Manager commentary - June 30, 2019

In reviewing the past quarter, we can’t help but think about how things that seemed so manageable in terms of decelerating economic growth felt so unmanageable and risky. We have felt this way many times over the past eight years, and every time markets seemed to overreact to the downside or upside. This year has been no different, and in a strange but recurring way, bad news has become good news once again since the beginning of the year. After witnessing one of the worst years of returns last year from a broad asset class and sector perspective, the economy is running at moderate levels of growth and the U.S. Federal Reserve (Fed) has committed to easing for the sake of risk management, creating a key element of the backdrop for a successful year for market returns. At the beginning of 2019 we estimated double digits returns, as economic recession risks were relatively low and global economies appear poised to stop decelerating in the first half of the year, giving way to relatively strong second half returns. While that thesis looks like it is playing out, the timing of returns has been less prescient, as market participants have celebrated a stable economy with more monetary stimulus as being the right recipe. This quick reaction to the upside has led to most of 2019’s anticipated returns being front loaded in the first half of the year. Central bank easing, coupled with a decelerating growth outlook, has also sent U.S. bond yields much lower. These bonds have been in heavy demand due to outsized U.S. yields relative to most of the developed world. To an extent, being invested so far this year has been a winning strategy, and the degree separating the winners from the losers has been relatively modest. For the time being, we are all winners. While the next 12 months will likely produce some losers, we will remain invested in areas that offer our unitholders the best risk-adjusted return prospects while remaining in higher-quality securities to protect against any potential downside.

The Fund has been relatively defensive during the first part of the year, generally carrying more cash than normal and having a higher exposure to defensive over cyclical securities, as they offer more downside protection in times of market and economic turbulence. However, we have been actively changing our portfolio composition over the past several months, effectively reducing our defensive posture from the end of last year to being more balanced in our approach, as several macro indicators have suggested that risks associated with a more protracted slowdown have begun to recede. As the second quarter progressed, we opportunistically increased exposure to equity- and credit-related securities to better align our investments with an improving forward market outlook.

In particular, we increased exposure to economically sensitive sectors including industrials, technology and consumer discretionary, while reducing exposure to more defensive sectors, including consumer staples and U.S. health care. The fixed-income component of the Fund started the year with a defensive posture, as yields increased in relation to general market weakness at the end of 2018. While our cash balance has decreased over the last couple of months, much of our elevated cash position is related to bonds being called during the year. Bonds being called is best described as a love-hate relationship: while you can generally love the outsized gains over a shorter period when they are called, you end up losing exposure to an attractive investment opportunity. During the quarter, we increased the quality of our fixed-income portfolio by adding to our BB rated credit exposure while reducing duration. Our lower fixed-income duration in a time of low government interest rates is a prudent way of protecting our unitholders if improved economic prospects lead to even a moderate increase in interest rates over the coming year.

The Fund marginally underperformed its benchmark during the quarter, mainly due to our overall defensive positioning by having high relative cash levels and a larger exposure to defensive stocks within our equity allocation. Our overall defensive stance in the Fund has decreased during the quarter with a higher allocation to equity securities and lower overall cash levels.

The Fund’s top contributors to performance during the past three months included our holdings in Superior Plus Corporation and CCL Industries Inc. Superior Plus has recently benefited from improved financial results and cash flow as well as an announced sale of its specialty chemicals unit. The company remains a core holding in the Fund. CCL reported solid financial results, primarily related to improved organic growth trends at its Innovia division. Within our fixed-income holdings, Gibson Energy Inc. 5.25% of 2024 and Brookfield Residential Properties 6.125% of 2023 bonds had the largest positive contribution to the Fund during the past three months.

The largest detractor from performance during the quarter came from an exposure to Encana Corp. Encana’s negative price sentiment was primarily a result of declining oil prices during the quarter as well as the earlier acquisition of Newfield Exploration, which was poorly received by investors. The exposure to Sherritt International 7.875% of 2025 bonds was the Fund’s largest fixed-income detractor from performance.

 

Fund and benchmark performance, as at June 30, 20191 year3 year5 year10 year
IA Clarington Strategic Income Fund - Series Y5.6%5.9%3.3%6.2%
40% FTSE TMX Canada Universe Bond Index, 60% S&P/TSX Composite Index5.4%6.2%4.6%6.3%

 

Learn more about IA Clarington Strategic Income Fund

The performance data comparison presented is intended to illustrate the Fund’s historical performance as compared with historical performance of widely quoted market indices. There are various important differences that may exist between the Fund and the stated indices that may affect the performance of each. The benchmark is a blend of 40% FTSE Canada Universe Bond Index and 60% S&P/TSX Composite Index. The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. The FTSE Canada Universe Bond Index is comprised of Canadian investment grade bonds and has significantly different portfolio duration characteristics. The FTSE Canada Universe Bond Index consists of a broadly diversified selection of investment-grade Government of Canada, provincial, corporate and municipal bonds issued domestically in Canada. The S&P/TSX Composite Index is the premier indicator of market activity for Canadian equity markets, with 95% coverage of Canadian-based, TSX-listed companies. The index includes common stock and income trust units and is designed to offer the representation of a broad benchmark index while maintaining the liquidity characteristics of narrower indices. The Fund's fixed income component can invest in both investment grade and high yield bonds while the benchmark has exposure only to investment grade bonds. The Fund may have exposure to equities and bonds domiciled both in Canada and outside of Canada while the benchmark only has exposure to equities and bonds domiciled in Canada. The Fund may have currency risk exposure while the benchmark has none. The Fund may hold cash while the benchmark does not. Overall, the Fund's bond and equity exposure can differ, because the Fund does not use a fixed ratio similar to the benchmark. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance. Effective August 8, 2011, IA Clarington Investments Inc. was appointed as sub-advisor to the Fund. On March 22, 2019, Strategic Income Class and Tactical Income Fund were merged into this fund.