Manager Commentary - Q3 2019

The last six-month period was marked by an escalation of geopolitical tensions. There was little advancement in negotiations between the U.S. and China on their ongoing trade dispute. As the months go by, it has become increasingly unlikely that the two countries will come to an agreement by the November 2020 U.S. presidential election. The launch, in late September, of an impeachment inquiry into U.S. President Donald Trump added further uncertainty about any resolution to the U.S-China dispute. As the last quarter ended, there was an increase in tensions in the Middle East, which could potentially lead to an increase in the geopolitical risk premium on the price of oil by the end of the year.

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 that 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.

Despite all this uncertainty, stock markets clung to all-time highs (in many cases). U.S. equities, as measured by the S&P 500 Index, posted a return of 6.1% (5.1% in Canadian dollars) over the period, while the Canadian stock market, as measured by the S&P/TSX Composite Index, advanced 5.1%. The MSCI World Index rose 4.6% (3.6% in Canadian dollars).

Sector allocation and stock selection in the energy sector contributed to the Fund’s performance, as did an overweight exposure to the utilities sector. Stock selection within the health are sector was another contributor to performance. Top individual contributors to performance included Brookfield Renewable Partners L.P., which performed well and is not in the benchmark. A lack of exposure to Canopy Growth Corp. was another contributor to the Fund’s relative performance as the stock declined significantly.

Security selection within the information technology and materials sectors detracted from the Fund’s performance. A holding in Methanex Corp. detracted from performance, as did a lack of exposure to the outperforming Shopify Inc., which does not fit the fund manager’s investment criteria for inclusion in the Fund.

The fund manager initiated a new position in Brookfield Property Partners L.P. to gain exposure to the real estate sector. The company has underperformed and was trading at a substantial discount to net asset value, all the while offering a good dividend. An existing position in Alimentation Couche-Tard Inc. was increased in order to raise the Fund’s exposure to the consumer staples sector. The company has had success growing internationally through mergers and acquisitions, as well as by increasing output and enhancing sales internally, and has an ambitious five-year growth plan that, if achieved, will increase shareholder value substantially.

Power Financial Corp. and Great-West Lifeco Inc. were eliminated from the Fund, as the fund manager was disappointed in the companies’ performance. TELUS Corp. was trimmed as its free cash flow ( Refers to the cash a company generates after accounting for capital expenditures) profile over the next few years is weak compared to Rogers Communications Inc., which was added to the Fund. In light of significant risk factors, trade tensions and an economic slowdown, the fund manager expects continued uncertainty. Interest-rate levels and bond market volatility demonstrate that investors are nervous about the outlook for economic growth. The same can be said about the currency market, with a strong U.S. dollar and currencies of emerging markets countries under pressure.

Despite this, it may not be the case that the strong equity market, which has continued for more than 10 years, will stop in the next few quarters. Central banks have begun a somewhat synchronized easing of monetary policy, which should support the economic cycle in the next six to 12 months. The fund manager notes that market fluctuations provide new buying opportunities.

Low interest rates and slow growth in corporate earnings generally come with rising volatility in stock markets. There has been a U.S. equity correction, on average, every nine months since the Second World War. It would not be surprising, even if they cannot be predicted in the short term, to observe such a correction in the coming months.

At the end of the third quarter, the fund manager noted that U.S. stock valuations were relatively expensive compared to the stock valuations in the Canadian, European and emerging markets, both on a relative basis and compared to the historical valuations of each market. The portfolio manager believes that the balance of risks currently should prevent the relative underperformance of U.S. equities in the coming quarters.

 

Fund and Benchmark Performance as at: September 30, 20191 year3 year5 yearSince Performance Start Date
(Feb. 2014)
IA Clarington Dividend Growth Class - Series T65.9%6.7%5.1%6.4%
S&P/TSX 60 Index8.4%8.4%6.1%7.5%

 

Learn more about IA Clarington Dividend Growth Class

1The 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 S&P/TSX 60 Index, which represents the large cap universe for Canada. Offering exposure to 60 large, liquid Canadian companies, this index is a methodology based index designed to represent leading companies in leading industries. Its 60 stocks cover approximately 73% of Canada's equity market capitalization. The Fund’s market capitalization, geographic, and sector 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. Effective February 7, 2014, IA Clarington Dividend Growth Fund merged into the Fund. Effective December 30, 2014, the investment objectives and strategies of the Fund were changed.