IA Clarington Canadian Conservative Equity Fund
Manager commentary - December 31, 2018
North American equities declined during the fourth quarter, despite continued constructive macroeconomic fundamentals. In Canadian dollar terms, Canadian stocks lagged their U.S. counterparts largely as a result of a historically wide spread between Western Canadian Select (WCS) and West Texas Intermediate (WTI) oil prices, which negatively impacted energy stocks. Although the new United States-Mexico-Canada Agreement alleviated concerns around North American trade, there were still worries about Brexit, the U.S.-China trade war, Iran and the independence of the U.S. Federal Reserve (Fed). In Canada, only three of 11 sectors managed to generate a positive return in the last quarter of the year.
During the quarter, security selection within health care, industrials and energy was the largest contributor to the Fund’s performance relative to the S&P/TSX Composite Index. An overweight exposure to Aecon Group Inc. contributed to the Fund’s performance as the company continued to add to its record backlog. Fortis Inc. was also a strong contributor to performance as a “flight to safety” trade during the quarter buoyed returns. Finally, Alimentation Couche-Tard Inc. also performed well as it reported strong same-store sales growth for the second quarter in a row.
Both stock selection and an underweight position in the materials sector detracted from performance during the quarter. The Fund is likely to remain underweight materials going forward due to the inability of most materials companies to maintain and grow their dividend over time. The real estate sector also detracted from performance due to security selection and the Fund’s underweight position relative to the index. Finally, consumer staples detracted from performance mainly due to the Fund’s slight underweight position versus the index, as this sector was one of the few that posted positive returns during the quarter. The largest individual detractors from performance included Toronto-Dominion Bank, Suncor Energy Inc. and Canadian Natural Resources Ltd. Toronto-Dominion Bank (like all Canadian banks) was impacted by worries over slowing mortgage growth and concerns around a heavily indebted Canadian consumer. Suncor and Canadian Natural Resources shares retreated amid market concerns over the wide WCS-WTI spread and continued concerns around lack of egress pipelines for Canadian oil.
The fund manager added a new holding in Magna International Inc., as it was very cheap, generated lots of cash, bought back its own shares and has increased its dividend annually. SNC Lavalin Group Inc. was added due to a strong backlog, improving fundamentals in its engineering and construction business and a potential catalyst from selling all or a part of its Highway 407 holding. International Game Technology, a global lottery operator, was added during the quarter as it is a business with more than 75% stable and recurring revenues that was trading at a very cheap price.
International Business Machines Corporation was eliminated from the Fund after disappointing results from a company segment that is supposed to have the best growth potential. AltaGas Ltd. was sold after the company sold some off its best assets in order to help pay for a recent utility acquisition. Parkland Fuel Corp. was reduced to maintain its target weighting. Sun Life Financial, Inc. and The Bank of Nova Scotia were trimmed to reduce the Fund’s weighting in insurance and banks, respectively. The fund manager trimmed holdings of Aecon Group Inc. in order to maintain the target weight. Goldcorp Inc. was trimmed due to the cumulative impact of several quarters of disappointing results. The fund manager reduced the Fund’s holdings in Thomson Reuters Corporation after it executed on a substantial issuer bid.
The fund manager believes that global growth will continue, albeit at a slower rate than prior years, which should help raise demand for Canadian products. Although housing and government policies are a concern, low inflation and low unemployment rates should ensure that the Canadian economy remains on a solid foundation. Canadian equities continue to be historically inexpensive relative to U.S. equities. Due to these factors, the fund manager has maintained the Fund’s overweight exposure to Canadian equities versus U.S. equities.
|Fund and benchmark performance as at December 31, 2018||1 year||3 year||5 year||10 year|
|IA Clarington Canadian Conservative Equity Fund– Series A||-5.5%||6.0%||0.8%||5.7%|
|S&P/TSX Composite Index||-8.9%||6.4%||4.1%||7.9%|
Learn more about IA Clarington Canadian Conservative Equity Fund
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 Fund’s benchmark is the S&P/TSX Composite Index, which is the premier indicator of market activity for Canadian equity markets, with 95% coverage of Canadian-based, TSX-listed companies. The index includes common stocks 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 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 April 1, 2016, IA Clarington Investments Inc. was added as a portfolio sub-advisor. Effective December 31, 2016, Leon Frazer & Associates, a member of iA Investment Counsel Inc. was removed as portfolio sub-advisor. These changes may have affected the Fund's performance.