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TIMESTAMPS

1:08 Alex talks about ncminvestments.com
1:47 Alex on the strengths of NCM Global Income Growth Class
6:14 Why buy in May?
18:34 Alex on the risks of marketing timing
20:33 How does Jason approach his asset mix?
28:06 Jason explains asset mix drivers by market cycle
33:13 How does Jason anticipate the optimal asset mix?
37:39 What does Jason think about tech stock valuations?
41:01 What is Jason’s prediction around interest rates?
48:56 Jason reviews his portfolio positioning and key metrics

TRANSCRIPT

Alex:
Hi, everybody, my name's Alex Sasso. And thank you for joining us today for this webinar with Jason Isaac, as we talk about markets, seasonality, a whole bunch of other topics hopefully, and their impact on the NCM Global Income Growth Fund that Jason manages. Today is Wednesday, May 1st, 2024. Feels a little bit weird saying May 1st, but here we are in the springtime.

Jason:
It's snowing here.

Alex:
Yeah. It's kind of nice here in Toronto. By the way, everybody, Jason is in Calgary. I'm in Toronto. I want to encourage everybody to visit our website. We've put a lot of time and effort into it. We've had a lot of really positive feedback on the tools, the products, the case use examples, and of course, our expert insights section. So, please check that out. Just very quickly on Jason. Jason is a portfolio manager with our team. Sorry. He has more than 20 years of experience in managing global equities. He's also spent three years as a lecturer at the University of Calgary on subjects including security analysis and portfolio management theory. Very useful for what Jason does every day now.

So, let me just start. I want to talk, just spend a couple minutes here to talk about my thoughts on the NCM Global Income Growth and why I think it's, for many of you advisors, I think this is an ideal sleeve in your asset allocation strategy. So, I've got a couple bullet points here.

So, one is this is a hard asset class for advisors to do on their own. There's just so many potential individual investment opportunities out there, which are the best ones, which ones have country risk associated with them, which ones have political risks. There's currency considerations, accounting considerations, and the list goes on and on. We have a team here that helps Jay try to figure out which are the best products, sorry, the best companies to put in the portfolio. So, we think that this is a very necessary sleeve in most clients' portfolios.

Two, in my opinion, this fund is better than an ETF that tracks an index. Jay and his team have proven that they outperform. Global Income Growth F-Class is up 22%. Its one-year number is up 22%. That compares to 19.3% for the benchmark and 13.3% for the peer group. Over the last five years, the peer group did about 5%. The benchmark did about 6.8%. And you can see from this chart here that our chart master just put up, Global Income Growth did almost double that. So, very impressive numbers. The ten-year numbers tell a similar story and so do the since inception numbers. Now this performance, of course, is after fees. And Global Income Growth importantly has produced positive returns in nine of the last 12 years, since the inception of the fund. 85% of the one-year periods have produced positive rates of return.

And then the third point I'd like to make is I believe this fund really fits well with the majority of clients. And the reason is, is because it's a low-medium risk rated fund, which is based on the standard deviation of the fund, the long-term standard deviation of the fund. So, for the advisors out there, it keeps your compliance teams happy and it doesn't use up all your smaller high-risk allocation in those portfolios. And if your compliance officer say anything to you, then just show them some of these upside, downside captured numbers on this chart. The upside over the three-year period is 119%. That's in the bottom right-hand side of that chart. And the downside capture is about 90% over three years.

Now, I've been managing money for a long time and I can assure you those are very, very impressive number. So, has Jason and the team done this well? It's kind of really focused in on adhering to our investment methodology, because they built portfolios with really great metrics. I know Jason loves dividends. He loves momentum, he loves growth, he loves quality, but he doesn't like overpaying for it. And really that is what's key. You're getting better growth and you're not paying for that growth. It's not as recognized in the markets. And that's how the team's been able to outperform.

And to many of you, if we showed you the list of portfolio holdings here, some of the investments, yes, you would recognize, but other investments are what I would call the titans of their industry that you don't know, either because they're not a name that you see on a billboard or an advertisement, but they may be in a different geography as well.

And then finally, I'll finish by saying that it's not just what the team owns, it's also about what the team doesn't own. So, you won't find fads in this portfolio. You won't find story stocks in this portfolio. You won't find free cash flow negative, perpetual free cash flow negative businesses in this fund. This fund is focusing on dividends and growth. And that methodology, what the team is doing has been really impressive when we showed you the numbers there.

Now, transitioning here a little bit to the theme of today's presentation is buy in May and go away, which might sound weird to you, as it should. Because we're all familiar with the old market adage, sell in May and go away, which has been popularized by the old trader's almanac, for those of you who remember that. I do.

But where they suggested that if you sold in May, the period post-May, typically the markets don't perform as well. Now, Jason spent some time reviewing this, the seasonality of the data as it pertains to the data itself and as it pertains to the Global Income Growth Fund. So, maybe Jay, start by explaining what this means to you and why it's important for the fund.

