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Portfolio Management & Financial Counsel
Investment Review
June, 2018
Portfolio Management & Financial Counsel
1
OUTLINE
1. Inside Nexus
2. Current Environment
3. Portfolio Overview
4. Investment Performance
Portfolio Management & Financial Counsel
2
We continue to build our capability to support our clients and our vision
INSIDE NEXUS
Our Vision Our Clients
Our PeopleOur Firm
◆ To be one of Canada’s most respected
investment counselling firms focused on private clients and foundations
◆ Nexus has surpassed $1.8 billion in assets under management
◆ We have approximately 550 clients with a range of portfolios up to $100 million in size
◆ 98% client retention rate (1)
◆ Improved custody fee schedule with RBC IS for clients who hold a
“segregated” portfolio
◆ Our team is growing!
• Alana Awad, Vice President, Investment Analyst
(1) Calculated as the average annual retention rate from December 31, 2007 to December 31, 2017.
Portfolio Management & Financial Counsel
5
15
25
35
45
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
VIX
20-year Average
3
CURRENT ENVIRONMENT
◆ Geopolitics • North Korea, Middle East, Europe
◆ Trade disruption • NAFTA, China
◆ Rising interest rates
◆ High debt levels• Consumers
• Government
Investors remain preoccupied with a long list of concerns… …and market volatility has recently increased
VIX (The Fear Index) (1)
Source: Bloomberg. (1) The Chicago Board Options Exchange Volatility Index is often used as a market estimate of future volatility of the S&P 500, and is commonly referred to as the fear index.(2) The twenty year average is 20.32.
• A higher VIX does not necessarily imply the end of the bull market
(2)
Portfolio Management & Financial Counsel
4
CURRENT ENVIRONMENT
Despite many “Made in Canada” specific worries…
Canada
◆ Household indebtedness
◆ Relative competitiveness • Tax rates
• Wages and energy costs
◆ Dysfunctional politics
◆ Slowdown in job growth• 41,000 jobs lost in 2018 (YTD)
◆ NAFTA
Portfolio Management & Financial Counsel
-4
-3
-2
-1
0
1
2
3
4
74%
76%
78%
80%
82%
84%
86%
88%
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Canadian Capacity Utilization (LHS)
Business Outlook Survey (RHS)
5
CURRENT ENVIRONMENT
…the economy is proving resilient
Source: Bloomberg. (1) YOY growth of average hourly earnings of permanent workers for April was 3.3%. (2) The Business Outlook Survey is a diffusion index calculated quarterly from consultations between Bank of Canada staff and businesses across Canada. Employment, pricing, revenue growth and
competitive conditions are some of the factors considered.(3) In May, the CFIB Business Barometer Index rose to 62.5 from 56.6 in April.
Canada
Business Outlook Survey (2) and Capacity Utilization
4%
6%
8%
10%
12%
14%
Feb-88 Feb-93 Feb-98 Feb-03 Feb-08 Feb-13 Feb-18
Canadian Unemployment Rate
5.8%
• Wage growth is increasing (1) • CFIB business barometer has rebounded (3)
Portfolio Management & Financial Counsel
96
98
100
102
104
106
108
110
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-181500
2500
3500
4500
5500
6500
7500
2.5%
3.0%
3.5%
4.0%
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
Job Openings (RHS)Job Hires (LHS)Job Separations (LHS)
6
CURRENT ENVIRONMENT
The U.S. economy continues to power ahead
Index of Leading Economic Indicators (LEI) (1)Job Opening and Labour Turnover Survey (JOLTS)
Source: Bloomberg.(1) The LEI Index is comprised of ten components, such as the length of the work week, consumer expectations, new orders for capital goods, and the S&P 500 Index.
United States
• Near record number of unfilled jobs
• Hirings and voluntary separations accelerating
Portfolio Management & Financial Counsel
46
50
54
58
62
May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18
Markit Eurozone Manufacturing PMI
Nikkei Japan Manufacturing PMI
7
CURRENT ENVIRONMENT
There are signs that growth outside North America is slowing
Source: Bloomberg.
