2017 mid-year review

At the beginning of the year, our portfolio managers provided their outlook for 2017. They now reflect back on their comments and discuss how they positioned their portfolios to take advantage of the opportunities and mitigate the risks they identified. We’ll also look at the performance of their funds in light of these developments, and what may lie ahead.


What was the initial outlook in January 2017?
  • Inflation and oil prices are likely to increase by the end of the year, though there will be volatility
  • Value investing likely to outperform growth investing
  • High-yield corporate bonds will likely be a better option than investment grade bonds, given their lower sensitivity to interest rates
The global environment is giving the first indication in a number of years that the deflationary environment, which has been a result of over-capacity, is showing signs of reversal. The prospects of an inflationary environment are positive by implication. However, the markets have subsequently responded to this possibility and have risen to a point where we believe we may have ‘front loaded’ the potential for positive corporate and economic data in a very short period of time. This increases the potential for more than the expected two rate hikes by the Fed and the possibility of a near-term correction that will put into question the positive benefits of higher inflation, higher commodity prices and a higher growth environment. We expect this scenario to unfold within the first half of 2017 before giving way to a more positive backdrop heading into 2018. (Dan Bastasic, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • We remained steadfast in our adherence to our value-oriented investment style
  • We remained exposed to high-yield corporate bonds, with an average credit quality of BB for the funds’ fixed-income exposure over the course of the first six months of 2017
  • We have held large cash positions in our funds – up to 20% – in an effort to mitigate the impact of interest rate hikes and geopolitical risks in the U.S., U.K., France and North Korea

What has transpired this year?1
  • The annualized inflation rate in Canada decreased to 1.0% from 1.4% in December 2016
  • Crude oil fell from $55.90 at the beginning of the year to $46.82 by mid-year, due to a short-term increase in supply
  • In Canada, both value investing and growth investing have had relatively flat returns (MSCI Canada Value Index -0.60% vs. MSCI Canada Growth Index +0.73%) while in the U.S., growth has outperformed value (S&P 500 Value Index USD +4.85% vs. S&P 500 Growth Index USD +13.33%). The outperformance of growth in the U.S. was largely driven by technology stocks, as many companies in the sector reported strong earnings
  • High yield has outperformed investment grade (Bank of America Merrill Lynch High Yield Master II Index USD +4.91% vs. FTSE TMX Canada Universe Bond Index +2.36%)
  • The Fed increased the target interest rate twice in the first six months of 2017 (the target rate has increased from 0.75% to 1.25% since the beginning of the year). The Bank of Canada hinted at potential rate increases in the latter half of 2017

What is the outlook for the second half of 2017?
  • Inflation is likely to be range bound at current levels for a number of months before continuing to trend higher toward the end of the year. This should be coupled with a continuation of global economic growth and higher energy prices as the year progresses
  • We currently do not see the overall demand and supply picture for oil changing from our expectations at the beginning of the year. We expect an actual oil and petroleum deficit throughout 2017
  • The outlook for high yield is still attractive relative to investment grade fixed income. We do not foresee a recession over the next 12-18 months and the economy is growing at a slow, but steady pace – an environment conducive to high yield performing well. Corporate fundamentals (earnings, sales, balance sheets, etc.) are not deteriorating and in fact have shown improvement over the past year, which suggests that default rates are not likely to spike
  • Value stocks may begin to outperform growth stocks. Value tends to outperform growth in a rising rate environment. One of the reasons for this is that, as interest rates rise, there is an implied acceleration of growth and inflation that help value stocks close the “growth” gap with growth stocks while offering less expensive valuations

IA Clarington Strategic Corporate Bond Fund Series F vs. Fundata High Yield Fixed Income Universe: Return
October 2011 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Strategic Income Fund Series F vs. Fundata Canadian Neutral Balanced Universe: Return
September 2011 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.


IA Clarington Strategic Equity Income Fund Series F vs. Fundata Canadian Dividend Income Equity Universe: Return
September 2011 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.



