Manager commentary - June 30, 2019

The Fund transitioned to QV Investors at the end of May. At the time of transition, the Fund was concentrated in seven positions, with a cash weight of approximately 30%.

Given the relatively illiquid nature of some of the legacy holdings, the fund manager has moved methodically to reduce or eliminate positions to more manageable levels that fall within the fund manager’s own risk management parameters.

As at June 30, 2019, the Fund held 35 positions with a cash weight of approximately 20%. This degree of diversification is more aligned with the fund manager’s historical levels. As the transition continues, additional positions will be added to the portfolio when opportunities arise.

Although exposure to the communication services and financials sectors remains elevated during the transition period, sector diversification within the Fund has been enhanced dramatically, with the goal of having no individual sector comprising more than 25% of the portfolio. This is a risk management parameter that is applied across all of QV’s investment strategies.

Within what is generally a highly valued stock market, the fund manager is finding individual securities trading at reasonable valuations. The valuations of high-growth and low-volatility stocks have diverged significantly from more economically sensitive counterparts. Many leading franchises with strong balance sheets appear to be trading at very reasonable multiples within out-of-favour sectors.

For example, the fund manager has made a significant investment in Exxon Mobil Corp., the world’s largest publicly traded international oil and gas company. The company has a proven track record of value creation through numerous commodity and market cycles. Its sound financial position, scale and diverse portfolio of high-return assets afford it numerous opportunities to invest for profitable growth irrespective of the commodity price environment. Exxon also possesses a strong capital allocation track record underpinned by consistent dividend growth and share buybacks. These fundamental attributes, coupled with the stock’s compelling valuation, provide attractive upside potential at current levels.

The Fund also holds a significant position in JPMorgan Chase & Co. (JPM), a superior banking franchise with a strong operating track record within the global financial services sector. More than a decade after the financial crisis, increased regulatory oversight has resulted in improved risk management practices and stronger capital adequacy ratios at JPM (and within the broader peer group). The bank now exhibits a more stable operating model and is better positioned to withstand eventual cyclical downturns. JPM exhibits all the characteristics of a high-quality franchise and remains well positioned to grow intrinsic value from current levels.

Weakening economic indicators and compressing bond yields have driven a flow of capital into both low-volatility ‘bond proxies’ and stocks with strong earnings momentum in 2019, driving the S&P 500 Index to new highs. As a result, bond proxy and growth stocks have rarely been as expensive as they are today relative to other areas of the marketplace. While the timing is always uncertain, the fund manager does not believe this extreme polarization in valuation levels will persist. In addition, the economic outlook continues to be a balancing act between softening monetary policy, trade-related geopolitical risks and numerous late-cycle indicators.

As the fund manager continues to move the portfolio closer to the desired target, favourable attributes of value are becoming apparent. The Fund trades at a distinct discount on the basis of both price-to-earnings and price-to-book multiples. The Fund also has excellent balance sheet qualities that are superior to the broader market. The current focus remains on protection of capital rather than trying to chase index returns.

Fund and benchmark performance, as at June 30, 20191 year3 year5 year10 year
IA Clarington U.S. Equity Currency Neutral Fund - Series A-7.2%0.6%0.3%7.5%
S&P 500 Index
(CAD Hedged)
8.6%13.1%10.0%14.2%

 

Learn more about IA Clarington U.S. Equity Currency Neutral Fund

The performance data comparison presented is intended to illustrate the Fund’s historical performance 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 S&P 500 Index includes 500 leading companies in leading industries of the U.S. economy and is widely regarded as the best single gauge of the U.S. equity market. The Fund’s market capitalization and sector exposure may differ from that of the benchmark. The Fund’s currency risk exposure may differ from that of the benchmark. The Fund may hold cash while the benchmark does not. 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 May 30 2019, the sub-advisor of the Fund was changed from Sarbit Advisory Services Inc. to QV Investors Inc. and the Fund was renamed from IA Clarington Sarbit U.S. Equity Fund to IA Clarington U.S. Equity Currency Neutral Fund.