Japan and Euro Area Purchasing Managers’ Index
Rest of World
◆ Japanese growth has stagnated in 2018
◆ EM economies have specific problems
◆ Political risk (Italy) brings risk of financial contagion in Europe
Portfolio Management & Financial Counsel
8
CURRENT ENVIRONMENT
Inflation remains under control, but it’s heating up
Source: JPMorgan Asset Management.
Year-Over-Year Headline Inflation
Global
Portfolio Management & Financial Counsel
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
U.S. FederalReserve
Bank ofCanada
Bank ofEngland
ECB Bank ofJapan
January 1, 2017 June 1, 2018
9
CURRENT ENVIRONMENT
Central bank policies are in “flux”
Central Bank Policy Rates
◆ Globally, monetary conditions remain easy• Emergency conditions no longer warranted
◆ Fed, ECB and BoJ Quantitative Easing policies have kept longer yields low
• Yield curve does not anticipate pick-up in inflation
◆ Interest rate sensitivity of economy unknown • Small rate increase may generate large effects
Source: Bloomberg.
Global
Portfolio Management & Financial Counsel
10
CURRENT ENVIRONMENT
◆ Despite a long economic expansion, the economic fundamentals remain healthy• U.S. tax cuts and fiscal stimulus should fuel more growth
◆ Valuations have returned to more normal levels• Strong growth in corporate earnings
◆ Easy money + strong economic growth + low inflation not sustainable
Continued volatility and modest investment returns most likely
Portfolio Management & Financial Counsel
11
PORTFOLIO OVERVIEW
◆ Allocation to equities and fixed income close to guidelines
◆ Fixed income portfolios are focussed on shorter maturities and higher quality
◆ Equity portfolios have been adjusted to take advantage of new opportunities
We remain focussed on the long term despite current uncertainty
Portfolio Management & Financial Counsel
12
PORTFOLIO OVERVIEW
Overall equity allocations are close to long-term guidelines
As at May 31, 2018
Nexus Equity Fund Nexus Income FundNexus Balanced Fund
Portfolio Positioning
9% 5% 9% 5% 5%
26% 30%
75%80%
41% 50%
28%
40%
20% 20%
39%
45% 29%
25%
11% 8%
Actual Guideline Actual Guideline Actual Guideline
Cash
InternationalEquities
U.S.Equities
CanadianEquities
Bonds
InternationalEquities
U.S.Equities
CanadianEquities
CashCash
Bonds
Income-Oriented Equities
Portfolio Management & Financial Counsel
3% 12%
20%
16%
25%
32%
52%
39%
Nexus Universe
Cash
AAA
AA
A
BBB$0m
$20m
$40m
$60m
$80m
2Year
5Year
10Year
20Year
30Year
Fixed Income Holdings
1.0%
1.5%
2.0%
2.5% GOC Yield Curve
13
PORTFOLIO OVERVIEW
Short duration and high quality remain our focus
Fixed Income
Source: Bloomberg.
Nexus Income Fund Credit Exposure vs. the Universe
• We have a high-quality portfolio
Yield Curve and Income Fund Positions
• Our duration is 4.2 years vs. Universe at 7.3 years
As at May 31, 2018
Portfolio Management & Financial Counsel
Non-Dividend-
Paying Companies
Dividend-Paying
Companies
REITs
100%
14
PORTFOLIO OVERVIEW
Our North American equities combine defensiveness and growth
Nexus North American Equity Portfolio
Source: Bloomberg.(1) The “forward” year is the current fiscal year estimate for each company; excludes data points that are not meaningful.
