Manager Commentary - Q3 2019

Turbulence in financial markets resumed in the second quarter of 2019. Global exports and manufacturing showed signs of weakness, and the breakdown in trade negotiations between the U.S. and China in early May concerned investors. Equity funds suffered sharp outflows as global stock markets lost a large proportion of their year-to-date gains.

With declining inflation expectations, longer-term sovereign bond yields hit multi-year lows. The 10-year U.S. Treasury yield finished the quarter near 2.0%. The federal funds target rate was 2.0% lower the last time this level was reached, in November 2016. With increasingly accommodative communications from major global central banks, monetary policy expectations adjusted swiftly. Current market expectations for two U.S. interest-rate cuts during the remainder of the year stand in stark contrast to the three interest-rate increases that were projected in 2019 by the U.S. Federal Reserve (the Fed) prior to last December. Risk assets recovered into the end of the quarter. The increasingly accommodative tone from policymakers and expectations that U.S.-China trade tensions would de-escalate helped to ease investor concerns.

The third quarter of 2019 saw policymakers take increasingly aggressive action to counteract the damaging effects from continued trade tensions. The Fed cut interest rates twice during the quarter, paving the way for central bank interest-rate cuts in developed and emerging countries worldwide. The European Central Bank pushed interest rates further into negative territory. With global manufacturing already in contraction territory and the U.S. announcing tariffs on a further US$300 billion worth of Chinese goods, recession fears escalated. The widely followed 10-year/two-year U.S. Treasury yield curve briefly inverted in August, which exacerbated the negative market sentiment. Emerging markets equities sold off, while longer-term government bond yields continued to decline.

In Europe, volatility increased as there was a greater likelihood of a “no deal” exit for the U.K. from the European Union (EU). U.K. equities and currency initially sold off, but recovered a large proportion of losses toward the end of the quarter. In Italy, the populist coalition government collapsed, giving rise to a new governing coalition between Five Star Movement and the centre-left Democratic Party. Italian bond yields declined sharply as financial markets expect the new government to be far less confrontational with the EU.

Toward the end of the quarter, oil markets were affected by a drone attack on Saudi Arabian oil facilities. The removal of more than half of Saudi oil output caused the biggest single day increase in over a decade for the West Texas Intermediate crude price. Prices remained volatile into quarter-end as investors assessed the Saudi oil facilities’ repair timeline and reconsidered the level of geopolitical risk premium warranted.

The Fund’s asset mix detracted from performance during the period, as an overweight exposure to equities modestly underperformed fixed income. The Fund’s fixed-income allocation was eliminated in mid-June and redirected into equities as declining yields pushed bond market valuations into overvalued territory.

Within the Fund’s equity component, exposure to Japanese equities contributed to performance as financial markets responded positively to Prime Minister Shinz┼Ź Abe’s success in the Upper House elections and a stronger Japanese yen. Allocation to the U.S. financials sector also contributed to performance amid renewed loan demand as mortgage rates fell alongside bond yields. Indirect commodity exposure to gold via a position in gold miner equities contributed to performance, as geopolitical turmoil and declining bond yields helped gold stage an impressive rebound.

Within the Fund’s fixed-income component, local-currency sovereign bonds in emerging markets contributed to performance, as their considerable yield advantage over their peers in developed markets helped to shield them from trade-related volatility. Geographic allocation also contributed to the Fund’s fixed-income returns as an allocation to emerging markets debt outperformed.

Domestic financials sector issues weighed heavily on the Fund’s Polish and Indian equity exposures. Both positions detracted from the Fund’s performance. Geographic allocation also detracted from performance. An overweight positioning in emerging markets equities underperformed as the escalating trade dispute between the U.S. and China made the prospect of a comprehensive trade deal increasingly unlikely.

The fund manager added positions in U.S. financials sector equities and U.S. mortgage real estate investment trusts (REIT) to position the Fund for a steepening yield curve (when long-term bonds are offering higher yields than short-term bonds). A new holding in U.S. materials sector equities was purchased to put a more cyclical orientation on the Fund’s U.S. equity exposure. A new gold miner equity position was added to the Fund as the price of gold stood to benefit from very low interest rates and elevated geopolitical risk.

A position in gold miner equities was liquidated in September to take profits after rebounding in the third quarter. A junior oil equity position was opportunistically sold in September after the attack on Saudi oil facilities led to a significant rise in oil prices. A local-currency emerging markets sovereign bond position was sold in June as the fund manager sought to reduce the Fund’s fixed-income exposure amid a collapse in global bond yields.

A holding in global (excluding the U.S.) real estate equities was reduced in June to lower the Fund’s interest-rate risk. A position in small-capitalization Indian equities was trimmed in June to capitalize on a rebound in share prices following the re-election of Prime Minister Narendra Modi in the second quarter.

Equity dividend yields are now much higher than 10-year sovereign bond yields, virtually around the world. This calls for a major transformation in the Fund’s construction. The fund manager added exposure to U.S. mortgage REITs. Mortgage REITs currently produce a dividend yield over 10%, and are highly attractive from an income generation standpoint. The asset class should perform well if the fund manager’s prediction of a re-steepening of the U.S. yield curve pans out.

Gold miner and junior oil equity exposures have been eliminated from the Fund as gold miner equities have rebounded considerably in recent months amid geopolitical turmoil and escalating recessionary fears. Additionally, declining bond yields have significantly reduced the “opportunity cost” of owning gold. However, with the gold rebound showing signs of excess, and given the fund manager’s view on bond market vulnerability, the fund manager elected to take profits on the exposure. Junior oil equities were held on the basis that stabilizing global growth would help reverse financial market pessimism toward world oil demand. While the fund manager still holds this view, the decision was made to opportunistically sell the exposure after the drone attack on Saudi oil facilities led to a significant spike in oil prices.


Fund and Benchmark Performance as at: September 30, 20191 year3 yearSince inception (Aug. 2016)
Forstrong Global Strategist Growth Fund – Series A-0.9%1.6%1.5%
25% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged) , 75% MSCI AC World Index15.4%8.4%8.2%


Learn more about IA Clarington Forstrong Global Strategist Growth Fund

1Source: MSCI Inc. 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 Fund's strategy is to invest primarily through diversified investments in a balanced mix of ETFs ("exchange-traded funds") of multiple global asset classes. 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 75% MSCI AC World Index and 25% 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. MSCI AC World Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International, and is comprised of stocks from both developed and emerging markets. 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 and sector 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.