. The system is expected to eventually compete against Intuitive Surgical in the robotic surgery market, after almost two decades of dominance by ISRG. Upside could be significant from a stock perspective since MDT currently trades at approximately 18x forward estimates while ISRG currently trades at approximately 37x forward estimates. Admittedly Intuitive Surgical is by far the dominant player in the market but even a modest amount of commercial success for Medtronic could help to narrow this tremendous valuation gap.
The Ninepoint Focused Global Dividend Class was concentrated in 28 positions as at August 31, 2019 with the top 10 holdings accounting for approximately 39.0% of the fund. Over the prior fiscal year, 26 out of our 28 holdings have announced a dividend increase, with an average hike of 13.9%. 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
1 All returns and fund details are a) based on Series F shares; b) net of fees; c) annualized if period is greater than one year; d) as at August 30, 2019; e) 2015 annual returns are from 11/25/15 to 12/31/15. The index is S&P GLOBAL 1200 TR (CAD) and is computed by Ninepoint Partners LP based on publicly available index information.
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