As at May 31, 2018
• 3 stocks
• Average EPS growth of 10.6% per year over 5 years
• 18.7x average forward P/E multiple (1)
• 31 stocks
• 2.8% average dividend yield
• Average dividend growth of 8.1% per year over 5 years
• 14.3x average forward P/E multiple (1)
• 2 Real Estate Investment Trusts
• Average distribution yield of 5.2%
• Average Price/NAV of 93%
Equities
Portfolio Management & Financial Counsel
15
PORTFOLIO OVERVIEW
Equity Portfolio Changes
Six Months to May 31, 2018
Foreign EquitiesCanadian Equities
Buy Sell Buy Sell
Magna International — General Motors —
Add Trim Add Trim
Cenovus Energy — — U.S. tech stock trims (1)
Equity portfolios have been adjusted to take advantage of new opportunities
(1) Trims of selected “overweight” stocks.
Portfolio Management & Financial Counsel
Body & Chassis25%
Powertrain17%
Exterior14%
Seating13%
Tooling & Other9%
Vehicle Assembly8%
Vision & Elec.7%
Closure7%
16
PORTFOLIO OVERVIEW
Magna is a leading auto parts supplier with a global footprint and strong customer relationships
Magna International
Magna Business Mix – 2017 Revenue
◆ #3 supplier of auto parts in the world• Total sales of US$39 billion in 2017
• 168,000 employees
◆ Diversified geographic footprint• 335 manufacturing operations in 28 countries
• 47% of revenue generated outside North America
◆ Supplies almost every auto manufacturer
◆ Strong return profile, conservatively financed, attractive valuation (1)
• 20% return on equity
• 2.2% dividend yield (20% payout ratio)
• 23% total debt/capital
• P/E multiple of 8.2x (on estimated 2019 earnings)
Source: Magna International company documents.(1) Metrics calculated at time of acquisition.
Portfolio Management & Financial Counsel
17
PORTFOLIO OVERVIEW
Magna is well-positioned for “Auto 2.0”
Magna International
◆ Possible transition to autonomous, ride-sharing and electric cars
◆ Transition will be slow• Barriers to change exist
• In the interim, Magna will continue to earn strong returns
◆ Magna has the opportunity to transition• Innovate alongside key customers
• Strategic partnerships (BMW/Intel/Mobileye, Lyft)• Shared
• Autonomous
• Electric/Hybrid
Portfolio Management & Financial Counsel
MSCI EAFE (1) MSCI EM (2) S&P 500
Forward
Price / Earnings14.0x 11.8x 16.3x
Price / Book 1.7x 1.7x 3.2x
Dividend Yield 3.1% 2.3% 1.9%
18
PORTFOLIO OVERVIEW
The case for international equities remains
International Equities
◆ Attractive valuations
◆ Portfolio diversification benefit
◆ Solid prospects for long-term earnings growth
As at May 25, 2018
(1) MSCI EAFE is the principal equity index for Europe, Austrailasia and the Far East region.(2) MSCI EM is the principal equity index for emerging markets.
Portfolio Management & Financial Counsel
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1985 1990 1995 2000 2005 2010 2015
Calendar Year Returns
Intra-Year Declines
19
PORTFOLIO OVERVIEW
Equity market volatility is the norm
Source: JPMorgan Asset Management; Year-to-date is up to May 31, 2018.
◆ Despite average intra-year declines of 15%, annual returns were positive in 24 of 33 years
Importance of a Long-Term Focus
S&P/TSX Composite Intra-Year Declines vs. Calendar Year Returns
YTD
Portfolio Management & Financial Counsel
-39%
-3%-1%
7%
47%
28%
19% 17%
-8% -2%1% 1%
43%
23%
16%12%
-15%
1% 2%
5%
33%
21%
16%14%
1 Year 5 YearRolling
20 YearRolling
10 YearRolling
20
PORTFOLIO OVERVIEW
Time and diversification reduce the volatility of returns
Source: JPMorgan Asset Management.(1) Returns shown are U.S. market returns in US$ and are based on calendar year returns from 1950 to 2017.
