investment review · income fund credit profile . 4.0 yrs 4.5 yrs 5.0 yrs 5.5 yrs 6.0 yrs 6.5 yrs...

Portfolio Management & Financial Counsel

Investment Review

Nexus Pooled Funds March, 2015


1

OUTLINE

1. Current Environment

2. Portfolio Overview

3. Investment Performance


2

CURRENT ENVIRONMENT

U.S. continues to anchor a global recovery

Canadian recovery “upended” by oil price decline

Globally, fear of deflation is precipitating significant monetary easing

Resilience of global economy may be underestimated

Global economic conditions remain unsettled


3

CURRENT ENVIRONMENT

The U.S. recovery continues

United States

U.S. Industrial Production & Unemployment

• Consumer confidence at highest level in more than 5 years • Industrial production continues to advance

• Unemployment continues to fall

University of Michigan Consumer Confidence Index

Source: Bloomberg.

85

90

95

100

105

110

2009 2010 2011 2012 2013 2014

5%

6%

7%

8%

9%

10%Industrial Production Index

Unemployment Rate

50

60

70

80

90

100

2009 2010 2011 2012 2013 2014


4

CURRENT ENVIRONMENT

S&P 500 Since January 1, 2009 West Texas Intermediate (US$ per barrel)

United States

The U.S. recovery continues

Source: Bloomberg.

• Stock market forecasts better economic times • Low energy prices will boost discretionary spending

600

1000

1400

1800

2200

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-1540

60

80

100

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15


5

CURRENT ENVIRONMENT Canada

Crude Oil & Canadian Dollar (in US$)

In Canada the outlook is more challenging

Source: Bloomberg.

Regional economic performance is changing

Government budgets in disarray

Stimulus to consumers and business from low oil prices will take time

$30

$40

$50

$60

$70

$80

$90

$100

$110

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15$0.78

$0.80

$0.82

$0.84

$0.86

$0.88

$0.90

$0.92

$0.94

US$ Oil Price (WTI)Canadian Dollar


6

CURRENT ENVIRONMENT

Source: Bloomberg.

Inflation Rates (year over year)

Plummeting inflation worries central banks

Rest of World

Deflation is a serious concern • Increases the “real” cost of debt • Encourages consumers to “wait” for lower prices

Low rates and more stimulus to come

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

CanadaU.S.U.K.Eurozone


7

CURRENT ENVIRONMENT

Source: Bloomberg.

ECB Balance Sheet – All Assets

More central bank easing coming

Rest of World

ECB has lots of room to stimulate

Bank of Canada committed to offsetting oil price shock and financial stability risks

Fed likely on hold until end of year

€ 1.8tn

€ 2.1tn

€ 2.4tn

€ 2.7tn

€ 3.0tn

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

€ 1.1tn


8

CURRENT ENVIRONMENT

Euro Area Unemployment Rate DAX Stock Index (Germany)

Not all news is dire: there are some signs of improvement

Rest of World

Source: Bloomberg.

• Modest improvement is under-appreciated • European QE is lifting market expectations

10.6% 10.6%

10.5%

10.4%

10.3% 10.3%

10.2%

10.1% 10.1%

10.0%

10.1%

10.0%

9.9%

9.8%

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan8500

9000

9500

10000

10500

11000

11500

12000

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15


9

CURRENT ENVIRONMENT

Widespread currency devaluations are destabilizing

Aggressive central bank intervention will make a difference

Geo-political risks, especially from low energy prices, worth watching

Market uncertainty likely to remain

Uncertain economic conditions will continue in 2015


10

PORTFOLIO OVERVIEW

Overall equity allocations are close to long-term guidelines • Modest global growth the most likely outcome • Equity valuations full, but not extreme