Jason:
The seasonality. Like you said, I put some slides together and I'm going to attack it from three perspectives. And anybody who's seen any of my presentations before, any of my lectures and stuff like that, know I'm very system-oriented, very disciplined and I always break things down into stages. And then when we look at the seasonality, it's great to say something, but what actually happens? And when it comes to this, I want to look at typically what happens in a year from a seasonality perspective. What happens in a year that's similar to what we've got going on, because as is always the case, it's great to have the data, but there's always context to it? And then what have we done? And we all know that past performance is not indicative of future returns. Everybody who's taken their mutual fund course knows that that's been beaten into their heads, but it is put up there because it tries to be like, is it repeatable? And we're going to go into that.

But chart master, if I can get you to throw up slide 14. This is a data point, a slide that a research provider that we deal with that I'm a big fan of, called Renaissance Macro, put together. Along the horizontal graph there, that's just the year. Or not the year, the individual days within eight individual single year. And we've gone back to 1928. And on any given day we've said, "What has been the three month rate of return if we invested on April 1st, or July 27th, or October 13th, or December 31st or something like that, and what has actually been the case?" So, keep in mind that this is the entire year. That horizontal dash line is if you were completely, randomly throwing a dart at a dart board and saying, "This is the day I'm going to invest. What's my three month rate of return going to be on the S&P 500?"

Well, it's going to come in just shy on average below 2%. It's about 1.9% after it's all said and done. But as you can see, there is definitely some cyclicality or what they would call here, some seasonality to it. But I want you to keep in mind that anytime you make an investment above that line, you are actually going to do better than what the typical market average is going to be. And anytime you make an investment below that line, the seasonality would suggest it's going to do worse. But I want you to keep in mind here that we look at it and then that red dot there is as of the 16th. So, it's a little bit dated, but we can quibble over the exact number there.

But that would suggest on average going back, what is it, the 90 some observations for April 16th, you would do about 2.10% on average. Some years are going to be worse, some years are going to be better. But it's not on April that you do that. You don't actually book those returns until the end of that three month period. So, that's close to the end of the summer. So, if you look at the beginning of June, if you look at the top of the peak there in June, that is one of the best times on a rolling three month basis to actually be invested in the market. You invest in June, more often than not, you outperform the market. Keep in mind that's June, July and August. That's the summer months.

Now you flash forward and you slide down the curve there, you can see that if you're really wanting to play the seasonality game on a three month basis, the worst time to actually invest and that gives you just slightly less than 0% return on a three month basis, would be the end of July, beginning of August. Keep in mind, that's going to include September and October. And we already know that those months tend to be volatile. It just is kind of the seasonality aspect. So, we want to be able to separate when you invest with what the outcome is. And this chart would say on any given year, you're actually missing a lot of opportunities in the summer. You always want to be invested till the end of July.

And then maybe you can make some arguments, depending on what's going on with the market going forward, that you might want to take the pedal off the gas a little bit in August. And it's not that it's been terrible. As you can see, it's just around 0% on a three month basis, which is not terrible from an equity perspective. But this chart shoots a hole in the hole, get out of the way of May, because you're just going to lose money in the summer. That is absolutely not the case. And if you want to slide to the next chart, this is saying the same thing, but what it says in a typical seasonal path for any given year. So, it's taken every year from 1928 to 1924.

And look at the gray line, I suppose the coloring could be a little bit better and we could've used maroon for the same. But you take the gray line, that is the typical seasonal path on any given year. And the rectangular box on the gray line there is the graphical representation. If you invested at the beginning of January on any given year and on a base of 100 went through the year, you see that there tends to be a little bit of consolidation from the end of June to the end of September. This is not surprising to anybody. This is typically what everybody's seeing. But what we've also done is we've passed the data, and we've taken all the years in which there's a presidential election and then we slight that over.

And what you see with the maroon is that that typical consolidation or weakness in the markets happens about a quarter earlier. You know what? We're right in the middle of it right now. So, it's one of the points I would make, that if you're truly worried about being invested and want to get out of the way of "market volatility in the summer," well, we've missed the boat on that. We're going through it. We saw what happened in April. We're having a little bit of a tough day today in May. But what this suggests is that by the Canadian long weekend, which is the third weekend in May or the US long weekend in the United States, you want to be fully invested, right leading up to both the Democratic and Republican national conventions and where you get everything like, this is not a political channel and I've got no opinion and I'm not going to go anywhere with any of that.

But the markets will actually start pricing in good outcomes once they know the certainty of who's running for what. We've got an idea of what's going on there, but what this chart says is that the markets really start to find their footing at the end of May. So, we're like right there. It's May 1st. I know we're a couple of weeks off. But when you're dealing in the world of investing, a couple of weeks here and there, we don't want to get too cute. So, we've talked at the strategic level that the buy in May just doesn't exist. There might be some three month weakness come April, but it's weakness in such that the market just kind of does nothing.