What was the initial outlook in January 2017?
  • Rising interest rates in 2017, led by U.S. Treasuries
  • Opportunities in fixed income will be in floating rate debt and shorterduration spread products with the ability to provide a cushion against rising interest rates
  • Constructive on credit, with our baseline view being a compression of spreads
  • Loan defaults to remain below the historical average and expect high-yield bond defaults to decline
Our current expectation is for rising interest rates in 2017, led by U.S. Treasuries. With interest rate sensitivity as a clear headwind, the opportunities in fixed income will be in floating rate debt and shorter-duration spread products with the ability to cushion rising interest rates. We continue to like senior loans and high-yield bonds with shorter maturities. We are constructive on credit, with our baseline view being a compression of spreads in 2017. We expect loan defaults to remain below the historical average and expect high-yield bond defaults to decline after hitting multi-year highs in 2016 due to challenges in the energy sector. Overall, our view is that the end of the credit cycle has been pushed out.(Jeff Sujitno, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • In general, we position all the funds we manage quite conservatively in order to limit price volatility and surprise risk
  • We have focused on higher-rated, larger issues in our non-investment grade positions
  • We have added exposure to higher-yielding single B-rated issues that are reasonably leveraged and generate predictable free cash flow

What has transpired this year?1
  • Short term rates moved higher (U.S. 2-yr treasury yield increased to 1.38% from 1.19%) while longer-term rates fell (U.S. 10-yr treasury yield declined to 2.31% from 2.45%)
  • The Fed increased the target interest rate twice in the first six months of 2017 (the target rate has increased from 0.75% to 1.25% since the beginning of the year)
  • Leveraged loan spread narrowed to 442 basis points from 461 basis points while the spread on high-yield bonds narrowed to 377 basis points from 422 basis points
  • Loan default rates declined to 1.4% from 1.5% while high-yield default rates declined to 2.0% from 4.0%

What is the outlook for the second half of 2017?
  • We expect the Fed and Bank of Canada to continue to tighten monetary conditions unless there is material deterioration in economic data
  • We expect the global move towards normalization to continue with the Fed starting its balance sheet reduction and the European Central Bank tapering asset purchases
  • However, none of this is causing us to make any meaningful changes to our portfolios. We believe that investors want low volatility and minimal surprise risk in their fixed income, first and foremost. Our portfolio construction favours capital preservation over outsized returns, so we are not prepared to seek capital appreciation by increasing duration

IA Clarington Floating Rate Income Fund Series F vs. Floating Rate Loan Universe: Return
December 2013 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Core Plus Bond Fund Series F vs. Fundata Canadian Fixed Income Universe: Return
July 2014 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.


What was the initial outlook in January 2017?
  • If the U.S. economy accelerates at a fasterthan- expected pace, driven by the implementation of reflationary policy, the Fed may increase rates at a faster pace than expected
  • Sectors such as bond proxies (i.e. pipelines, utilities, REITs) could potentially follow bonds lower, while other more cyclical sectors should follow earnings higher at this stage of the cycle
  • With monetary policy divergences around the globe, the U.S. dollar looks to continue its strength in 2017
  • Volatility to increase from the low levels experienced in 2016
We are finally seeing a reacceleration of earnings in North American markets and as long as this continues, we believe markets can grind higher despite elevated valuations. Many of the drivers were already in place before the U.S. election (improving U.S. economy, increasing global demand and inflation); however, since the unexpected outcome these drivers have been amplified by the Trump administration’s proposed package of reflationary policies. If fully implemented, the positive policies could be fuel to the fire (for example, trade). Earnings should continue to grow and markets should follow in general. Another positive driver for 2017 could finally be a rotation of funds from traditional fixed income into equities given the sharp rise in rates we have just witnessed. This should help sustain multiples for a period. ( Terry Thib, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • For our large-cap mandate, the IA Clarington Canadian Conservative Equity Fund, we have a barbell strategy where we have taken down our weighting in the more interest rate sensitive and defensive bond proxy sectors and added slightly to positively correlated segments, such as insurance. We have also added to industrials and a few more cyclical names that should benefit from improving domestic and global growth
  • We continue to position the IA Clarington Growth & Income Fund as a complement to core holdings with our quality dividend growth strategy, sourcing the portfolio’s income mainly from sub-sectors that are outside of the bond proxies (REITS, pipelines, utilities and telecommunications) and banks. We also like Canadian companies that have exposure to the global reflation trade