Fixed income remains positioned for eventual interest rate increase

Short-term capital preservation the only remaining attribute of bonds

International equity markets more attractively valued than North America

Portfolios remain positioned for the uncertain environment


11

PORTFOLIO OVERVIEW

Overall equity allocations are close to long-term guidelines

Asset Allocation

As at February 28, 2015

Nexus Equity Fund Nexus Income Fund Nexus Balanced Fund

. .11%5%

36% 50%

45%

45%

8%

Actual Guideline

International Equities

Cash

CanadianEquities

U.S. Equities

6% 5%

29% 30%

27%40%

31%

25%

7%

Actual Guideline


U.S. Equities

CanadianEquities

Bonds

Cash 5%

76%80%

19% 20%

Actual Guideline

Other Income-Oriented

Securities

Bonds

Cash


12

5%

76%

4%

15%

Asset Mix

Fixed Income

U.S. Stocks

Cdn Stocks

Cash

A27%

BBB1%

AA34%

AAA (corp)9%

AAA (gov)29%

PORTFOLIO OVERVIEW

Fixed Income Duration

We remain positioned for an eventual normalization of the bond market

Fixed Income


• Our maturity profile is shorter than the index • Credit quality very high

Income Fund Credit Profile

4.0 yrs

4.5 yrs

5.0 yrs

5.5 yrs

6.0 yrs

6.5 yrs

7.0 yrs

7.5 yrs

8.0 yrs

2004 2006 2008 2010 2012 2014

FTSE TMX Universe Bond Index

Nexus Income Fund Bonds


13

PORTFOLIO OVERVIEW Equity Portfolio Changes

Since March 1, 2014

Foreign Equities Canadian Equities

Buy Sell Buy Sell

ATCO Bombardier

Rogers Communications General Electric Covidien Sirona Dental

Add Trim Add Trim

— Enbridge Progressive Waste

— —

With a long-term oriented investment approach, limited trading is the norm


14

PORTFOLIO OVERVIEW

The sharp decline in energy prices has surprised investors

Energy Sector

Source: Bloomberg. (1) XEG is an ETF that holds the energy-producing companies in the TSX. It excludes the non-producing infrastructure companies like Enbridge and TransCanada.

Crude Oil Prices (US$/bbl) XEG – Energy Sector ETF (1)

$45

$55

$65

$75

$85

$95

$105

$115


WTI (Cushing)Brent

$10

$12

$14

$16

$18

$20

$22

$24



15

PORTFOLIO OVERVIEW

Investors are scrambling to understand the sell-off

Energy Sector

Significant increase in non-OPEC supply • Storage near capacity in many regions

Modest global growth limits demand • China a particular source of uncertainty

Many political undercurrents • Saudis sending a message with refusal to cut output • Destabilizing in Russia, Nigeria and several other “oil” countries


16

$73 $74$78

$81$86

$59$62 $63 $63

$72 $73

$83$87

$91 $94

$55$62

$66$73

$78

SK V

ikin

g

MB

Spea

rfis

h

SK B

akke

n

SK S

haun

avon

AB C

ardi

um

CVE

FC

IMO

Nab

iye

MEG

CL

CVE

CL

Sync

rude

Bas

e

PGF

Lind

berg

h

HSE

Sunr

ise

CNQ

Hor

izon

IMO

Kea

rl

SU F

ort H

ills

TX E

agle

ford

U

T U

tica

Basi

n

DJ B

asin

TX P

erm

ian

ND

Bakk

en

Canadian Reservoirs Major Oil Sands Projects U.S. Reservoirs

PORTFOLIO OVERVIEW

Market forces will eventually push prices higher

Energy Sector

Source: Gordon Gee & Associates. (1) Breakeven price includes direct costs plus an assumed 10% return required to proceed with development. Bars set out the main onshore development projects in North America. Current oil

price is for WTI as of February 28, 2015.

Breakeven Price By North American Resource Play (1)

Saudi Arabia one of the few producers able to generate a profit at current prices

Most OPEC countries need higher prices to balance budgets

Current Market Price US$50.40


17

PORTFOLIO OVERVIEW

Nexus energy holdings focussed on the highest quality companies in sector

Energy Sector

Energy holdings represent only 4.1% of the Equity Fund • Certain other companies also have business exposure to sector

Long-term outlook is uncertain given current turmoil

Source: Bloomberg. (1) Market is pricing in some skepticism that $0.30 annual dividend will be sustained.

Cenovus EnCana Suncor Trican (1) TSX

2016 EV / EBITDA 6.9x 4.8x 6.7x 6.5x 9.1x

Dividend Yield 5.0% 2.2% 3.0% 6.8% 2.8%

Debt / Capital 35% 43% 24% 38% n/a



18

PORTFOLIO OVERVIEW

GE is a large, well diversified company with substantial recurring profits

General Electric Company

General Electric Business Mix – 2014 Revenue

GE is a global giant • $149 billion revenue and 307,000 employees • Targeting $10 - $12 billion of free cash flow in 2015

Well diversified with multiple growth areas • 8 major business units • U.S. (47%), Europe (17%), Rest of World (36%)

Business is quite stable • Long-cycle equipment and services business has $250 billion

backlog • High recurring revenue model due to large installed base

28%

12%

12%

6%

4%5%

16%

18%

GE Capital

Power & Water

Aviation

Oil & Gas

Healthcare

Appliances & Lighting

Energy ManagementTransportation


19

PORTFOLIO OVERVIEW

GE has good long-term prospects

General Electric Company

Stability and strong free cash flow

Sharpened industrial focus • Shrinking GE Capital business to 25% - 30% of earnings from over 50% • Sold Appliance business to Sweden’s Electrolux • Acquired Alstom’s thermal power business – reinforces combined cycle power expertise

Meaningful streamlining underway • Targeting cost reductions of $1 billion per year • Reducing Selling, General & Administrative expenses to 12% of revenues in 2016, from 16% in 2013

Attractive valuation and yield • GE has been out of favour with investors • Dividend yield is 3.5% (53% payout ratio) • P/E multiple of 15.0x (on estimated 2015 earnings)


20

PORTFOLIO OVERVIEW

The Balanced and Equity Funds continue to hold international equities


Annualized Return

(1) The Balanced Fund’s international equity exposure (as a percentage of its equity portfolio) is similar. (2) Annualized return since June 30, 2012 (approximately 3 years), which was when EMEC was added to the Nexus Funds.

