Manager Commentary - Q3 2019

The six-month period was marked by geopolitical tensions and signs of a global synchronized slowdown. Trade tensions between the U.S. and China escalated, and market volatility was heightened by additional tariffs being levied on Chinese goods. The impeachment process launched against U.S. President Trump in late September also added to uncertainty about the signing of any potential agreement with China. As the period closed, tensions in the Middle East rose following the attack on oil production facilities in Saudi Arabia, which had apparently been orchestrated by Iran.

Global trade tensions led the Organisation for Economic Co-operation and Development to lower its expectations for global economic growth from 4% to 2.9% for 2019. In the last quarter, the European Central Bank cut its key interest rate further below zero as part of its monetary policy plan to stimulate the European economy. The uncertainty surrounding the U.K.’s decision to leave the European Union remained as the U.K.’s new prime minister, Boris Johnson, attempted to negotiate a trade deal.

The global slowdown has affected the U.S., and recently published data showed that the only pillar supporting the U.S. economy was household consumption. The U.S. Federal Reserve (the Fed) relaxed its monetary policy in the third quarter, cutting its policy interest rate twice by a total of 50 basis points.

The U.S. stock market, as measured by the S&P 500 Index, posted a total return of 6.1% in the last six months (5.1% in Canadian dollars). The Canadian bond market, as measured by the FTSE Canada Universe Bond Index, gained 3.7%. Since the decreasing interest-rate environment favoured longer-term bonds, the FTSE Canada Short Term Bond Index returned 1.2%, whereas the FTSE Canada Long Term Bond Index advanced 7.5%. The European market, represented by the MSCI Europe Index, gained 6.1% in the period (2.2% in Canadian dollars), while the MSCI EAFE Index rose 4.6% (1.7% in Canadian dollars). The MSCI World Index posted a gain of 4.9% (3.94% in Canadian dollars), while emerging markets, as measured by the MSCI Emerging Markets Index, returned -1.6% (-4.3% in Canadian dollars).

The Fund’s equity allocation was strongly tilted toward Canada, and while all underlying Canadian equity funds contributed to the Fund’s overall performance, three out of four underperformed their respective benchmarks and detracted from the Fund’s performance relative to its benchmark.

Over the period, four out of fourteen underlying funds contributed to the Fund’s outperformance relative to its benchmark. Notably, IA Clarington U.S. Dividend Growth Fund significantly outperformed its respective benchmark, largely due to security selection in the information technology sector.

Exposures to international securities and currencies were the main detractors from the Fund’s performance. The Fund’s positioning in the consumer discretionary sector and in U.S. equities also detracted from performance. Notable detractors included, IA Clarington Global Opportunities Fund, due to positioning in in consumer discretionary and U.S. equities; IA Clarington Global Equity Fund, due to stock selection in international equities; IA Clarington Canadian Small Cap Fund, which was mainly affected by the negative performance of the materials sector; and the IA Clarington Strategic Corporate Bond Fund.

The Fund is invested in several underlying IA Clarington funds that provide both yield and capital appreciation potential. Allocation to the underlying funds is predetermined in accordance with the respective investor profile corresponding to each Distinction portfolio, and can fluctuate slightly over time without significantly affecting the Fund’s overall risk. For the period, the Fund generally maintained a 15% allocation to fixed income and an 85% allocation to equities. The core of the fixed-income allocation is almost equally invested in the IA Clarington Strategic Corporate Bond Fund, the IA Clarington Global Bond Fund, the IA Clarington Emerging Markets Bond Fund and the IA Clarington Bond Fund. The Fund’s allocation remained stable throughout the period.

Economic uncertainties are on the rise, and the fund manager expects this trend to continue amid ongoing trade tensions and the economic slowdown. Central banks have begun a more or less synchronized easing of their monetary policies, which should support the economic cycle in the next six to 12 months, despite a loss of confidence in their ability to stimulate economies. The tone of the Fed changed drastically for several months, and the market anticipates three additional interest rate cuts over the next 12 months. The Bank of Canada may maintain current interest rates levels for the rest of 2019, despite the pressure it faces from the markets to lower them.

At the end of the third quarter, the valuation of the U.S. stock market was relatively expensive compared to Canadian, European and emerging markets, both on a relative basis and in comparison to the historical valuations of each market.

 

Fund and benchmark performance, as at September 30, 20191 year3 year5 yearSince Performance Start Date (Feb. 2014)
Distinction Bold Class - Series A-2.8%2.3%2.8%3.8%
5% FTSE Canada Universe Bond Index, 40% MSCI World Index1, 45% S&P/TSX Composite Index, 10% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged).6.5%8.1%7.5%8.2%

 

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1Source:MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

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% MSCI World Index, 45% S&P/TSX Composite Index, 10% FTSE Canada Universe Bond Index and Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged). The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of 24 developed market country indices. 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 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 Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged) is a measure of global investment grade debt from 24 local currency markets that includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. 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’s geographic exposure may differ from that of the benchmark. The Fund may have different currency risk exposure than the benchmark. 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 February 7, 2014, Distinction Bold Portfolio merged into this Fund. Historical performance for this series is calculated from the date of the material merger.