And then we've talked specifically about the presidential year, where we're saying that if we really wanted to get away, out of the way of the market volatility, which is what we've done, and we can get into that in the portfolio, and reduce a little bit of exposure, you should have been doing that at the end of March, which is what we'll do, we were doing and all that sort of stuff. And now what we're going to talk about, so the strategic level, the tactical level, and the operational level, we'll get into. This is exactly what we've done with the fund over the three months of the summer. Next slide please.

So, since 2020, it's kind of funny, I actually took over management of this fund May 1st, 2020. So, it's completely relevant. But we saw in 2020, and 2021, '22 and '23, this is what the fund's done over the three month period that people classify as the summer, versus what the benchmark has done over the same prevailing time periods. And we can see that we've had different markets every single time and the portfolio has held up well depending on the market. If you guys remember 2020, we had the zombie apocalypse, the pandemic was there, and then we had the Fed dumping nothing but liquidity and we had the day trader boys sitting in their basement bidding up Dogecoin and GameStop, like market was running, risk was on. That's where we were going.

A lot of the stuff that was performing extremely well is just not in the area that we sniff for and the stuff that we look at, yet we kept up and that was important. In 2021, we had a US presidential election coming. We had that coming up. And we had quality over valuations and everybody was on the same side of the boat, where you've gone valuations, people were getting extreme. You saw the mag seven, the super seven, the mag of the fang, whatever you want to call it, but quality of earnings became questionable to people. People were changing what they were investing in. They were bailing out of GameStop. They were bailing out of Dogecoin, and Bitcoin, and they were going to your Microsofts and going to your Amazons.

And why was that? Well, liquidity was getting a little bit tighter. People were worried about what the Fed was going to do.

And then in 2022, nothing worked. We had rates going through the roof, we had safe harbor assets becoming the name of the game and cash flow became king. Well, that's where we migrated to. Of course, we lost. The market was down a little bit. We were down a little bit, but the name of the game is to be better than what you'd otherwise be. And then in 2023, I don't know if there was a earnings report that didn't come out. I don't care if you were a waste management company or a tech company or a staples company, if you didn't mention AI in your earnings report, you were probably taking an 11 or 12% hit.

Tech became the safe haven. It's kind of moved from a cyclical industry to a cash flow industry. So, all of these environments were a little bit different. And one of my favorite quotes of all time is a Wayne Gretzky quote that says, "I don't skate to where the puck has been. I skate to where puck is going." That's what we're doing with the portfolio. Well, maybe we like equities. Where in the equity space is where we want to be. And that's what we are continually monitoring, and what region and all that sort of stuff.

So, again, I just want to take a step back. There is no sell in May and go away. That just doesn't make any sense. You miss a lot of opportunities with that. There is a seasonality weak period in October, late September and October, but that can be managed around depending on the assets that you're in. We're in a presidential year, which is usually always positive for the equity markets. When I get into the global outlook, we can talk about this year in specific, but it looks pretty good.

And that we've exhibited the ability to be... Craig, who used to run the fund had one of a great quote that I found and I take it to heart is, "You kind of got to be a sock in the wind when you're managing portfolios." It's great to sit and put your flag on the hill and say, "I'm right about this stock,” but if the market's telling you you're wrong about the stock, you got to get out of the way. And that's what we're doing in the portfolio. If it's not working or if the market's not loving it, there's no point saying, "I'm smarter than everybody else. This is where I'm going to go." So, at the couple of different levels, the seasonality thing we can really use to maximize to the investor's benefit.

Alex:
Yeah. And thanks, Jay. And from the advisor's perspective, your decision if you try to play the seasonality is not just what time when I actually make the exit decision. Your decision has to incorporate the additional belief that the asset class that you're going to transition into will also have superior returns for that period of the market. Now, again, this is market timing. We don't condone market timing. In fact, personally, I'm terrible at it. I've been managing money for 25 years and I don't market time. I buy a small pack when I make a decision to buy a company and then I add over a period of time. But in the example of the advisor trying to sell in May or whatever month you think that the market is going to have a short term or period of return, you have to think of the asset class you're going to go into and whether or not that asset class on an after-tax basis is going to compete with some of the numbers that Jay just showed you.

And then not only that, but I Googled some other research reports yesterday and found out that in the last 10 years, the six month return after May was up on average 400 basis points. So, that tells you that you can't just go to cash even at the higher rates of return. You're earning on cash today, because a 4% rate of return in cash over a six month period, call it a 2% rate of return, you're giving 1% of the government after tax. And so, you're netting yourself 1%. And you got to ask yourself whether or not the equity market over long periods of time can compete with that or the dividends that you will earn by owning that, owning Global Income Growth will compete with that rate of return.

And I would argue that just the dividends alone may compete with that rate of return. So, anyways, thanks Jay. Appreciate the color on that. Maybe you talked about elections and maybe just the asset mix methodology. How do you implement this kind of strategy into the fund? Maybe you can just share some colour on that.

