Manager Commentary - September 30, 2018

The U.S. equity market performed well during the period, as economic growth and strong earnings outweighed concerns of an escalating trade war. Large-capitalization stocks in the information technology sector continued to dominate the U.S. equity landscape, although there were some strong gains in other areas of the U.S. market. The U.S. dollar strengthened against the Canadian dollar.

Individual detractors from performance included MDC Partners Inc., Whirlpool Corp. and Adient PLC. MDC Partners’ earnings declined as its customers tightened their advertising budgets. Whirlpool had a weak second quarter, with sales in its European and overseas business declining 12% amid currency weakness, high raw material costs and reduced volumes. The company’s South American operations were negatively affected by a trucking strike and, while its North American operations performed well, U.S. steel tariffs drove up costs and decreased demand. Automotive parts supplier Adient struggled with production execution challenges earlier in the year, as well as the impact of trade wars on the North American auto sector.

Top individual contributors included MBIA Inc., Encana Corp., EOG Resources Inc. and CVS Health Corp. MBIA’s shares rose as Puerto Rican bondholders made progress in restructuring the commonwealth’s debt. Encana and EOG Resources outperformed as a result of improving oil prices. Robust demand for oil, along with supply risks resulting from the Organization of the Petroleum Exporting Countries’ commitment to production targets, U.S. sanctions on Iran and production disruptions in Libya and Venezuela, should provide further support for oil prices. CVS Health posted strong second-quarter results, an early indication that its takeover of Aetna Inc. is likely to be approved.

During the period, the fund manager introduced a number of new positions to the Fund. REV Group Inc., a U.S. manufacturer of specialty vehicles in emergency services, recreation and public transit, was added to the Fund. The fund manager has monitored the stock since its January 2017 initial public offering and initiated a position in the company after its share price declined amid weak first-quarter earnings. Skyworks Solutions Inc. was re-purchased after the position was exited earlier this year. Skyworks is a well-run semiconductor company with a solid foundation of supplying chips in smartphones. It has experienced strong growth in new markets, including automotive and other Bluetooth consumer devices. Facebook Inc. was purchased after the Cambridge Analytica Ltd. data scandal put pressure on its stock price. The fund manager believes the company is still a strong franchise with solid cash flow generation that should continue to grow earnings. McKesson Corp., a stock the Fund has held since November 2016, was trimmed several times after periods of strong share price performance, and was exited fully in July.

The U.S. economy remains strong and does not appear to be losing steam. In fact, many economic indicators suggest the economy is gaining momentum. Consumer confidence is high, employment is rising, wages are higher and unemployment claims are at their lowest level in almost 50 years. While inflation is rising, it is still relatively low. This bodes well for equities and cyclical and value stocks, which tend to outperform global markets late in economic cycles.

In this stage of the economic cycle, the fund manager believes the tide should turn in favour of value-style equities. The fund manager will maintain the strategy of investing based on fundamentals and valuation. The Fund is fully invested and well diversified across nine major sectors, with a focus on companies and industries positioned to benefit from continued global economic improvement. When the fund manager’s research indicates that the environment is changing, the Fund has flexibility to reposition and move to cash.

 

Fund and benchmark performance, as at September, 28, 20181 year3 yearSince inception (Jun. 2014)
IA Clarington Focused U.S. Equity Class - Series A-1.1%8.0%7.7%
S&P 500 Index21.9%15.9%17.1%

 

Learn more about IA Clarington Focused U.S. Equity 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 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. equities market. The Fund’s market capitalization 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.