Manager Commentary - Q3 2019

The Fund invests substantially all of its assets in units of IA Clarington Canadian Small Cap Fund (“the Reference Fund”). Its performance therefore largely reflects the performance of that fund. All reference made to “the Fund” hereinafter reflects a discussion of the portfolio holdings and characteristics of the Reference Fund.

Despite strong global equity returns, markets have seen significant volatility. Trade conflicts have increased uncertainty, while accommodative central bank policies have supported asset valuations. Domestically, consumer debt levels and the upcoming federal election continue to be front of mind for investors. The underlying quality of the market appreciation in Canada, which has been largely unsupported by earnings growth, was cause for concern. Growth and gold-related equities continued to perform well while value stocks lagged.

The Fund’s exposure to quality financials sector companies that offered value and its avoidance of weaker businesses in the health care sector were key contributors to performance. In particular, side-stepping double-digit declines from the early-stage marijuana industry in favour of businesses with strong franchises and management teams provided support. Security selection in and an overweight exposure to the utilities sector also contributed to the Fund’s performance. Individual contributors to performance included iA Financial Corporation Inc., which reported healthy operating results and continued strengthening of its balance sheet positioning. Commercial lender Canadian Western Bank continued its business diversification efforts while raising its dividend 4% and returning additional capital to share owners through its buyback.

A lack of exposure to the gold industry detracted somewhat from the Fund’s performance, as did security selection in the industrials sector, which underperformed the benchmark index. Individual detractors from performance included Secure Energy Services Inc., as negative commodity prices and industry activity have weighed on the entire energy sector.

The fund manager added new positions in Westshore Terminals Investment Corp. and Stella-Jones Inc. The Fund’s holdings in Westshore, which maintains key shipping infrastructure, bolstered its balance sheet and valuation characteristics. The company’s outlook has been negatively affected by customers facing financial challenges and the potential for new shipping capacity to reduce volumes. However, the critical nature of the company’s assets, historical pricing power and sound balance sheet may allow for steady cash generation despite future volume uncertainty. Stella-Jones is a North American producer of treated wood products, such as railway ties and utility poles. The company provided steady growth and excess cash flow to be used to reduce debt, grow dividends or fund opportunistic acquisitions. Stella-Jones is an above-average company trading at a reasonable valuation, and this new position enhances the Fund’s cash flow stability and return on equity.

The fund manager eliminated the Fund’s position in Varex Imaging Corp. in favour of Westshore and Stella-Jones. The position was sold at a small gain when company management diverted from its previous commitment to reducing leverage by making a debt-funded acquisition.

The fund manager remains committed to the investment and risk management process that has historically generated healthy absolute performance over time. The Fund provides a dividend yield of approximately 3%, with over 80% of the companies held paying a dividend. The Fund maintains clear balance sheet and valuation advantages relative to the average Canadian small-cap company while providing more diversification than the market.

 

Fund and benchmark performance, as at September 30, 20191 year3 year5 year10 year
IA Clarington Canadian Small Cap Class - Series A-5.0%1.6%1.7%8.5%
BMO Nesbitt Burns Small Cap Index-4.9%0.2%1.1%5.4%

 

Learn more about IA Clarington Canadian Small Cap Class

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 BMO Nesbitt Burns Small Cap Index includes common shares of all Canadian companies trading on the Toronto and Montreal Stock Exchanges with a total capitalization at the beginning of each month which does not exceed 0.1% of the total capitalization of the S&P/TSX Index. The Fund’s sector and geographic exposure may differ from that of the benchmark. The Fund’s currency risk exposure may be different than 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.