Manager Commentary - Q3 2019

The period continued to be marked by geopolitical tensions and signs of a global growth slowdown. Trade tensions between the U.S. and China continued, with additional tariffs creating greater market volatility. As the period ended, there was a resurgence of tensions in the Middle East following the attack on oil production facilities in Saudi Arabia. The uncertainty surrounding the U.K.’s exit from the European Union also continued, under the new prime minister, Boris Johnson.

The global economy showed signs of a slowdown, partially as a result of global trade tensions, and the slowdown began to reach the U.S. In Europe, one area of weakness was Germany, as Europe’s largest economy will soon be officially in a technical recession. The importance of the U.S. labour market was demonstrated in recently published data that showed the U.S. economy was largely being supported by household consumption. Significant job growth and wage gains have greatly benefited the wealth of U.S. households, but those same households have been exposed to the potential of a stock market decline.

The U.S. Federal Reserve (the Fed) began easing its monetary policy in the third quarter, cutting its policy rate twice in a row. The Fed’s tone changed drastically in past months, and the market anticipates three more interest-rate cuts over the next 12 months. During the third quarter, the European Central Bank also cut its key interest rate from -0.4% to -0.5%, and announced plans to keep its accommodative policies in place until inflation returns “robustly” to the 2.0% target.

In contrast, Canada’s economy showed the best performance in the G7 during the second quarter and continued to demonstrate resilience. Canada created more than 471,000 jobs across the country in the 12 months to August 2019, its best result since 2003, benefiting from the strength of Canadian demographics. Despite this, Canadian consumers continued to have a high household debt burden, which weighed on consumer spending growth.

In spite of this uncertainty and an increase in volatility, equity markets remained close to their historic highs. U.S. equities, as measured by the S&P 500 Index, posted a total return of 6.1% in the last six months (5.1% in Canadian dollars), while Canadian equities, as measured by the S&P/TSX Composite Index, advanced 5.1%. The MSCI EAFE Index rose 4.6% (1.7% in Canadian dollars). In the second and third quarter of 2019 combined, the Canadian bond market, as measured by the FTSE Canada Universe Bond Index, gained 3.7%

The Fund is almost fully invested in zero-coupon bonds maturing in 2025. The remaining portion of the Fund is invested in a global equity fund and Treasury bills. Despite the positive returns posted by global equity markets, the Fund’s high allocation to fixed-income securities drove the Fund’s performance. The Fund’s underweight position in global equities fund vs. its benchmark, slightly detracted from the Fund’s performance.

Exposure to global equities contributed to performance as a result of hedged foreign-currency exposures.

The Fund’s fixed-income component is mainly invested in provincial zero-coupon bonds maturing in 2025. In the declining interest-rate environment, the return of such investments was positive, but to a lesser extent than the benchmark. Bond values and interest rates have an inverse relationship. A bond’s duration (interest-rate sensitivity) affects the strength of this relationship, the higher the duration, the greater the impact of the inverse relationship and vice versa. Given the Fund’s low duration vs. its benchmark, the Fund’s fixed income sleeve underperformed.

The fund manager added exposure to Government of Canada zero-coupon bonds, replacing bonds that had matured during the period and global equity exposure was reduced in the Fund.

Economic uncertainties are on the rise, a trend that the fund manager expects will continue as trade tensions remain and the economic slowdown gains momentum. Central banks have begun a somewhat synchronized easing of monetary policy, which should support the economic cycle in the next six to 12 months. In this environment of uncertainty, the fund manager believes that the Bank of Canada should remain on the sidelines until the end of 2019, despite the pressure it faces from the markets, brought about by the slight inversion of the yield curve late in the third quarter of the year (A yield curve graphically illustrates the yields and maturities of bonds of similar credit quality. An inverted yield curve represents market conditions in which long-term debt instruments have lower yields than short-term debt instruments. An inverted yield curve has historically been a leading indicator of recession.).

The Fund remains heavily invested in zero-coupon bonds, which ensures its guaranteed value at maturity. Any interest-rate increases could negatively influence the Fund’s short-term returns, although the duration of these investments are relatively moderate.

 

Fund and Benchmark Performance as at: September 28, 20181 year3 year5 year10 years
IA Clarington Target Click 2025 Fund - Series A5.6%-0.1%1.9%3.9%
10% MSCI World Index1, 90% FTSE Canada All Government Bond Index9.5%3.2%4.6%4.9%

 

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11MSCI 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 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 FTSE Canada All Government Bond Index (90%) and MSCI World Index (10%). 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 All Government Bond Index consists of a selection of investment-grade Government of Canada fixed-income securities issued domestically in Canada. The FTSE Canada All Government Bond Index is comprised of Canadian investment grade bonds and has different portfolio duration characteristics. 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 23 developed market country indices. The Fund’s market capitalization, geographic, sector and credit quality 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. 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. On December 5, 2011, the portfolio manager changed. This change may have affected the Fund's performance.