Manager Commentary - Q3 2019

Canadian equities recorded solid gains over the period despite elevated volatility that was a result of U.S.-China trade tensions and the growing collection of weak economic data releases. Equity markets experienced a rotation of investor interest from growth-oriented stocks to more defensive equities, as the probability of a recession in 2020 rose somewhat.

Exposure to the information technology and utilities sectors contributed to the Fund’s performance, as did a significant underweight exposure to the energy sector. The underweight allocation to energy was a result of the Fund’s climate risk strategy. Stock selection within the health care sector also contributed to performance.

Individual contributors to performance included an overweight allocation to Dollarama Inc., which delivered a solid rebound in same-store sales growth and announced the majority ownership of Dollar City in Latin America. Other notable contributors to performance included holdings in Boralex Inc. and Agnico Eagle Mines Ltd. Defensive stock Boralex benefited from investors’ shift toward stocks that provide yield and stable cashflows. Gold producer Agnico Eagle generated positive returns as spot gold prices rose to over US$1,500 per ounce in the face of economic uncertainty.

A higher than usual cash balance detracted from the Fund’s performance during a period of rising markets. Security selection in the industrials sector, and within the diversified financials industry group, detracted from performance.

A lack of ownership in Shopify Inc. detracted from performance as the information technology company outperformed. Industrials stocks Savaria Corp. and NFI Group Inc. detracted from performance. Savaria’s earnings results fell short of expectations and NFI Group experienced production issues that hampered product delivery forecasts.

The fund manager added several new positions during the period. Pinnacle Renewable Energy Inc. was added as its production of biofuel wood pellets supports lower carbon baseload power generation than coal plants in Asia and Europe. CVS Health Corp., a leading U.S. pharmacy, was purchased for its attractiveness compared to the Canadian health care sector, which is dominated by cannabis companies that do not fit with the Fund’s environmental, social and governance (ESG) mandate. Other new additions to the Fund included Boyd Group Income Fund, Saputo Inc., Tricon Capital Group Inc., Nike Inc., The TJX Companies Inc. and Thermo Fisher Scientific Inc.

WPT Industrial REIT and Fiera Capital Corp. were eliminated as the yield characteristics of these businesses no longer suited the Fund’s mandate. Intertape Polymer Group Inc. was sold amid concerns that an economic slowdown would limit the future performance of this commodity packaging company. Sleep Country Canada Holdings Inc. was eliminated following weaker-than-expected sales performance.

In early 2015, the fund manager developed and implemented a climate risk strategy based on four elements: divestment, decarbonization, re-investment and engagement. This strategy has been used to manage exposure to fossil fuel and carbon emissions across the IA Clarington Inhance family of funds. As a crucial point in the transition to a low carbon future has been reached, the fund manager believes that this is an appropriate time to revisit the Fund’s residual exposure to oil and gas companies. The Fund is now in a position to fully divest companies whose primary business is the extraction, production and distribution of fossil fuels. The Fund will no longer invest in oil and gas producers, pipeline companies, natural gas distribution utilities or liquified natural gas operations. In addition, the fund manager will avoid investing in service companies whose primary business is supporting the fossil fuel industry.

To support this key strategy shift within the portfolio, several holdings were eliminated, including ARC Resources Ltd., Tourmaline Oil Corp, Vermilion Energy Inc., Algonquin Power Co., Brookfield Infrastructure Partners L.P., Canadian Tire Corp. Ltd., Franco-Nevada Corp. and Pembina Pipeline Corp.

In terms of ESG issues, the fund manager participated in a meeting with Loblaw Companies Ltd. to discuss the company’s approach to supply chain management and employee benefits.

The fund manager engaged with Nutrien Ltd. on the risks associated with neonicotinoid regulation, and with Nutrien, Agnico Eagle and Lundin Mining Corp., regarding mine tailings management. New Flyer Industries Inc., Onex Corp., Boralex, Colliers International Group Inc., Nutrien and Waste Connections Inc. were encouraged to participate in the Carbon Disclosure Project. An engagement was begun with Canadian Tire and CVS Health on the potential to end sales of specific pesticides. The fund manager joined a collaborative investor engagement with CVS Health aimed at ensuring removal of toxic pesticides from the supply chain.

The fund manager supported the Global Investor Statement to Governments on Climate Change, and became a member of the World Benchmarking Alliance, a global network of public, private and civil society sectors supporting the measurement of corporate performance on achieving sustainable development goals.

Global economic growth remains uncertain amid an increase in geopolitical and other risks. These risks, including an escalating U.S.-China trade dispute, the U.K.’s ongoing negotiations to exit the European Union, the impeachment inquiry against U.S. President Donald Trump and upcoming elections in both Canada and the U.S., are very difficult to predict and have increased the uncertainty facing financial markets.

Central banks have provided accommodation and appear ready to act further, if necessary. However, growing skepticism about the effectiveness of negative interest-rate policies has led to a growing view that monetary stimulus may be reaching its limits and that fiscal stimulus may be required, which could have a very different impact on bond markets. Fiscal stimulus could lead to increased government deficits, which would be financed with increased debt issuance, likely putting upward pressure on bond yields.

The impact of the upcoming Canadian federal election may not be significant for long-term equity returns but there is some historical precedent that a minority government can have a positive impact versus a majority government. The average annualized performance of the Canadian equity market is 9.9% during minority governments, well ahead of the 6.5% average performance seen during majority governments.

 

Fund and benchmark performance, as at September 30, 20191 year3 year5 yearSince Inception (Dec. 2009)
IA Clarington Inhance Canadian Equity SRI Class – Series A3.2%5.4%3.5%5.7%
S&P/TSX Composite Index7.1%7.4%5.3%6.9%

 

Learn more about IA Clarington Inhance Canadian Equity SRI 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 Fund’s benchmark is the S&P/TSX Composite Index, which is the premier indicator of market activity for Canadian equity markets, with 95% coverage of Canadian-based, TSX-listed companies. The index includes common stock and income trust units and is designed to offer the representation of a broad benchmark index while maintaining the liquidity characteristics of narrower indices. The Fund holds securities of companies which meet the fund manager's socially responsible investment principles, while the holdings in the benchmark may not align with these principles. 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. Around December 7, 2009, a material fund merger occurred. Around December 14, 2009, the sub-advisor changed. These changes may have affected the Fund's performance.