Manager commentary - December 31, 2018

Despite an exceptional rise in U.S. business profits, the U.S. Federal Reserve’s decision to continue normalizing its monetary policy, the escalation of U.S.ÔÇÉChina trade tensions and fear of a recession created a highly volatile environment on Wall Street and for risk assets across the world. This resulted in the S&P 500 Index recording a drop of nearly 15% in the last quarter of 2018, its worst quarterly performance in a decade. The final month of the year was particularly painful, with a drop of 9% – the worst December since the 1930s.

In Canada, oil price weakness during the quarter likely contributed to the slowdown. The price per barrel for West Texas Intermediate fell from $75 to $45 in the beginning of October, while Western Canadian Select slid to around $13 in mid-November. The reason for this major price difference was the difficulty in transporting heavy Canadian crude to export destinations (mainly the U.S.), leading to a stockpile in Alberta.

The fourth quarter was marked by high volatility across all stock markets. The U.S. stock market, represented by the S&P 500 Index, had a total return of -13.5% in the fourth quarter (-8.6% in Canadian dollar terms). The Canadian stock market, represented by the S&P/TSX Composite Index, suffered a decline of 10.1%. The S&P/TSX 60, comprised of 60 large companies listed on the Toronto Stock Exchange, returned -8.9% over the quarter.

The S&P/TSX 60 had a very difficult quarter. Four of 10 sectors posted a positive return, with utilities finishing first. The other six sectors finished the quarter significantly down, between -7.6% (consumer discretionary) and -23.9% (health care). The three largest sectors (financials, energy and industrials), representing close to 70% of the index, were part of the latter group.

Over the period, the Fund had its largest overweight in utilities and financials and most important underweight in materials and energy.

In a very difficult environment worldwide for stock markets, the absolute performance (total return) of the fund over the quarter was down significantly. The two largest sector positions in the portfolio, financials and energy, were among the five-worst sectors over the quarter. A flattening yield curve, a Canadian housing slowdown and economic growth fears caused the decline in the financials sector, while lower prices weighed on the energy sector. The weighting in the financials sector alone explains half of the total return of the Fund.

In terms of relative performance against the benchmark, an underweight to the energy sector and an overweight to utilities contributed to the Fund’s performance. Security selection also contributed to performance, particularly in the energy, industrials, health care and consumer discretionary sectors.

Stock selection in energy was the strongest contributor to performance, as the Fund’s return of -9.9% in that sector significantly outperformed the benchmark, which returned -15.2%. The stocks that contributed to performance were Cameco Corp. and Enbridge Inc.

The Fund’s consumer discretionary holdings beat the benchmark return by a wide margin thanks to the performance of Gildan Activewear Inc.

The most important detractors from performance were an underweight to materials and security selection in utilities, information technology, materials and consumer staples.

In utilities, great performance from Emera Inc. and Fortis Inc. was not enough to overcome the performance of other holdings of the portfolio in that sector, notably Brookfield Renewable LP. Methanex Corp. and Nutrien Ltd. had a very difficult quarter, which explains why stock selection in materials was one of the most important detractors from the Fund’s relative performance.

The Fund currently holds close to 4% cash. The fund manager will look to deploy most of this cash in the coming months. There is still much uncertainty and volatility in the market, and the fund manager would like to see some of this reduced before deploying cash. There are many names where the fund manager sees good long-term value, which has not been the case for some time.

The daily volatility we have seen recently is something of a concern. A 2019 recession is getting priced into market. If that happens, the fund manager thinks there would be further downside. The fund manager will be patiently watching and waiting, prepared to step in should things get overdone relative to the probable macroeconomic outcomes.

Fund and benchmark performance as at December 31, 2018 1 year5 year3 year 10 year
IA Clarington Canadian Dividend Fund - Series A-8.4%5.0%%3.7%7.3%
S&P/TSX 60 Index-7.6%7.2%5.0%7.9%

 

Learn more about IA Clarington Canadian Dividend 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 60 Index, which represents the large cap universe for Canada. Offering exposure to 60 large, liquid Canadian companies, this index is a methodology based index designed to represent leading companies in leading industries. Its 60 stocks cover approximately 73% of Canada's equity market capitalization. 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.