Manager Commentary - Q3 2019

The six-month period was marked by escalating geopolitical tensions. In early August, U.S. President Trump announced additional tariffs on a set of consumer goods imported from China, which hindered trade negotiations between the two countries. As the U.S.-China trade dispute drags on, the chances of reaching an agreement before the November 2020 U.S. election diminish, and the impeachment process launched against President Trump in late September added to this uncertainty.

As the last quarter ended, tensions in the Middle East were rising, prompting concerns that the geopolitical risk premium on the price of oil could increase by the end of the year.

The global economy continued to show signs of a synchronized slowdown in the third quarter of 2019. From a purely economic perspective, the Organisation for Economic Co-operation and Development revised its expectations for global economic growth from 4.0% to 2.9% in 2019 and then up slightly to 3.0% for 2020, citing global trade tensions.

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. The U.S. Federal Reserve (the Fed) began easing its monetary policy in the third quarter, cutting its policy interest rate twice, for a total of 50 basis points. The Fed’s tone has changed drastically in the past months, and the market anticipates three more interest rate cuts over the next 12 months.

Despite all this uncertainty, stock markets clung to their highs. The U.S. stock market, as measured by the S&P 500 Index, posted a return of 6.1% (5.1% in Canadian dollars) over the last six months. The Canadian stock market, as measured by the S&P/TSX Composite Index, advanced 5.1% for the same period, while the MSCI World Index rose 4.6% (3.6% in Canadian dollars).

Stock selection in the healthcare, information technology and consumer discretionary sectors were the top contributors the Fund’s performance. Since the fund manager favours a bottom-up stock selection approach and does not look to add value by deviating significantly from benchmark sector weights, most of the added value can be attributed to successful stock selection. Top individual contributors to performance included Total System Services Inc., Inc. and Algonquin Power & Utilities Corp.

Stock selection within the materials and industrials sectors were the main detractors from the Fund's performance. Top individual detractors from performance included Great Canadian Dollar STore Ltd., Tencent Holdings Ltd. and Cost Corp.

The fund manager looks for stocks that pay dividends, preferably in companies that can grow their dividends each year, using their cash flows. The fund manager also looks for a strong management team, conservative leverage, a history of dividend growth and good defensive traits, all at a fair valuation.

Over the period, the fund manager added a new position in BlackRock Inc. for its secular growth within its industry, strong free cash flow (refers to the cash a company generates after accounting for capital expenditures), growing dividend and lack of debt. Waste Connections Inc. was added for its good management team, defensive strategy, strong free cash flow, disciplined growth strategy and small-but-growing dividend. Public Storage Inc., the largest operator of self-storage facilities, was added for its low debt and strong dividend. Additionally, self-storage is a defensive industry and has shown strong growth through multiple cycles.

The fund manager increased the Fund’s existing positions in Stryker Corp., Thermo Fisher Scientific Inc., Accenture PLC, MasterCard Inc. and Visa Inc.

The fund manager sold the Fund’s positions in all non-dividend-paying stocks, such as Google Inc., Boston Scientific Corp., Berkshire Hathaway Inc. and Electronic Arts Inc.

In light of significant, lingering risk factors, ongoing trade tensions and the economic slowdown, this trend of uncertainty may continue. Interest rate levels and, above all, bond market volatility demonstrate that investors are nervous about the outlook for economic growth. The same can be said about the currency market, with a strong U.S. dollar (safe haven effect) and currencies of emerging countries under pressure.

Despite all this, it is not necessarily clear that the “bull market” that has been going on for over a decade will stop in the next few quarters. Central banks around world have recently begun a fairly synchronized easing of their monetary policies, which should support the economic cycle in the next six to 12 months.

The fund manager notes that the relationship between the number of central banks that lower their key interest rate and the direction of the manufacturing cycle has been relatively stable and positive for decades. Assuming that relationship holds, the current situation suggests an upcoming synchronized re-acceleration of global data. For now, it is the fund manager’s view that fluctuations should be considered buying opportunities.

Low interest rates and slow growth in corporate earnings generally coincide with rising volatility on the stock markets. Given that there has been an average of one correction on Wall Street every nine months since the Second World War, it would not be surprising to observe such a correction in the coming months.


Fund and Benchmark Performance as at: September 30, 20191 year3 year5 year10 years
IA Clarington U.S. Dividend Growth Fund - Series A-1.4%6.5%8.5%9.4%
S&P 500 Index6.8%13.7%14.6%15.7%


Learn more about IA Clarington U.S. Dividend Growth Fund

1The 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 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 Fund’s invests in dividend paying stocks while the benchmark is comprised of companies which may not necessarily pay a dividend. 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. Effective November 26, 2012, McLean Budden Limited was removed as sub-advisor to the Fund. Effective January 3, 2013, the Fund began using specified derivatives as part of its new investment strategy.