EQIT (International Developed Markets) EMEC (International Emerging Markets)

Equity Fund Asset Allocation (1)

4.6%

3.8%

Periods Ended February 28, 2015

13.7%

17.4%

12.0%12.9%

18.4%

11.6%

EQITMSCI EAFE (C$)

22.6%

13.2%

-

18.6%

12.8%

-

1 Year 3 Years 5 Years

EMECMSCI EM (C$)

(2)

( )

(2)

( )


21

PORTFOLIO OVERVIEW

Despite a difficult environment, we like our EQIT holding

Equity International Investment Trust

EQIT was up 3.8% in 2014

EQIT reduces overall portfolio volatility

Holdings are quality companies with global growth exposure

JPMorgan Asset Management is a proven manager with quality orientation

Attractive valuation: forward P/E of 14.1x and 2.8% dividend yield

Will benefit from any European “normalization”

As at December 31, 2014

EQIT Country Weights

46.0%

7.1%

6.1%

17.7%

22.8%

Europe

U.K.

Japan

Emerging Mkts

Other Pacific Cash 0.4%


22

PORTFOLIO OVERVIEW

EMEC has high growth potential and a very attractive valuation

Emerging Markets Equity – Canada Fund

Emerging markets are now more than 50% of global GDP (1)

Economic growth continues to outpace the developed world

EMEC has a high-quality orientation • 71 large cap holdings with average ROE approximately 19%

Proven manager – JPMorgan Asset Management

Attractive valuation: forward P/E of 14.0x and dividend yield of 2.9%

(1) At purchasing power parity.

As at December 31, 2014

EMEC Country Weights

16.5%

10.1%

7.5%

5.5%

3.7%

28.1%

13.1%

15.5%

India

China

South Africa

BrazilTaiwan

South Korea

Other

Cash


23

INVESTMENT PERFORMANCE

2015 has been outstanding thus far • Equity Fund up 7.0%; Balanced Fund up 6.1% year-to-date • Equity returns particularly strong outside Canada • Bond returns continue to be surprisingly good

Lower expectations sensible going forward • Returns have been well above average for several years • 2015 expected to be positive; risks to the downside

Longer-term returns remain strong relative to market benchmarks and most other managers

Nexus portfolios have performed well


24


(1) Nexus return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses. (2) Equity Fund market benchmark is 5% FTSE TMX 91-Day T-Bill Index, 50% TSX, and 45% S&P 500 (in C$); rebalanced monthly. (3) Balanced Fund market benchmark is 5% FTSE TMX 91-Day T-Bill Index, 30% FTSE TMX Universe Bond Index, 40% TSX, and 25% S&P 500 (in C$); rebalanced monthly. (4) Income Fund market benchmark is the FTSE TMX Universe Bond Index. (5) Mutual fund returns from Morningstar Canada. Morningstar presents returns net of management fees.

Year ended February 28, 2015

1-Year Return on Nexus Funds

Nexus funds generated great returns in the last 12 months

22.4%

#N/A

18.6%

NexusEquityFund (1)

MarketBenchmark(2)

MedianN. American

EquityFund (5)

17.7%

14.7%

#N/A

NexusBalancedFund (1)

MarketBenchmark(3)

MedianCanadianBalancedFund (5)

9.9% 10.4%

#N/A

NexusIncomeFund (1)

MarketBenchmark(4)

MedianCanadian

BondFund (5)


25

Lower expectations sensible, given recent strong gains

Nexus Equity Fund Rolling 1-Year Returns


Recent returns well above long-term averages

Correction inevitable; timing uncertain

Trying to anticipate correction a faulty strategy • Many on sidelines for last several years • Stick with high-quality stocks

(1) Return is the compound average annual return shown prior to the deduction of management fees, but after deduction of all other expenses.

9%

12%

15%

18%

21%

24%

27%

Feb-13 Aug-13 Feb-14 Aug-14 Feb-15

3-year CAGR: 18.2%


26



Five Years ended February 28, 2015

5-Year Annualized Returns on Nexus Funds

Five-year returns remain strong

13.3% 13.4%

#N/A

NexusEquityFund (1)

MarketBenchmark (2)

MedianN. American

EquityFund (5)

11.6%10.4%

#N/A


MarketBenchmark (3)


7.2%6.0%

#N/A

NexusIncomeFund (1)

MarketBenchmark (4)

MedianCanadian

BondFund (5)


27



Ten Years ended February 28, 2015

10-Year Annualized Returns on Nexus Funds

Despite the financial crisis, 10-year returns attractive by historical standards

9.2%7.8%

#N/A

NexusEquityFund (1)

MarketBenchmark(2)

MedianN. American

EquityFund (5)

8.5%7.2%

#N/A


MarketBenchmark (3)


6.6%5.7%

#N/A

NexusIncomeFund (1)

MarketBenchmark (4)

MedianCanadian

BondFund (5)

investment review · income fund credit profile . 4.0 yrs 4.5 yrs 5.0 yrs 5.5 yrs 6.0 yrs 6.5 yrs...

Documents