Jason:
Okay. As is always the case, it's a three-step process for me, a high-level, mid-level and a tactical. So, there is no point reinventing the wheel. The bottom line is when the market is above its 200 day moving average and moving up into the right, all things equal, you want to be overweight equities. It just pays. Yes, you get short-term blips, like we're having here. But over the long term, that is where you want to be. So, I look at the 50 day versus the 200 day, versus where the index is. And when the index is higher than the 200 day moving average and the 50 day is higher than the 200 day... Yeah, thanks, chart master. That's exactly what we're looking at. You moving up and to the right, you want to be overweight equities. Now there is no debate that we are in a correction-type territory.

We could easily come down to 4,800 from a technical perspective and not wreck anything. So, we're still in a bullish situation. We se the U and then we're on an oversold condition with respect to price. And it just says that you want to be overweight equities. How much overweight? That's where we get into a little bit of the nuance. And this is where you get a little bit of a flavor of the market. The next chart tells me, and this is the Russell 2000's consumer discretionary versus the rest of the market. It's just that specific industry. It is what I use as the canary in the coal mine, if you will, on where our investors at the high level on taking risk.

When consumer discretionary is doing better than the rest of the market, generally speaking, investors are favorable, lean into risk. They're higher beta, higher growth names, all things equal, a Cathie Wood type portfolio, long duration assets. I can throw all the words down, but generally speaking, people are like the story stocks, they like all that sort of stuff. When consumer discretionary is doing worse than the market, when you're seeing that middle pain, Russell 2000 versus the Russell 2000 Index Consumer Discretion, when you're seeing that move down to the right, that means people are starting to hoard cash, go to safe haven assets, go to more stable type earning streams.

It's telling me risk is coming out of the market. People are going downstream in what they want with beta. They're going probably more to a higher dividend yielding type security and all that sort of stuff. As it sits right now, this is kind of neutral. It's not really saying one thing or the other. So, I'm looking at the high level. What are we doing at the 50 day and the 200 day and the index? Well, we're still in an uptrend, so we want to be overweight equities. But this would suggest we're not going to be maximum overweight equities. This fund has the ability to go between 60% equities and 90% equities with 75% being the mid-tier. Right now, I'm between 82 and 85% equities, because that's the lean you want to do.

The final stage of my asset mix call between equities and fixed income and cash, is what are small-time traders doing? And it's more granular and it's based on the NASDAQ futures market. I use the NASDAQ futures market as the pointy end of the spear of risk taking, and where people really want to be and are they committed to the market. And it's made up of three constituents. You have commercial hedgers, this is your big banks. You have speculators and hedge funds trying to make a profit one way or the other. And then you've got small-time traders trying to skim around the situation. So, between hedge funds and small-time traders, the commercial hedgers have to offset just so they clear the system.

Generally speaking, and this is, I kind of say it, tongue in cheek, but small-time traders usually are always wrong. When they lean into risk, that's the time you want to get on the other side of the boat. When they're absolutely terrified of the market, that's the time you want to start stepping back in. We've had the price, we've had the correction and the correction looks decent from a price perspective. It looks decent from an individual in number of securities internally within the index, but we haven't had small-time traders take their foot off the gas. If you look at the bottom pane of this chart, basically what this says is you want to be wary of the next 13 to 14 weeks of the S&P 500 return if you have nine of 10 small-time traders excessively long in their futures positioning. You want to be starting to really think about backing up the truck when you only have one of 10 traders being very, very aggressive on the NASDAQ.

The thing that speaks to me, just to give you an idea, is right now small-time traders haven't come off the boil yet. So, this makes me a little bit more cautious. I suspect in May we're probably going to test that 200 day moving average or at least 4,800 on the S&P 500. We're going to test it. We're still in an uptrend. We got to test it enough either through time or through price to bring these guys off the boil. Once this oscillator gets around zero, then we're good. But right now it's still a little bit of excessive and it tells me people are expecting outside returns that just aren't there. So, that would be the difference between that last 85 to 90% allocation and equities for me. It just doesn't make sense. The upside, downside risk is not there.

If you see right before 2020 there, you see that excessive short, that big spike down, that was leading into the US presidential election. That was when everybody and their dog was talking about how the markets were going to end, and everybody was going to cash and they just wanted to see what was happening. That was when we decided to get very aggressive with the equity component. So, we use this when there's a clear call one way or the other, but it's very short-term in nature. This is usually a two week to maybe at most a month issue positioning. For the most part, you want to take a step back. So, there's a high level, there's a mid-level, then there's a short-term level. Again, you don't want to wreck the trend. And the trend is up to the right. So, the S&P-500 versus the 200 day index, you want to be overweight equities, all things equal.

What's consumer discretionary doing versus the market? It's kind of neutral right now. So, it doesn't tell you to press any more in equities or any less. And then traders, small-time traders are very aggressively long still. So, that tells me you want to pair back or change the composition of your equity portfolio, such that maybe you're not leaning into the high beta, high-flying stocks, you might've pulled back and invested in some areas that tend to be a little bit more stable, maybe some healthcare, maybe some certain industrials, and of course, consumer staples and things like that.

