Commentary: NCM Small Companies Class

TRANSCRIPT

Hi Everybody. My name is Alex Sasso, I’m the lead manager for the NCM Small Companies Fund. Today is Monday, November 28, 2023. It's hard to believe we're at the end of the month, but the end of the month always makes me think about the upcoming year. And in this case, 2024 should be and hopefully will be more of a regular year relative to the past few years.

And when I talk about that, I'm talking about social normalcy. I'm talking about supply chain being a bit more normal. I'm talking about health care being a bit more normal and I'm talking about the ability to travel be a bit more normal, all incremental but beneficial to society. Everything but the economy. And I say that because the economy is never normal.

You never have exact business cycles that repeat exactly one after the other, although they are fairly similar. And we can learn from past periods. And obviously one of the toughest things that the markets have been grappling with has been inflation. And it was just not too long ago in 2022, we saw a massive spike in inflation. This certainly scared the Fed and central bankers around the world and as a result, we've had a significant increase in interest rates. As a result, that's put a strain on the economy.

Things have unwound here a little bit from the perspective that most market pundits think that we're at the terminal rate when it comes to interest rates. And by terminal rate, I mean the peak rate of interest rates. And that we could we could likely see interest rates coming down in 2024.

Inflation will certainly dictate that for us. And if inflation continues on the same cadence, i.e. the drop from what we saw a couple of years ago and continues to move lower, that will be, in my opinion, very positive for the stock markets and very positive for the fixed income markets. And so when it comes to the NCM Small Companies Fund, we've positioned it to be able to take advantage of what should be a more normal year going out, particularly in the second half of the year.

Now, when I think of the group of businesses that we own in the fund, we really focus in on businesses that are growing their top line faster, but also have a significant amount of free cash flow. The free cash flow we have in our portfolio is significantly higher than the free cash flow of our benchmark. That's one of the best predictors of future stock price movements because it enables companies to reinvest back into what they do best. And so we really look for those type of companies.

One of those companies is this company that we've recently added to the fund. It's a company called Pollard Banknote. And so Pollard Banknote provides scratch and win lottery tickets, it provides digital lottery tickets, and it has seen its business grow significantly over the years, although the stock has come under pressure recently.

And the reason for that is because they have fixed price contracts and those fixed price contracts didn't take into account rising inflation and rising paper prices, which we saw a particular rapid increase in the last few quarters. That's starting to come off right now. Plus, they've been able to reprice some of those contracts as they’ve renewed, and it's breathed new life into the margins of the business and we expect that to continue going into next year.

The other reason we like it is because this business has really strong organic growth. We've seen an increase in the lottery companies that they do business with. We've seen an increase in their overall rate of sales all with the exception of this past year. But we expect that trajectory to continue and in our opinion, it's a very well-managed company.

I'll leave it there. If you have any other questions, please reach out to your regional NCM salesperson at sales@ncminvestments.com.

Disclaimer:

The information in this video is current as of November 27, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.