Importance of a Long-Term Focus
Range of Stock, Bond and Blended Total Returns (1)
Annual avg. 20-yr growth
total re turn of $100,000
Stocks 11.2% $840,219
Bonds 5.9% $316,600
9.0% $556,84850/50
Portfol io
Portfolio Management & Financial Counsel
21
INVESTMENT PERFORMANCE
Portfolio returns have moderated in 2018
◆ 1-Year equity returns decent, but slightly behind benchmark• Canadian, U.S. and International stocks all made similar contributions
• Canadian dollar strength reduced U.S. equity returns by 4.7 percentage points
◆ Fixed income returns were negative in the last 12 months• Paradoxically, our conservative portfolio underperformed
• Nexus bonds -1.8% vs. -1.0% for the Universe Bond Index
◆ Over the long term, Nexus portfolios have performed well• Up- and down-market capture ratios even better after Q1
Portfolio Management & Financial Counsel
7.3%8.4%
4.1%5.3%
-1.0% -1.0%
NexusBalanced
Fund (1)
NexusEquityFund (1)
NexusIncomeFund (1)
MarketBenchmark (2)
MarketBenchmark (3)
MarketBenchmark (4)
22
INVESTMENT PERFORMANCE
(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results.(2) Equity Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 50% TSX, and 45% S&P 500 (in C$); rebalanced monthly.(3) Balanced Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 30% FTSE TMX Canada Universe Bond Index, 40% TSX, and 25% S&P 500 (in C$); rebalanced monthly.(4) Income Fund market benchmark is the FTSE TMX Canada Universe Bond Index. Note that in addition to bonds, up to 20% of the Income Fund portfolio may be invested in equity securities.
12 Months ended May 31, 2018
One-year returns faced a number of headwinds
1-Year Returns on Nexus Funds
Portfolio Management & Financial Counsel
12.7% 12.3%
9.8%8.7%
4.3%
2.9%
NexusBalanced
Fund (1)
NexusEquityFund (1)
NexusIncomeFund (1)
MarketBenchmark (2)
MarketBenchmark (3)
MarketBenchmark (4)
23
INVESTMENT PERFORMANCE
(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results.(2) Equity Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 50% TSX, and 45% S&P 500 (in C$); rebalanced monthly.(3) Balanced Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 30% FTSE TMX Canada Universe Bond Index, 40% TSX, and 25% S&P 500 (in C$); rebalanced monthly.(4) Income Fund market benchmark is the FTSE TMX Canada Universe Bond Index. Note that in addition to bonds, up to 20% of the Income Fund portfolio may be invested in equity securities.
Five Years ended May 31, 2018
5-Year Annualized Returns on Nexus Funds
Fund and benchmark returns are above long-term averages
Portfolio Management & Financial Counsel
9.0%
7.6% 7.8%
6.2%5.7%
4.4%
NexusBalanced
Fund (1)
NexusEquityFund (1)
NexusIncomeFund (1)
MarketBenchmark (2)
MarketBenchmark (3)
MarketBenchmark (4)
24
INVESTMENT PERFORMANCE
(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results.(2) Equity Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 50% TSX, and 45% S&P 500 (in C$); rebalanced monthly.(3) Balanced Fund market benchmark is 5% FTSE TMX Canada 91 Day TBill Index, 30% FTSE TMX Canada Universe Bond Index, 40% TSX, and 25% S&P 500 (in C$); rebalanced monthly.(4) Income Fund market benchmark is the FTSE TMX Canada Universe Bond Index. Note that in addition to bonds, up to 20% of the Income Fund portfolio may be invested in equity securities.
Ten Years ended May 31, 2018
10-Year Annualized Returns on Nexus Funds
Ten-year returns attractive on an absolute and relative basis
Portfolio Management & Financial Counsel
7.4%
5.0%
16.8%
13.6%
Fund1-Year (1)
MarketBenchmark (2)
MarketBenchmark (2)
Fund2-Year (1)
25
INVESTMENT PERFORMANCE
(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. Past performance is not indicative of future results.(2) International Equity Fund market benchmark is 75% MSCI EAFE and 25% MSCI Emerging Markets indices (both in C$); rebalanced monthly.