So, those are the three things that dictate the asset mix that I think give us a really good idea of where the puck is going, if you will. And where the rubber hits the road on when it comes to actual positioning in the portfolio, I'll get you to slide over to the next chart here.

This is kind of a busy chart, but we've taken some research from a couple of research providers and we've kind of Canadianized it. So, what we've done is we've mapped out growth on the horizontal axis, inflation on the vertical axis. And instead of trying to get all cute on exactly where they are, we've just said, is growth, is it in the bottom third, middle third or top third of wherever it's been? And same with inflation.

And just to give you an idea, the basic question for where we're doing growth is you go to purchasing managers and people that make stuff and you go, "Do you expect to make more next month than you did last month?" And as that answer becomes yes, and yes, and yes, and more to the system, we go from the far left-hand, bottom third, along the horizontal axis to the middle third, to the top third. So, if most of the managers that have been surveyed expect to make more next month than they did this month, that growth metric gets into the top third decile or box there.

Same with inflation. We ask them the same question. Do you expect to pay more for the inputs for you to make something last month or next month than you did last month? As that becomes yes, costs are going up on us or costs are moderating, no, it's about the same, inflation or the expectations for inflation goes from the bottom third to the middle third, to the top third. And then we just put it in this nice tic-tac-toe box. And then what we've done is we've gone through and we've seen what has actually outperformed six months from today's date, wherever the reading is. And that's how you want to try and position your portfolio.

So, I've got the blue circles or the blue arrows in there. This tends to go on a counterclockwise pattern and it represents the business cycle. You guys have all seen it in your business books and all that sort of stuff, but we've just put this in a quant format. And if we were to go through, and do an animation and plot each month as it comes in, you would see a general trend in a counterclockwise fashion. Most of the time the observations are in boxes 7, 8, 5, 6, and 3. That's where most of the observations always are. Couple of times they have a couple of cups of coffee in other areas. But generally, that's where they are.

And then again, what we've done is from a Canadian return perspective, we've just gone to the individual markets and the individual sectors and said, "What outperforms six months given where we are?" There is some debate which box we're in. We kind of ticked up. Everybody's heard about inflation, it's a little bit higher and growth is still a little bit lower. There's some debate that we're in four, because if you look at what actually outperforms, the Russell 2K is actually doing reasonably well. Materials are doing fantastic, but consumer discretionary is not doing as well as you would expect it to. But industrials are doing really, really well and financials are doing really well and Europe's doing really, really well.

So, if you kind of look, there's aspects of all four boxes. This is just a map of an overlay to try and give us an idea of where we want to position the portfolio, but it's not a hard and fast rule. You need to sit and look and see what's actually happening. The one thing that my takeaway is, whether we're in box four, whether we're in box five, whether we're in box seven or we're in box eight, at worst, you're equal weight equities. There's three other boxes there that you're overweight equities. And the S&P, or Europe or the R2K, the tech does really well in this scenario. Other than this spot where the star is, we've spent the last 17 months in box seven. And we all know the markets have been great since the October 2022 lows, and that's what we're doing.

So, we're overweighting the US, we're overweighting tech, we were overweighting consumer discretionary. Now we're seeing a little bit of a sector switch. I'm looking at expanding in Europe, I'm looking at expanding in financials and I'm looking at expanding in materials. Those are areas that opportunities present themselves. Again, this is not a hard and fast rule. This is a general trend. So, when we look at what the S&P is doing versus it's moving averages, what is consumer discretionary doing? What are small-time traders doing? And then what is actually the market doing given what typically happens where the readings of growth of inflation are? All of those hone in onto where we start wanting to look for opportunities. And then we start doing, we roll up our sleeves. I guess I got my sleeves rolled up and go, this stock actually makes sense in the fund at this particular time. But I would never put a stock in just because financials say it's going to go good. It gives me an opportunity to look at a specific jurisdiction, region, GIC sector. I see you got your hand up there, Alex.

Alex:
Yeah. No. And the other thing that it does is it helps you think about based on historical patterns, where it's going to go next. So, you're not only thinking about what box you're in now, but you're also trying to anticipate what's the next box it's going to go into. And you'll have in the back of your mind, "Okay, so it's probably likely going to go into this next box. And here are the signs I need to look out for in order to give me the confidence that that's the direction it's going." So, it helps you in a big way how to position the portfolio.

Jason:
You couldn't have teed me up better, actually. If you want to flip to the next page. It's almost like you've seen the presentation. Or actually go to the last page. Go to slide... Here. I've got it here. Just slide 25, please. So, like I said, there's some debate on which box we're in. And what we've done now, and again, we've gone to school on one of our research providers here and we've let them do a lot of the dirty work. But going back to 1964, when growth is in the bottom third, which is what it is, and inflation is in the middle third, this is what the individual GIC sectors in the United States do. So, the size of the histogram, so real estate typically underperforms the market by about 22% six months out. Consumer staples typically outperform the market by about 4% six months out.