What has transpired this year?1
  • The Fed increased the target interest rate twice in the first six months of 2017 (the target rate has increased from 0.75% to 1.25% since the beginning of the year)
  • Bond proxy sectors moved higher along with bond prices (S&P TSX Utilities Index +10.08%, S&P TSX Capped REIT Index +3.62%). Most cyclical sectors were strongly positive (S&P TSX Consumer Discretionary Index +12.20%; S&P TSX Industrials Index +11.72%; S&P TSX Information Technology Index +9.39%). The S&P/TSX Energy Index, on the other hand, returned -13.34%, mainly due to oil price volatility
  • The U.S. dollar initially appreciated at the beginning of the year, but then depreciated versus major currencies, mainly as a result of Trump’s reforms not coming to fruition and failing to meet market expectations, as well as the quickly dissipating expectation that the Fed will continue to increase rates (-2.92% vs. Canadian dollar; -7.89% vs. Euro; -5.11% vs. British Pound)
  • Volatility (as measured by the VIX index) rose to 15.96 in April after beginning the year at 12.85, and then declined to 10.09 by the end of June
  • Canada was hit by a perfect storm : a large decline in the energy sector, muted inflation/ interest rates, NAFTA/Border Adjustment Tax overhang, as well as an inflated housing market, which negatively impacted banks and financials due to concerns over soaring household debt and housing prices

What is the outlook for the second half of 2017?
  • Inflation should pick up: employment will eventually move it higher and interest rates therefore should be stable to higher
  • Oil likely to stabilize in the $40-50/barrel range
  • Value likely to outperform growth
  • Canadian markets could outperform due to the valuation divergence versus the U.S. and the unprecedented performance divergence (on the negative side) compared to major markets around the world amid global synchronized growth

IA Clarington Growth & Income Fund Series F vs. Fundata Canadian Equity Balanced Fund Universe: Return
January 2015 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Canadian Conservative Equity Fund Series F vs. Fundata Canadian Dividend Income Equity Universe
November 2005 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.


What was the initial outlook in January 2017?
  • The Canadian stock market could be in for another decent year as the deal to cut oil production struck by OPEC on November 30th might put a floor under oil prices
  • A return to the $50-60/barrel range on oil prices could act as a tailwind for the Canadian economy
  • Equities in the Europe, Australasia and Far East (EAFE) region could outperform
  • The loonie may remain slightly under pressure, as the Bank of Canada could maintain a careful tone
The Canadian stock market could be in for another decent year as the deal to cut oil production struck by OPEC on November 30th might put a floor underneath oil prices. A return to the $50-60 range on oil prices could act as a tailwind for the Canadian economy, as non-energy-product exports are lagging and it is still unclear whether the recently imposed mortgage rule measures will hurt a frothy housing market. We’ll finally keep a wary eye on Donald Trump’s plan to renegotiate the North American Free Trade Agreement, as nearly 75% of Canadian exports go to the U.S. market and Canada’s current account deficit as a share of GDP is presently the worst among developed countries. In this context, we expect the loonie to remain slightly under pressure, as the Bank of Canada could maintain a careful tone. ( Clément Gignac, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • Overweight EAFE equities, slight overweight Canadian equities and underweight U.S. equities
  • We have actively managed the downside risk of our portfolio through equity put options and long-term U.S. bonds

What has transpired this year?1
  • Contrary to our expectation, Canadian equities lagged world equity markets in the first half of the year (S&P/TSX Composite index up only 0.74%) as energy and material sectors underperformed
  • Even with the November OPEC deal, crude oil fell from $55.90/barrel at the beginning of the year to $46.82 by mid-year based on a strong acceleration of U.S. oil production, while Canada’s ex-energy sectors posted higher economic momentum
  • As expected, EAFE equity markets outperformed those in the U.S. (MSCI EAFE Index USD +13.81% vs. S&P 500 Index USD +9.34%)
  • The Canadian dollar appreciated 4.14% versus the U.S. dollar as negative sentiment on the loonie, fueled by real estate and NAFTA uncertainties, strongly reversed following unexpected hawkish comments from the Bank of Canada about their monetary policy

