NexC April Commentary

 Market Backdrop

We continue to believe that unprecedented central bank accommodation across the globe is supportive for high quality, dividend-paying equities. Global data was generally poor throughout the month evidenced by weak industrial production across Europe and China. The US also hit a soft patch, which was highlighted by disappointing payroll and retail sales numbers.

With global growth pointing towards slowdown, commodity prices came under pressure, as energy and metals experienced volatile selloffs. In Japan, the BOJ pledged massive additional bond purchase in hopes of achieving a 2% inflation target and sending reflation trades soaring; while in Europe sovereign yields tightened in anticipation of ECB easing to address economic contraction across the euro-zone. Canadian equity markets fell in response to the macro weakness. On the other hand, US equities largely ignored the weakening fundamental picture, and rallied back with the S&P reaching new all time highs; the market viewed worsening economic data as a positive sign which would encourage further accommodative action from global central banks.

Fund Commentary

A continuation of the trends that drove solid performance in Q1 created additional NAV appreciation in April. Geographic diversification helped, with significant outperformance of US names. Against a backdrop of a 1.9% gain in the S&P500, the portfolio’s US names averaged gains of 4.3%. Canadian names averaged positive gains as well, with security selection benefits able to overcome the headwind of a -1.7% loss in the S&P/TSX60.

Utilities and IT exposure posted exceptionally strong returns, with solid gains also coming from Financials and Consumer Staples. The value of sector diversification is highlighted by the strong IT contribution, which is not typically a large exposure in Canadian dividend portfolios. Our best performing single name was Entergy, which was re-rated by the market on positive earnings expectations and progress on a corporate transaction with ITC. In technology, SAIC Inc. was also a positive outlier on a steady succession of positive news. Meanwhile, we experienced a modest performance drag from exposure to the Consumer Discretionary and Industrials sectors. The loss in Industrials was entirely due to weakness in Finning International, which sold off in sympathy with weakness in the Canadian materials sector. Similarly, the loss in Telcom was largely due to Shaw Communications’ disclosure of subscriber losses in their quarterly report.

There was no turnover of names in March. A partial covered call overwriting program is in effect for about 13% of underlying equity exposure spread across 13 names at month end. FX forward hedges cover about 80% the USD exposure. We are currently not using leverage for management of the NexC portfolio.

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