So, if the market was up 10%, consumer staples on average going back to 1964 would've done about 14%. Real estate would've been down about 12%. That's what happens. Now, that's all fine and dandy, but the color is what those sectors are doing right now. Green is good, red is bad. So, what you'd want to see is industrials, healthcare, discretionary and staples all be green or at worst gray. Which means that's where people are starting to position and transition their money, but that's not actually happening. You could see the top three sectors in this particular market cycle clock aren't actually performing that well versus the rest of the market.

Now, real estate's doing exactly what you'd expect it to do, but energy and financials should be lagging, and they're not. They're actually performing really, really well. So, if we go back to that market cycle clock, I think it's slide 21, please, start to look at what's doing well. Well, industrials are doing really well, financials are doing really well. The S&P 500 is doing really, really well. Tech's doing okay. So, you'd expect materials and real estate. Real estate doesn't actually start to be something that you want to invest in until we get up to box three. So, we're not even there yet.

So, the performance of what's actually happening in the GICS sectors doesn't really subscribe to what's happening in the market. So, four, this is where I'm saying maybe we're not actually in four. Again, investing, we try and put all these science and these numbers and say, "Hey, I've got this fancy black box," but it is a gut feel and it tends to be a little bit of an art. So, you've got to look at absolutely everything. But what this gives us is a really good indication. Generally speaking, when an observation or a point changes a box, 80% of the time it does move to the right. And it moves to the right with an upward bias and that's why it's cyclical.

So, right before COVID, we spent about 15 months in box three, which was ripe for a crash. And that's exactly what happened. And now since October 2022, we spent about 17 months in box seven. I'm guessing our next reading over the next couple of months will be in box five or box eight. And the reason box nine has no call is because I think there's only been two observations. It's just not enough to have any statistical relevance after it's all said and done. But the other point of note is we've got nine boxes on here. There's only two of the nine that actually suggest we should be underweight equities, which kind of speaks to every rule of thumb investment adage that you have. Seven out of 10 days, seven out of 10 months, seven out of 10 years the markets go up. That kind of fits what we're saying here. So, I'll stop.

Alex:
Speaking of that, the tech stocks have been quite strong. I get this question pretty much every meeting, except for '22. 2022 was obviously tough, particularly for non-profitable tech companies. But let's narrow it down to the mag seven. You might call it the mag five, the mag six, the mag seven, the super seven, whatever you want to call it. Your thoughts, and are they catching up to their valuations? So, maybe if I could just lateral that over to you.

Jason:
Sure. I think they're fairly valued. Slide 28, please. We're kind of jumping around a little bit here, but slide 28. So, this is a slide from BNP Paribas. And just basically compares the super seven and the S&P 500 to their valuations to what their historical average has been, versus the rest of the 490 odd rest. So, both sets of data suggest that they're fairly valued versus themselves. Now, there's a lot of people that have a hard and fast rule that suggests anything over 18 times PE is just an absolute no go and I'm not going to touch it. And it's like that's fair, but you're leaving a lot of opportunity. The one thing that the mag seven and specifically Microsoft, Amazon, Google, Meta in my world for sure, they've got double-digit growth numbers for the next five years that are in some cases triple the expected growth on the S&P 500.

And if you're looking at that, theoretically you should be spending double to triple what you're getting for that earning stream, for that opportunity. So, I think they're reasonably valued. We just saw Amazon come out, I haven't been through the whole quarter yet. I'm just in the process of finishing digesting Google's from last week, and it was absolutely fantastic. These companies are starting to do... If people remember Microsoft, everybody had this issue with Microsoft in the late '90s and early 2000s. They were making gobs of cash, do something with it, buy back stock or kick out a dividend. That's what they're starting to do. They're starting to mature and they're starting to tick all the boxes of being a safe haven asset. Because they're so big, the market's actually moving in tandem with them as opposed to them moving in tandem or being more volatile in the market.

They generate cash, they've got captive audiences, they've got global reach, they're kicking out dividends, they're buying back stock. It just tends to tick all the boxes that you need from a dividend growth or free cash flow profile. So, well, I'm not one, you're never going to see something in my portfolio that is like eight or 10% of the equity component. They are a necessary component, because they do have the growth opportunities. I'm a fan of most of them. Not a huge fan of Tesla, even though I do think Elon's going to change the world. I'm not convinced that it's a good car company. If you're investing in Tesla because it's a technology company, sure, I can buy that. But a car company, not so much. And I kind of want to invest in some of these companies for what they do, not what they could be.

Alex:
Yeah. Nice. Interesting. Now, in March, we had the Fed come out with their summary of economic projections. GDP went from 1.4 to 2.1%. We saw unemployment drop from 4.1 to four. And we saw inflation, their favorite measure, which is the PCE deflator, drop to a forecast of 2.4. What's interesting in that 2.4, if you took out the rent component, we would be pretty darn close to our 2%. So, one thing that we're seeing in the market right now is expectations for rate cuts come down. Any thoughts on rate cuts the back half of the year and the impact that may or may not have on the portfolio?