What is the outlook for the second half of 2017?
  • We will very closely monitor global central banks’ monetary policies. Global economic activity is gaining momentum and that could push more central bankers to favour a less accommodative monetary policy going forward
  • We are also watching U.S. inflation and wage growth very closely to gauge how the Fed will implement its monetary policy with respect to interest rate hikes and balance sheet management. For now, the bond market is pricing less than one more Fed rate hike before year-end
  • After the failure of Congress to move forward with a reform of Obamacare, we give a low probability that Washington delivers on the promised fiscal reform this year
  • The Bank of Canada clearly signaled in June its intention to remove its 50-basispoint “insurance policy” with respect to the discount rate, a clear game changer. Given the significant narrowing of the 2-year Canadian yield spread relative to the U.S., we think the loonie should maintain its recent gains and trade around $0.80 by the end of the year

IA Clarington Monthly Income Balanced Fund Series F6 vs. Fundata Canadian Equity Balanced Universe: Return
July 2009 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Yield Opportunities Fund Series F vs. Fundata Canadian Fixed Income Balanced Universe: Return
January 2016 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Strategic Corporate Bond Fund
IA Clarington Strategic Equity Income Fund/Class
IA Clarington Strategic Income Fund
IA Clarington Strategic U.S. Growth & Income Fund
IA Clarington Tactical Income Fund

icon  2017 mid-year review - Dan Bastasic

What was the initial outlook in January 2017?
  • Inflation and oil prices are likely to increase by the end of the year, though there will be volatility
  • Value investing likely to outperform growth investing
  • High-yield corporate bonds will likely be a better option than investment grade bonds, given their lower sensitivity to interest rates
The global environment is giving the first indication in a number of years that the deflationary environment, which has been a result of over-capacity, is showing signs of reversal. The prospects of an inflationary environment are positive by implication. However, the markets have subsequently responded to this possibility and have risen to a point where we believe we may have ‘front loaded’ the potential for positive corporate and economic data in a very short period of time. This increases the potential for more than the expected two rate hikes by the Fed and the possibility of a near-term correction that will put into question the positive benefits of higher inflation, higher commodity prices and a higher growth environment. We expect this scenario to unfold within the first half of 2017 before giving way to a more positive backdrop heading into 2018. (Dan Bastasic, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • We remained steadfast in our adherence to our value-oriented investment style
  • We remained exposed to high-yield corporate bonds, with an average credit quality of BB for the funds’ fixed-income exposure over the course of the first six months of 2017
  • We have held large cash positions in our funds – up to 20% – in an effort to mitigate the impact of interest rate hikes and geopolitical risks in the U.S., U.K., France and North Korea

What has transpired this year?1
  • The annualized inflation rate in Canada decreased to 1.0% from 1.4% in December 2016
  • Crude oil fell from $55.90 at the beginning of the year to $46.82 by mid-year, due to a short-term increase in supply
  • In Canada, both value investing and growth investing have had relatively flat returns (MSCI Canada Value Index -0.60% vs. MSCI Canada Growth Index +0.73%) while in the U.S., growth has outperformed value (S&P 500 Value Index USD +4.85% vs. S&P 500 Growth Index USD +13.33%). The outperformance of growth in the U.S. was largely driven by technology stocks, as many companies in the sector reported strong earnings
  • High yield has outperformed investment grade (Bank of America Merrill Lynch High Yield Master II Index USD +4.91% vs. FTSE TMX Canada Universe Bond Index +2.36%)
  • The Fed increased the target interest rate twice in the first six months of 2017 (the target rate has increased from 0.75% to 1.25% since the beginning of the year). The Bank of Canada hinted at potential rate increases in the latter half of 2017

