Manager commentary - Q3 2019

The period continued to be marked by geopolitical tensions and signs of a global growth slowdown. Trade tensions between the U.S. and China continued, with additional tariffs creating greater market volatility. As the period ended, there was a resurgence of tensions in the Middle East following the attack on oil production facilities in Saudi Arabia. The uncertainty surrounding the U.K.’s exit from the European Union also continued, under a new prime minister, Boris Johnson.

The global economy showed signs of a slowdown, partially as a result of global trade tensions, and the slowdown began to reach the U.S. The importance of the U.S. labour market was demonstrated in recently published data that showed the U.S. economy was largely being supported by household consumption. Significant job growth and wage gains have greatly benefited the wealth of U.S. households, but those same households have been exposed to the potential of a stock market decline.

The U.S. Federal Reserve (the Fed) began easing its monetary policy in the third quarter, cutting its policy rate twice in a row. The Fed’s tone changed drastically in past months, and the market anticipates three more interest-rate cuts over the next 12 months. During the third quarter, the European Central Bank also cut its key interest rate from -0.4% to -0.5%, and announced plans to keep its accommodative policies in place until inflation returns “robustly” to the 2.0% target.

In contrast, Canada’s economy showed the best performance in the G7 during the second quarter and continued to demonstrate resilience. Canada created more than 471,000 jobs across the country in the 12 months to August 2019, its best result since 2003, benefiting from the strength of Canadian demographics. Despite this, Canadian consumers continued to have a high household debt burden, which weighed on consumer spending growth.

In the second and third quarter of 2019 combined, the Canadian bond market, as measured by the FTSE Canada Universe Bond Index, gained 3.7%. The decreasing interest-rate environment favoured longer-term bonds, with the FTSE Canada Short Term Bond Index returning 1.2%, whereas the FTSE Canada Long Term Bond Index advanced 7.5%.

The Fund’s underweight allocation to federal bonds contributed to performance, as did security selection within the sector. Security selection within provincial bonds was another contributor to performance. During the second quarter of 2019, the reach for yield helped provincial and corporate bond performance versus federal bonds. Therefore, an overweight allocation to corporate bonds and long-term provincial bonds aided the Fund’s performance.

Municipal bond holdings detracted from the Fund’s performance. Allocation to corporate bonds detracted from performance, as did security selection within corporate bonds. Some exchange-traded funds (ETF), in which the Fund held small positions, performed poorly, which detracted from performance.

Many of the bought and sold positions within the Fund were traded as part of an active duration (sensitivity to interest rates) management strategy where the fund manager attempts to predict the movement of the interest-rate curve. Most of the bond issuers will stay the same, but the maturity date of the holdings will change. During the period, a high-yield corporate bond ETF was added to profit from higher returns and a possible decline in interest rates for this type of fixed-income security. An emerging markets bonds ETF was eliminated from the Fund during the period.

Economic uncertainties are on the rise, a trend that the fund manager expects will continue as trade tensions remain and the economic slowdown gains momentum. Central banks have begun a somewhat synchronized easing of monetary policy, which should support the economic cycle in the next six to 12 months. In this environment of uncertainty, the fund manager believes that the Bank of Canada should remain on the sidelines until the end of 2019, despite the pressure it faces from the markets to cut interest rates.

 

Fund and benchmark performance, as at September 30, 20191 year3 year 5 year10 year
IA Clarington Bond Fund – Series A8.1%1.3%2.4%2.8%
FTSE Canada Universe Bond Index9.7%2.7%3.9%4.4%

 

Learn more about IA Clarington Bond 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 Fund’s benchmark is the FTSE Canada Universe Bond Index, which 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 Fund's geographic, sector and credit quality 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.