Manager Commentary - Q3 2019

The Fund invests substantially all of its assets in units of IA Clarington Strategic Income Fund (“the Reference Fund”). Its performance therefore largely reflects the performance of that fund. All reference made to “the Fund” hereinafter reflects a discussion of the portfolio holdings and characteristics of the Reference Fund.

During the period, interest rates dropped dramatically, which resulted in positive equity market returns. Overall yields in the high-yield and investment-grade bond markets declined significantly.

The Fund’s equity exposure outperformed fixed-income holdings during the period. The equity component was increased, while fixed-income exposure was increased, as were cash and other equivalents.

Within the Fund’s equity component, exposures to the financials and utilities sectors were the largest contributors to performance. Top individual contributors included AT&T Inc. and Brookfield Asset Management Inc. AT&T’s growth was driven by shedding of customers in favour of higher margins, and an activist investor’s plan to improve efficiency. Brookfield Asset Management reported strong financial results. Growth of alternative investments valuations in a lower interest-rate environment gave the company a boost.

Allocation to consumer cyclicals and the energy sector were the largest contributors to performance in the Fund’s fixed-income component. Top individual contributors to performance included Gibson Energy Inc. (5.25%, 15/07/2024) and Norbord Inc. (6.25%, 15/04/2023). Gibson Energy received an investment-grade credit rating. Norbord’s strong balance sheet and first-lien nature has supported its bonds despite market softness.

Within equities, exposure to the industrials and basic materials sectors detracted most from performance. The largest individual detractors from performance were Encana Corp. and Caterpillar Inc. Encana was affected weakness in oil and natural gas prices and negative reaction to its acquisition of Newfield Exploration Co. earlier in the year. Caterpillar Inc. felt the impact of reduced construction spending and a slowdown in Asia-Pacific sales.

Within fixed income, the Fund’s exposure to the utilities and basic materials sectors detracted from performance. Individual detractors from performance included Sherritt International Corp. (7.875%, 10/11/2025) and Just Energy Group Inc. (6.75%, 31/12/2021). Sherritt was negatively affected by weak commodity prices and liquidity concerns, primarily as a result of U.S.-dollar currency constraints in Cuba. Just Energy wrote-down assets, and there was indication that a strategic review would not result in a sale.

During the period, the fund manager added new equity positions in AT&T Inc. and CVS Health Corp., and bond positions in Keyera Corp. (6.875%, 13/06/2079) and Videotron Ltd. (4.50%, 15/01/2030). Existing holdings in Royal Caribbean Cruises Ltd. and Manulife Financial Corp. stock were increased.

Equity positions in Pfizer Inc. and Canadian Imperial Bank of Commerce were eliminated from the Fund. The fund manager also sold holdings in AGT Food & Ingredients Inc. (5.875%, 21/12/2021) and Frontier Communications Corp. (7.125%, 15/01/2023). Bank of America Corp. and Merck & Co. Inc. shares were trimmed in the Fund, while Sprint Corp. (7.25%, 15/09/2021) and Synaptive Medical Inc. (7.0%, 09/12/2019) were reduced in the Fund, the latter owing to a partial paydown by the company.

The fund manager expects the economy to be supported by low interest rates and strong employment, limiting the potential risks of a market correction related to a dramatically weakening economy. Positive returns in many equity markets will likely be limited given expected low single-digit earnings growth over the next year. The fund manager has positioned the Fund with an approximate equal balance between cyclical securities and defensive securities, given positive but limited expected returns.

 

Fund and Benchmark Performance as at: September 30, 20191 year3 year 5 yearPerformance start date (Nov. 2009)
IA Clarington Tactical Income Class - Series T64.6%4.4%2.2%3.9%
40% FTSE Canada Universe Bond Index, 60% S&P/TSX Composite Index8.3%5.6%4.9%6.5%

 

Learn more about IA Clarington Tactical Income Class

The performance data comparison presented is intended to illustrate the historical performance of the IA Clarington Tactical Income Class as compared with historical performance of widely quoted market indices. As this fund invests substantially in its Reference Fund (IA Clarington Strategic Income Fund), the differences discussed are those of the Reference Fund. 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 40% FTSE Canada Universe Bond Index and 60% S&P/TSX Composite Index. The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. 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 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 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 may have exposure to equities and bonds domiciled both in Canada and outside of Canada while the benchmark only has exposure to equities and bonds domiciled in Canada. The Fund may have currency risk exposure while the benchmark has none. 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. Effective December 30, 2014, the portfolio manager was changed from Aston Hill Asset Management Inc. to Industrial Alliance Investment Management Inc. Effective December 30, 2014, the investment objectives and strategies of the Fund were changed. Effective March 22, 2019, the reference fund of the Fund was changed to IA Clarington Strategic Income Fund.