U.S. GDP growth accelerated markedly between the first and second halves of 2016 and recent economic data suggests that growth will continue at a reasonable pace in the first half of this year. The Conference Board’s measure of consumer confidence hit a 15-year high in February, bolstered by expectations of favorable job and income prospects and suggesting that consumption growth will remain healthy. Optimism seems to be finally improving for businesses as well, with the National Federation of Independent Business (NFIB) Index of Small Business Optimism posting a 13-year high in January. The global economy appears to also be on the mend, with indicators for both manufacturing and non-manufacturing rising in the Eurozone and Japan over recent months.
U.S. equity markets are making record highs over optimism on expected tax cuts, infrastructure spending and deregulation. The S&P 500 Index returned 4.0%* in February, while the smaller stock indices trailed in performance, with the S&P SmallCap 600 Index posting a 1.6%* gain for the month and the S&P MidCap 400 Index showing a 2.6%* return. Growth-oriented U.S. equity management approaches outperformed Value-tilted strategies for the month and investors rewarded the stocks of larger companies exhibiting better returns on capital and higher earnings quality. The Russell 1000 Value Index returned 3.6%* in February, with the more defensively oriented sectors generally performing better and led by the Health Care (+7.1%)* and Consumer Staples (+6.0%)* sectors.
The U.S. Dollar Index, which measures the value of the U.S. dollar relative to its most significant trading partners, rose 1.7% in February, recovering from a short term decline in response to comments from President Trump in January. The Canadian dollar is often influenced by energy prices, but it fell 2.0% against the U.S. greenback in February, despite a 2.1% increase in oil prices over the month. The U.S. dollar strength helped the Fund’s performance for February. Looking forward, strengthening economic growth in the U.S. has raised the prospects for higher interest rates, while oil appears contained at the upper end of its price range over the past year. These fundamentals would suggest an outlook that supports U.S. dollar strength in the near term.
Net of fees, the NexGen U.S. Dividend Plus Fund outperformed the Russell 1000 Value Unhedged Canadian Dollar Index in February, aided by its stock selection in the Industrials and Energy sectors. The Fund carried a neutral allocation to the energy sector relative to the benchmark, in recognition of the volatile nature of the energy prices that drive the sector’s earnings. Stock selection within the Energy Sector contributed positively to the Fund’s performance. The Fund carried an overweight to the Information Technology sector, reflecting the higher prospects for earnings and dividend growth that the sector provides.
The Fund carried its largest relative sector overweight in Consumer Discretionary stocks to benefit from higher anticipated discretionary spending associated with the favorable levels of consumer confidence. Unfortunately, the sector’s underperformance and a holding in a popular retailer detracted from the portfolio relative performance in February. Conversely, the Fund’s largest sector underweight has been maintained in Consumer Staple stocks, where we find it difficult to find attractively valued stocks that pay above average dividends. This underweight detracted from relative performance in February. The Fund is also overweight to the Utilities and Real Estate sectors to take advantage of the higher yields available in those sectors. The overweight in the Real Estate sector detracted while the overweight in the Utility sector contributed to the strategy, largely offsetting each other.
The S&P 500 Index traded at 18.1X the 2017 consensus operating earnings estimate of nearly $131* per share at the end of February, well above its 15-year average of 15.5X. Fourth quarter earnings reports were largely completed by the end of February and showed about 22% year-over-year growth. A second quarter of consecutive earnings growth is welcomed after seven consecutive quarters of contracting earnings, but it is still quite a shortfall from the 32% growth that was expected at the beginning of the quarter. Stronger growth in future earnings will be necessary to help the market advance from current levels. Consensus analyst earnings estimates for 2017 imply 23% year-over-year earnings growth, but we are concerned that such an outlook may prove to be optimistic, leaving the market potentially expensive if economic growth stalls.
The Fund is well diversified across economic and industrial sectors and is positioned for an economic environment of improving growth, where we believe that stocks with consistent earnings growth, dividend increases and stock repurchases will do relatively well. The Fund’s relatively low beta and composition of dividend paying stocks with quality management can help to cushion the Fund from a potential market downturn.
For more information about NexGen U.S. Dividend Plus Funds, please contact your financial advisor.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in share value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities ae not covered by Canada Deposit Insurance Corporation or by any other government deposit insurer.
This release may contain “forward-looking statements” which reflect the current expectations of NGAM Canada LP and/or its sub-advisor, Ziegler Capital Management, LLC. (“Ziegler Capital Management”). These statements, reflect the applicable management’s current beliefs with respect to future events and are based on information currently available to such management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements including, without limitation, those listed under the heading “Risk Factors” in the NGAM Canada LP Funds prospectus, which is available on NGAM Canada LP’s website and on SEDAR at www.sedar.com. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this release. Although the forward-looking statements contained in this release are based upon what NGAM Canada LP and/or Ziegler Capital Management believes to be reasonable assumptions, NGAM Canada LP and Ziegler Capital Management cannot assure investors that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this release and NGAM Canada LP and Ziegler Capital Management do not assume any obligation to update or revise them to reflect new events or circumstances.”