Manager Commentary - Q3 2019

The six-month period was marked by geopolitical tensions and signs of a global synchronized slowdown. Trade tensions between the U.S. and China escalated, and market volatility was heightened by additional tariffs being levied on Chinese goods. The impeachment process launched against U.S. President Trump in late September also added to uncertainty about the signing of any potential agreement with China. As the period closed, tensions in the Middle East rose following the attack on oil production facilities in Saudi Arabia.

Global trade tensions led the Organisation for Economic Co-operation and Development to lower its expectations for global economic growth from 4% to 2.9% for 2019. In the last quarter, the European Central Bank cut its key interest rate further below zero as part of its monetary policy measures to stimulate the European economy. Europe’s largest economy, Germany, may soon officially be in a technical recession as it has been affected by the slowdown in the Chinese economy. The uncertainty surrounding the U.K.’s decision to leave the European Union remained as the U.K.’s new prime minister, Boris Johnson, attempted to negotiate a trade deal.

The global slowdown has affected the U.S., and recently published data showed that the only pillar supporting the U.S. economy was household consumption. Wage gains and the accumulation of new jobs by hundreds of thousands in recent years have improved the wealth of U.S. households, but these gains were still vulnerable to shocks in the event of a stock market correction. The U.S. Federal Reserve (the Fed) relaxed its monetary policy in the third quarter, cutting its policy interest rate twice by a total of 50 basis points. Strong Canadian demographics benefited job creation, despite the debt burden that weighed on the growth of consumer spending. Despite uncertainty and increased volatility, equity markets remained near their historic highs.

The U.S. stock market, as measured by the S&P 500 Index, posted a total return of 6.1% over the last six months (5.1% in Canadian dollars). The Canadian bond market, as measured by the FTSE Canada Universe Bond Index, gained 3.7%. Since the decreasing interest environment favoured longer-term bonds, the FTSE Canada Short Term Bond Index returned 1.2%, whereas the FTSE Canada Long Term Bond Index advanced 7.5%. The European market, represented by the MSCI Europe Index, gained 6.1% in the period (2.2% in Canadian dollars), while the MSCI EAFE Index rose 4.6% (1.7% in Canadian dollars). The MSCI World Index posted a gain of 4.9% (3.94% in Canadian dollars), while emerging markets, as measured by the MSCI Emerging Markets Index, returned -1.6% (-4.3% in Canadian dollars).

An overweight exposure to equity funds contributed to the Fund’s performance, as did an underweight exposure to fixed-income funds. Over the period, 11 out of 14 underlying funds contributed to the Fund’s performance. Within the equity sleeve, the Fund’s holding in IA Clarington U.S. Dividend Growth Fund was one of the biggest contributors to performance. Within the Fund’s fixed-income sleeve, IA Clarington Bond Fund, IA Clarington Core Plus Bond Fund and IA Clarington Emerging Markets Bond Fund were the biggest contributors to performance.

Exposure to foreign equity funds detracted from the Fund’s performance as they experienced significant challenges that more than offset the positive effects of the other underlying funds. The most significant individual detractors from the Fund’s performance were investments in global equities, particularly IA Clarington Global Equity Fund and the IA Clarington Global Opportunities Fund. Top individual detractors included consumer discretionary company Foot Locker Inc., a U.S.-based retailer of athletic shoes and apparel. Foot Locker’s quarterly sales guidance was downgraded slightly, and investors became skeptical as to whether the company could meet its full-year targets.

The fund manager tactically adjusted positioning during the period, dynamically managing the Fund’s exposure to the Canadian dollar against the U.S. dollar. Exchange-traded funds (An ETF, or exchange-traded fund, is a security that trades openly on a stock exchange and represents an underlying basket of securities, frequently an index) were used to add exposure to gold mining companies, which normally act as natural protection in risk-off environments. A new position in gold bullion was added during the second quarter and contributed to the Fund’s performance. The low real-interest-rate environment, combined with the Fed’s accommodative stance, led to a significant increase in precious metals prices.

Economic uncertainties are on the rise, and the fund manager expects this trend to continue amid ongoing trade tensions and the economic slowdown. Central banks have begun a more or less synchronized easing of their monetary policies, which should support the economic cycle in the next six to 12 months, despite a loss of confidence in their ability to stimulate economies. The tone of the Fed changed drastically for several months, and the market anticipates three additional interest rate cuts over the next 12 months. The Bank of Canada may maintain current interest rates levels for the rest of 2019, despite the pressure it faces from the markets to lower them.

At the end of the third quarter, the valuation of the U.S. stock market was relatively expensive compared to Canadian, European and emerging markets, both on a relative basis and in comparison to the historical valuations of each market.

The Fund maintains an underweight position in U.S. equities as the fund manager believes that earnings revisions could turn lower in the last quarter of the year.

 

Fund and benchmark performance, as at September 30, 20191 year3 yearSince inception (Apr. 2016)
IA Clarington Moderate Portfolio – Series B 0.7%2.1%3.0%
10% MSCI World Index,1 15% S&P/TSX Composite Index, 15% S&P 500 Index and 60% FTSE Canada Universe Bond Index8.6%5.9%6.8%

 

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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 in other investment funds. 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 10% MSCI World Index, 15% S&P/TSX Composite Index, 15% S&P 500 Index and 60% FTSE Canada Universe Bond Index. The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of 24 developed market country indices. The S&P/TSX Composite Index 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 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 FTSE Canada Universe Bond Index is comprised of Canadian investment grade bonds and has significantly different portfolio duration characteristics. The FTSE Canada Universe Bond Index consists of a broadly diversified selection of investment-grade Government of Canada, provincial, corporate and municipal bonds issued domestically in Canada. 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 sector and geographic 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.