Manager commentary - December 31, 2018

The Fund invests substantially all of its assets in units of IA Clarington Canadian Balanced 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.

The Fund’s underperformance during the fourth quarter is attributed mostly to its equity holdings. Asset allocation aided performance amid the significant sell-off in equities.

The Fund closed the year with 4.0% invested in cash and treasury bills, 46.8% in fixed-income securities and 49.2% in Canadian equities. There were no significant changes in the Fund’s asset mix during the quarter.

The ongoing sabre rattling between the U.S. and China weighed heavily on markets during the fourth quarter. Monetary policy was also a concern with the U.S. Federal Reserve leading the charge towards interest rate normalization, while President Trump argued lower for longer. We expect trade and monetary policy to be major market drivers in 2019. The U.S. and China are at a fork in the road: one way leads to cooperation and mutually beneficial trade, the other to acrimony, economic malaise or even financial crisis. The choice at hand should be obvious, but the state actors are unpredictable.

The world economy is highly sensitive to interest rates given the large debts accumulated by individuals, corporations and governments during the recovery from the financial crisis. The Canadian economy is particularly sensitive to global economic conditions given our resource-based economy and highly leveraged households. The macro-prudential reforms to the Canadian mortgage market (e.g. the stress test) were badly needed, but arrived far too late. Excesses have accumulated to dangerous levels in key real estate markets. Low interest rates led to expensive homes and also caused the Canadian household savings rate to drop to a meagre 0.8% of income, the lowest level since 2005. For many years, the wealth effect from housing helped Canadians feel richer, spurring leveraged consumption. With these tailwinds abating, Canadians, feeling less secure, might choose (or be forced) to spend less. Indeed, demand for cars and other retail goods declined during 2018. Canada’s consumer-led expansion appears to be on its last legs. Caution is warranted in this environment. The Fund’s conservative allocation to equities and defensive positioning within equities should be helpful during what we expect to be a tumultuous 2019. The Fund remains well positioned to capitalize on any further stock market declines.

Fund and benchmark performance as at December 31, 20181 year3 year 5 yearSince inception (Jul. 2011)
IA Clarington Canadian Balanced Class - Series A-8.9%%0.2%0.4%2.6%
40% FTSE TMX Canada Universe Bond Index, 60% S&P/TSX Composite Index-4.7%%4.7%4.0%4.0%

 

Learn more about IA Clarington Canadian Balanced 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 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 may have different sector exposure, credit quality and interest rate sensitivity than the benchmark. 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. On December 30, 2014, the investment objective and strategies of the IA Clarington Canadian Balanced Class changed. These changes may have affected the fund’s performance.