Jason:
I still think rate cuts are likely. I was never in the camp that we're going to see six rate hikes or rate cuts at the beginning of the year. I thought that was just way too optimistic. I know the anxiety that's happening in the market rate is that inflation is sticky and that they're worried. Like Powell's coming out right now. I'm going to be talking. I'm actually seeing the markets bump up. So, he might've said something that was absolutely favorable to the market and talking up the Fed's book a little bit. I'll have to digest that in a minute. I still think that there's going to be cuts. And the reason I think that there's going to be cuts is because the issue with inflation. Yes, it's ticked up. And I've spent a lot of time looking at this because I've had a couple of presentations from economists and they've told me it's the acyclical component of inflation that's ticked up. And I'm like, what the hell is that?

So, I went and looked. And basically what they're saying is it's stuff that has to do not with the business cycle, but it's just stuff that's kind of one-off. And I'm like, okay, well give me some examples. Well, the effect of the US dollar on input costs over the short term, what does it do to inflation? That's not a business cycle related. Yes, over the long term, when you look five years out, currency is an issue and you've got rate normalizations and purchasing power parity. But on any given month or any given quarter, what FX does, that's geopolitical as much as anything else. And that has nothing to do with "the business cycle." The high-end apparel, if somebody's got in the snack bracket to be able to buy a $55,000 handbag, it doesn't really matter what the business cycle is. They're probably not too concerned about purchasing power parity or what the average work week was.

So, those things tend to be against it. Healthcare costs has no real effect. And all of these things were affecting inflation. And yes, they've read through and it's ticked up inflation a little bit, but all of these things are going to dissipate. And you see average weeks worked, you're seeing wage pressures come down on companies, and things like that and productivity going up. So, it is still disinflationary. So, I think the biggest problem that we have in the markets is, well, this is what's happened over the last three weeks and this is what's going to happen for the next three years.

That's not the case. So, as it bleeds through, inflation pressures are coming down.

The other issue is that inflation primarily a US-centric issue. You look at Europe, you look at Japan, you look at what's coming to an arguably an issue in Canada, inflation's coming down. Yes, I know when you go and get your gas, that's a problem, but that's not what they're measuring when they're measuring inflation. What they really want to capture is how hard is it for businesses to do what they do, and produce what they want. And those pressures are all coming down. So, we're in a situation where expectations for purchasing managers are going up, especially globally. Inflation pressures in the United States are the anomaly. Every place else it's coming down and they think the inflation issues in the states, it's just a timing thing.

We're going to see less inflationary pressures a couple of months out. Earnings estimates are going up, and central bankers across the planet are still positioning themselves to cut rates. So, I got to look three and four months out and go, that's the likely scenario. So I still think the Fed's going to cut rates. I think they want to cut rates. I think they're in an interest. The problem is, and again this is politics, I don't know where their window is. And the reason is, is because they don't want to get too close to the election, and cut rates and seem like they're playing a favorable game for the incumbent or not cut rates and try to make the economy, tip the economy and hurt some. They don't want to do that.

Traditionally, there's been about an eight-week window where they do nothing. But at the end of the day, they're going to do what's right. My guess is there's going to be two cuts, two small cuts before the end of the year. And that dovetails right nicely into our election cycle seasonality of the equity market. So, I think there's a bunch of stuff that's lining up from that perspective. The only other thing that I would say is, if you want to jump to slide 23, it just kind of highlights a little bit more of the outlook. So, I've talked about a bunch of this stuff. My favorite metric is free cash flow. We're growing free cash flow three times, arguably four times faster than global inflation. That's on the portfolio. We've talked about the market dynamics.

We've talked about global growth going global. Cyclicals are still outperforming defensives. Even in April, when we had a really horrible month and horrible is relative, it really wasn't that bad. Sure, it was down 2%. But we've had such a ripper since October of 2023. Cyclicals are still outperforming defensives. And United States, we're probably going to be equal weight. Europe and Japan will be overweight versus Canada. Remember, this is a Canadian investment vehicle. I have the opportunity to go in the major four jurisdictions. I'm liking the United States, Europe, and Japan all better than Canada, as it sits right now, is where I'm at. Did that help with the rates? Is there anything else that we wanted to hammer out on that?

Alex:
Are you going to tell me you don't like the leafs either? You don't like Canada, you don't like the leafs?

Jason:
Well, I'm from the Republic. I'm a stubble jumper from Saskatchewan that lives in the Republic of Alberta. So, no, I don't like the leafs.

Alex:
Well, you helped answer a couple questions that we got on interest rates and your thoughts on Japan. We've gone much longer than what we had budgeted.

Jason:
I'm talking too much?

Alex:
No. Honestly, it's all good. There's just a wealth of information. I think if you and I had another hour, we could just sit here and have a conversation for another hour, because this stuff is just fascinating. And just trying to figure out how you're thinking, I think really helps advisors. But what's really important is the consistency of the track record that you, and your team have put together. And to say it's impressive is an understatement, and it's the reason why Global Income Growth has been one of our most flowing products on our product shelf. So, keep up the great work.