What is the outlook for the second half of 2017?
  • Inflation is likely to be range bound at current levels for a number of months before continuing to trend higher toward the end of the year. This should be coupled with a continuation of global economic growth and higher energy prices as the year progresses
  • We currently do not see the overall demand and supply picture for oil changing from our expectations at the beginning of the year. We expect an actual oil and petroleum deficit throughout 2017
  • The outlook for high yield is still attractive relative to investment grade fixed income. We do not foresee a recession over the next 12-18 months and the economy is growing at a slow, but steady pace – an environment conducive to high yield performing well. Corporate fundamentals (earnings, sales, balance sheets, etc.) are not deteriorating and in fact have shown improvement over the past year, which suggests that default rates are not likely to spike
  • Value stocks may begin to outperform growth stocks. Value tends to outperform growth in a rising rate environment. One of the reasons for this is that, as interest rates rise, there is an implied acceleration of growth and inflation that help value stocks close the “growth” gap with growth stocks while offering less expensive valuations

IA Clarington Strategic Corporate Bond Fund Series F vs. Fundata High Yield Fixed Income Universe: Return
October 2011 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Strategic Income Fund Series F vs. Fundata Canadian Neutral Balanced Universe: Return
September 2011 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.


IA Clarington Strategic Equity Income Fund Series F vs. Fundata Canadian Dividend Income Equity Universe: Return
September 2011 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.


IA Clarington Floating Rate Income Fund
IA Clarington U.S. Dollar Floating Rate Income Fund
IA Clarington Core Plus Bond Fund
IA Clarington Tactical Bond Fund

icon  2017 mid-year review - Jeff Sujitno

What was the initial outlook in January 2017?
  • Rising interest rates in 2017, led by U.S. Treasuries
  • Opportunities in fixed income will be in floating rate debt and shorterduration spread products with the ability to provide a cushion against rising interest rates
  • Constructive on credit, with our baseline view being a compression of spreads
  • Loan defaults to remain below the historical average and expect high-yield bond defaults to decline
Our current expectation is for rising interest rates in 2017, led by U.S. Treasuries. With interest rate sensitivity as a clear headwind, the opportunities in fixed income will be in floating rate debt and shorter-duration spread products with the ability to cushion rising interest rates. We continue to like senior loans and high-yield bonds with shorter maturities. We are constructive on credit, with our baseline view being a compression of spreads in 2017. We expect loan defaults to remain below the historical average and expect high-yield bond defaults to decline after hitting multi-year highs in 2016 due to challenges in the energy sector. Overall, our view is that the end of the credit cycle has been pushed out.(Jeff Sujitno, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • In general, we position all the funds we manage quite conservatively in order to limit price volatility and surprise risk
  • We have focused on higher-rated, larger issues in our non-investment grade positions
  • We have added exposure to higher-yielding single B-rated issues that are reasonably leveraged and generate predictable free cash flow

What has transpired this year?1
  • Short term rates moved higher (U.S. 2-yr treasury yield increased to 1.38% from 1.19%) while longer-term rates fell (U.S. 10-yr treasury yield declined to 2.31% from 2.45%)
  • The Fed increased the target interest rate twice in the first six months of 2017 (the target rate has increased from 0.75% to 1.25% since the beginning of the year)
  • Leveraged loan spread narrowed to 442 basis points from 461 basis points while the spread on high-yield bonds narrowed to 377 basis points from 422 basis points
  • Loan default rates declined to 1.4% from 1.5% while high-yield default rates declined to 2.0% from 4.0%

What is the outlook for the second half of 2017?
  • We expect the Fed and Bank of Canada to continue to tighten monetary conditions unless there is material deterioration in economic data
  • We expect the global move towards normalization to continue with the Fed starting its balance sheet reduction and the European Central Bank tapering asset purchases
  • However, none of this is causing us to make any meaningful changes to our portfolios. We believe that investors want low volatility and minimal surprise risk in their fixed income, first and foremost. Our portfolio construction favours capital preservation over outsized returns, so we are not prepared to seek capital appreciation by increasing duration