Periods ended May 31, 2018
The International Equity Fund return exceeded its benchmark
Returns on Nexus International Equity Fund
◆ Benefitted from a recovery in Emerging Markets and JPMorgan outperformance
◆ We still like International
Portfolio Management & Financial Counsel
Appendices
Portfolio Management & Financial Counsel
4%
5%
6%
7%
8%
9%
3% 5% 7% 9% 11% 13%
Re
turn
Risk
North American Equity Fund
North American Equity Fund Benchmark
S&P/TSX Composite Index
S&P 500 Index (C$)
102%(50 quarters)
69%(23 quarters)
UpQuarters
DownQuarters
Benchmark
Benchmark
27
RISK MANAGEMENT
Equity Fund
Equity Fund Up- & Down-Market Capture Ratios (1,2,3) Risk / Return Profile Since January 1, 2000 (2,3,4)
(1) Each quarter since January 1, 2000 is defined as an “up” or “down” quarter based on whether the benchmark return for the quarter was positive or negative. For up (down) quarters, the capture ratio is the ratio of compound average rates of return for the Fund and its benchmark for such quarters.
(2) Nexus returns are presented prior to the deduction of investment management fees. Past performance is not indicative of future results.(3) Equity Fund benchmark is 5% FTSE TMX 91 Day TBill Index, 50% TSX, and 45% S&P 500 (in C$); rebalanced monthly.(4) Risk is calculated as the annualized standard deviation of monthly returns since January 1, 2000.
Period Ending March 31, 2018
Our approach has worked over the long term, with good downside protection
Portfolio Management & Financial Counsel
4%
5%
6%
7%
8%
9%
3% 5% 7% 9% 11% 13%
Re
turn
Risk
North American Balanced Fund
North American Balanced Fund Benchmark
S&P/TSX Composite Index
S&P 500 Index (C$)
FTSE TMX Universe Bond Index
56%(22 quarters)
UpQuarters
DownQuarters
Benchmark
Benchmark
101%(51 quarters)
28
RISK MANAGEMENT
Balanced Fund
Balanced Fund Up- & Down-Market Capture Ratios (1,2,3) Risk / Return Profile Since January 1, 2000 (2,3,4)
(1) Each quarter since January 1, 2000 is defined as an “up” or “down” quarter based on whether the benchmark return for the quarter was positive or negative. For up (down) quarters, the capture ratio is the ratio of compound average rates of return for the Fund and its benchmark for such quarters.
(2) Nexus returns are presented prior to the deduction of investment management fees. Past performance is not indicative of future results.(3) Balanced Fund benchmark is 5% FTSE TMX 91 Day TBill Index, 30% FTSE TMX Universe Bond Index, 40% TSX, and 25% S&P 500 (in C$); rebalanced monthly.(4) Risk is calculated as the annualized standard deviation of monthly returns since January 1, 2000.
Period Ending March 31, 2018
Our approach has worked over the long term, with good downside protection
Portfolio Management & Financial Counsel
4%
5%
6%
7%
8%
9%
3% 5% 7% 9% 11% 13%
Re
turn
Risk
North American Income Fund
North American Income Fund Benchmark
103%(47 quarters)
27%(15 quarters)
UpQuarters
DownQuarters
Benchmark
Benchmark
29
RISK MANAGEMENT
Income Fund
Our approach has worked over the long term, with good downside protection
Risk / Return Profile Since October 1, 2002 (2,3,4)Income Fund Up- & Down-Market Capture Ratios (1,2,3)
(1) Each quarter since October 1, 2002 is defined as an “up” or “down” quarter based on whether the benchmark return for the quarter was positive or negative. For up (down) quarters, the capture ratio is the ratio of compound average rates of return for the Fund and its benchmark for such quarters.
(2) Nexus returns are presented prior to the deduction of investment management fees. Past performance is not indicative of future results.(3) Income Fund benchmark is the FTSE TMX Universe Bond Index. Note that in addition to bonds, up to 20% of the Income Fund portfolio may be invested in equity securities.(4) Risk is calculated as the annualized standard deviation of monthly returns since October 1, 2002.
Period Ending March 31, 2018