Jason:
Can I just leave with one slide? There's one slide that I wanted to touch on. Slide 24, please. And everybody probably wants to know, I can't see all the questions in the... But this is the current positioning of the portfolio as it sits right now, and it's probably some place that you wanted to go. So, we're running about 13% in fixed income. The fixed income portion of the portfolio is the ballast. It's short duration. We're long on credit. We're generating a yield of maturity about 5.86%, modest duration of 2.6. We just don't take any risk on the fixed income side. It's just plug and play, part of the portfolio that just generates cash. That's all that we want to do. Where we take the risk in the portfolio is on the equity side. We're running about... it's actually about 84% now. So, this is a little bit dated, but I kind of bucket the portfolio.

I've got 25 to 30 names in low beta, defensive, free cash flow focused and dividend growth assets. And then I've got another part of the portfolio where it's higher beta, higher risk revenue and earnings growth. And the names gets selected in there. Right now, I'm running about 50/50 between the stable bucket and the growth bucket, because I do believe the opportunities in the equity market are there. I'll cut back equities at the high level, but I'll still stay in the growth and stable. If we ever get in that market cycle clock that I was showing you where we want to be underweight to equities, I'll be 75 or 80% in the stable bucket and really cut down the beta in the portfolio. And that's one of the things that we've done.

The last line is where I think the rubber hits the road, the meat and the potatoes, the important thing that I want everybody to take from in this portfolio. Your equity exposure. For every dollar that you have invested in the GIG, you've got 13 cents in fixed income, and 2 cents in cash and 85 cents in equity. But that 85 cents in equity is an equity portfolio, such that these are five year numbers, and these are my calculated numbers. This is what I do on a daily basis. I power through the portfolio. But we're growing the revenue stream on the equity component about 8.3% per year for the next five years. That's what the revenue stream. Whether it ends up being 8% or 8.5 or 7.8, it doesn't really matter. That's the general trend.

The thing that's important to me is earnings are growing at 17%. The expected earnings stream off every individual company in this portfolio. And yes, companies miss earnings and all that sort of stuff, but that's why you have a portfolio of 45 or 50 names, because some work, some don't. But that's the general trend. And we're doubling up on the revenue. So, our margins are fantastic. But the number that jumps off the page for me that I really want to highlight is the free cashflow growth on this portfolio is expected to grow almost 16% per year for the next five years. The dividends, not the dividend yield, but the dividend growth off the portfolio is 13%.

So, if inflation's two, inflation's five or inflation's 10%, we're still maximizing purchasing power, because this free cashflow is in nominal terms and you're still outpacing inflation off the equity component of the portfolio. And then the portfolio is also buying back shares. I'm not a huge from portfolio management theory, buybacks theoretically don't matter, but also from portfolio management theory, dividends don't matter. And we all know that they matter. Get a company that cuts a dividend, see what happens to their stock. I just would like to compare. I was just looking at the MSCI World. The MSCI World's growth over that same timeline, the revenues are growing at 4%, earnings are growing at eight, free cash flow's growing at 13 and dividends are growing at seven. So, this equity component on this portfolio is in many cases doubling up what you could get just in an index. Just plug and play, pay no attention. This is where active management really shines.

Alex:
Yeah. Beautiful.

Jason:
And that's what I want people to look at. The individual names are great, and I've got a lot of religion on the names and happy to talk about them. I want to make sure any individual name, regardless of the market cycle, is accentuating or adding to one of these five metrics at the bottom. That's what you're buying when you're buying the GIG.

Alex:
And those are some of the most important metrics in order... Those are some of the best predictors of future stock price performance. I've said it over and over again, free cash flow yield, one of the best predictors. Earnings per share, growth, best predictors. Revenue per share growth, a fantastic predictor. Dividends, and we all know the stats around dividends and the importance of dividends and the compounding of dividends, but when you put all of that together, again, all you're doing is you're stacking your probabilities in your favor. And it's one of the reasons why, as I mentioned earlier, you've had the track record that you've had with this fund.

So, thanks, Jay. Always wonderful getting your thoughts. On behalf of everybody at NCM and all the clients out there, thanks for the great job that you're doing. If anybody has additional questions, please reach out to sales@ncminvestments.com. Thank you for your time. Apologize for going a little bit over here. But in my opinion-

Jason:
Sorry. I talk a lot.

Alex:
... it was well worth it. It was well worth it, Jay. All the best to everybody out there. Thank you very much, everybody, for your time. Appreciate it.

Jason:
Thanks, Alex. Thanks everybody. Talk to you soon.

Alex:
Thanks. Bye.

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Webinar Replay: Buy in May and go away!

Host Alex Sasso, CFA interviews NCM Global Income Growth portfolio manager, Jason Isaac, CAIA, CFA, about myths of market seasonality and how he plans to pursue continued strong performance in the coming summer months.

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