IA Clarington Floating Rate Income Fund Series F vs. Floating Rate Loan Universe: Return
December 2013 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Core Plus Bond Fund Series F vs. Fundata Canadian Fixed Income Universe: Return
July 2014 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington North American Opportunities Class
IA Clarington Growth & Income Fund
IA Clarington Canadian Conservative Equity Fund/Class

icon  2017 mid-year review - Terry Thib

What was the initial outlook in January 2017?
  • If the U.S. economy accelerates at a fasterthan- expected pace, driven by the implementation of reflationary policy, the Fed may increase rates at a faster pace than expected
  • Sectors such as bond proxies (i.e. pipelines, utilities, REITs) could potentially follow bonds lower, while other more cyclical sectors should follow earnings higher at this stage of the cycle
  • With monetary policy divergences around the globe, the U.S. dollar looks to continue its strength in 2017
  • Volatility to increase from the low levels experienced in 2016
We are finally seeing a reacceleration of earnings in North American markets and as long as this continues, we believe markets can grind higher despite elevated valuations. Many of the drivers were already in place before the U.S. election (improving U.S. economy, increasing global demand and inflation); however, since the unexpected outcome these drivers have been amplified by the Trump administration’s proposed package of reflationary policies. If fully implemented, the positive policies could be fuel to the fire (for example, trade). Earnings should continue to grow and markets should follow in general. Another positive driver for 2017 could finally be a rotation of funds from traditional fixed income into equities given the sharp rise in rates we have just witnessed. This should help sustain multiples for a period. ( Terry Thib, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • For our large-cap mandate, the IA Clarington Canadian Conservative Equity Fund, we have a barbell strategy where we have taken down our weighting in the more interest rate sensitive and defensive bond proxy sectors and added slightly to positively correlated segments, such as insurance. We have also added to industrials and a few more cyclical names that should benefit from improving domestic and global growth
  • We continue to position the IA Clarington Growth & Income Fund as a complement to core holdings with our quality dividend growth strategy, sourcing the portfolio’s income mainly from sub-sectors that are outside of the bond proxies (REITS, pipelines, utilities and telecommunications) and banks. We also like Canadian companies that have exposure to the global reflation trade

What has transpired this year?1
  • The Fed increased the target interest rate twice in the first six months of 2017 (the target rate has increased from 0.75% to 1.25% since the beginning of the year)
  • Bond proxy sectors moved higher along with bond prices (S&P TSX Utilities Index +10.08%, S&P TSX Capped REIT Index +3.62%). Most cyclical sectors were strongly positive (S&P TSX Consumer Discretionary Index +12.20%; S&P TSX Industrials Index +11.72%; S&P TSX Information Technology Index +9.39%). The S&P/TSX Energy Index, on the other hand, returned -13.34%, mainly due to oil price volatility
  • The U.S. dollar initially appreciated at the beginning of the year, but then depreciated versus major currencies, mainly as a result of Trump’s reforms not coming to fruition and failing to meet market expectations, as well as the quickly dissipating expectation that the Fed will continue to increase rates (-2.92% vs. Canadian dollar; -7.89% vs. Euro; -5.11% vs. British Pound)
  • Volatility (as measured by the VIX index) rose to 15.96 in April after beginning the year at 12.85, and then declined to 10.09 by the end of June
  • Canada was hit by a perfect storm : a large decline in the energy sector, muted inflation/ interest rates, NAFTA/Border Adjustment Tax overhang, as well as an inflated housing market, which negatively impacted banks and financials due to concerns over soaring household debt and housing prices

What is the outlook for the second half of 2017?
  • Inflation should pick up: employment will eventually move it higher and interest rates therefore should be stable to higher
  • Oil likely to stabilize in the $40-50/barrel range
  • Value likely to outperform growth
  • Canadian markets could outperform due to the valuation divergence versus the U.S. and the unprecedented performance divergence (on the negative side) compared to major markets around the world amid global synchronized growth

IA Clarington Growth & Income Fund Series F vs. Fundata Canadian Equity Balanced Fund Universe: Return
October 2014 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Canadian Conservative Equity Fund Series F vs. Fundata Canadian Dividend Income Equity Universe
November 2005 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Monthly Income Balanced Fund
IA Clarington Yield Opportunities Fund
IA Clarington Managed Portfolios

