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 had a very difficult quarter. Only three of 11 sectors posted a positive return, with consumer staples finishing first. Six sectors posted double-digit losses over the quarter, including the three largest (financials, energy and materials, which account for more than 60% of the index).

Over the period, the Fund maintained an underweight in financials, materials (mainly gold) and energy (pipelines), and an overweight in health care and information technology.

In a very difficult environment worldwide for the stock markets, the absolute performance (total return) of the Fund over the quarter was down significantly. The three-largest sector positions in the index and in the portfolio – financials, energy and industrials – were among the five worst-performing 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 weighted on the energy sector. The performance of these two sectors accounts for more than 60% of the total return of the Fund.

In terms of relative performance against the benchmark, the Fund underperformed as both sector allocation and security selection detracted from performance. The Fund’s overweight to health care was the largest detractor from performance from a sector allocation perspective. There were no sector allocation decisions that had a significant positive impact on Fund’s relative performance.

Stock picking in health care (the Fund avoided cannabis stocks) and consumer staples was not enough to overcome the negative contribution to performance of security selection overall. Within materials, an overweight position in Methanex Corp. and an underweight in Franco-Nevada Corp. detracted from performance. Security selection in energy (Nuvista Energy Ltd. and Advantage Oil & Gas Ltd.), industrials (Bird Construction Inc. and SNC-Lavalin Inc.) and communication services also detracted from performance.

Fund and benchmark performance as at December 31, 20181 year3 yearSince inception
(Feb. 2014)
IA Clarington Canadian Leaders Class - Series A-10.0%3.8%2.8%
S&P/TSX Composite Index-8.9%6.4%3.8%


Learn more about IA Clarington Canadian Leaders 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 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 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 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.