icon  2017 mid-year review - Clément Gignac

What was the initial outlook in January 2017?
  • The Canadian stock market could be in for another decent year as the deal to cut oil production struck by OPEC on November 30th might put a floor under oil prices
  • A return to the $50-60/barrel range on oil prices could act as a tailwind for the Canadian economy
  • Equities in the Europe, Australasia and Far East (EAFE) region could outperform
  • The loonie may remain slightly under pressure, as the Bank of Canada could maintain a careful tone
The Canadian stock market could be in for another decent year as the deal to cut oil production struck by OPEC on November 30th might put a floor underneath oil prices. A return to the $50-60 range on oil prices could act as a tailwind for the Canadian economy, as non-energy-product exports are lagging and it is still unclear whether the recently imposed mortgage rule measures will hurt a frothy housing market. We’ll finally keep a wary eye on Donald Trump’s plan to renegotiate the North American Free Trade Agreement, as nearly 75% of Canadian exports go to the U.S. market and Canada’s current account deficit as a share of GDP is presently the worst among developed countries. In this context, we expect the loonie to remain slightly under pressure, as the Bank of Canada could maintain a careful tone. ( Clément Gignac, January 2017)

How have the portfolios been positioned to take advantage of this outlook?
  • Overweight EAFE equities, slight overweight Canadian equities and underweight U.S. equities
  • We have actively managed the downside risk of our portfolio through equity put options and long-term U.S. bonds

What has transpired this year?1
  • Contrary to our expectation, Canadian equities lagged world equity markets in the first half of the year (S&P/TSX Composite index up only 0.74%) as energy and material sectors underperformed
  • Even with the November OPEC deal, crude oil fell from $55.90/barrel at the beginning of the year to $46.82 by mid-year based on a strong acceleration of U.S. oil production, while Canada’s ex-energy sectors posted higher economic momentum
  • As expected, EAFE equity markets outperformed those in the U.S. (MSCI EAFE Index USD +13.81% vs. S&P 500 Index USD +9.34%)
  • The Canadian dollar appreciated 4.14% versus the U.S. dollar as negative sentiment on the loonie, fueled by real estate and NAFTA uncertainties, strongly reversed following unexpected hawkish comments from the Bank of Canada about their monetary policy

What is the outlook for the second half of 2017?
  • We will very closely monitor global central banks’ monetary policies. Global economic activity is gaining momentum and that could push more central bankers to favour a less accommodative monetary policy going forward
  • We are also watching U.S. inflation and wage growth very closely to gauge how the Fed will implement its monetary policy with respect to interest rate hikes and balance sheet management. For now, the bond market is pricing less than one more Fed rate hike before year-end
  • After the failure of Congress to move forward with a reform of Obamacare, we give a low probability that Washington delivers on the promised fiscal reform this year
  • The Bank of Canada clearly signaled in June its intention to remove its 50-basispoint “insurance policy” with respect to the discount rate, a clear game changer. Given the significant narrowing of the 2-year Canadian yield spread relative to the U.S., we think the loonie should maintain its recent gains and trade around $0.80 by the end of the year

IA Clarington Monthly Income Balanced Fund Series F6 vs. Fundata Canadian Equity Balanced Universe: Return
July 2009 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

IA Clarington Yield Opportunities Fund Series F vs. Fundata Canadian Fixed Income Balanced Universe: Return
January 2016 - June 2017
(not annualized if less than 1 year)

Source: Zephyr StyleADVISOR as of June 30, 2017.

Dealer use only. 1 All data as of June 30, 2017 unless otherwise noted. The information provided herein does not constitute financial, tax or legal advice. Commentaries are provided by the portfolio manager or sub-advisor responsible for the management of the fund’s investment portfolio, as specified in the applicable fund’s prospectus (“portfolio manager”). Statements by the portfolio manager represent their professional opinion, do not necessarily reflect the views of iA Clarington, and should not be relied upon for any other purpose. Information presented should not be considered a recommendation to buy or sell a particular security. Specific securities discussed are for illustrative purposes only. Mutual funds may purchase and sell securities at any time and securities held by a fund may increase or decrease in value. Past investment performance of a mutual fund or individual security may not be repeated. Statements that pertain to the future represent the portfolio manager’s current view regarding future events. Actual future events may differ. iA Clarington does not undertake any obligation to update the information provided herein.

Trademarks displayed herein that are not owned by Industrial Alliance Insurance and Financial Services Inc. are the property of and trademarked by the corresponding company and are used for illustrative purposes only. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.