Manager commentary - December 31, 2018

IA Clarington Focused Canadian Equity Class Series A struggled through a difficult fourth quarter with a return of -15.1%, as equities around the world posted a sharp decline. Instead of the “Santa Claus rally” investors were expecting, the S&P 500 Index had its worst ever December and saw its biggest quarterly decline since 2011. Canada lagged for most of the year and the S&P/TSX Composite Index fell another 10.1% in the final quarter. There was nowhere safe to hide during the quarter and exposure to energy didn’t help. Oil prices changed course and fell sharply, and the discount in Canadian crude prices to U.S. crude neared historical levels. The Fund’s energy positions accounted for about 18% of assets, but two-thirds of its return. Canada’s oil and gas producers were the hardest hit during the downturn. Paramount Resources Ltd. (POU) and Birchcliff Energy Ltd. (BIR) were the Fund’s biggest detractors from returns. We believe the worst is behind us. We expect WTI oil prices to turn with OPEC cuts and Canadian oil to see a stronger recovery with Canadian pipelines coming on stream, increased rail shipping and mandatory production cuts. The discount in Canadian crude to WTI has already narrowed considerably. POU has recovered +45% and BIR +30% from their December lows.

Despite the tough quarter for equities, there were some bright spots in the Fund. OceanaGold Corp. (OGC) – our largest position – was the top positive contributor to performance, returning 27% for the Fund. OGC benefited from rising gold prices as investors fled to safe-haven investments. OGC outperformed other gold companies due to positive exploration results at its Waihi Gold Mine in New Zealand. We have been trimming to reduce the stock’s weighting, but continue to hold as we believe there is still considerable upside. Home Capital Group Inc. (HCG) spiked in October on a strong Q3 and news of a substantial issuer bid. We sold into the spike and tendered about 75% of the Fund’s position in the issuer bid to crystallize gains. HCG returned 7% for the Fund during the quarter while the S&P/TSX Composite Index was down 10%. Element Fleet Management Corp. (EFN) had a solid Q3 and the market responded well to management’s steps to de-risk and improve the firm’s financial position, and to add $150 million to annual profitability in the next two years. EFN returned 4% during the quarter.

True to our style, we took advantage of opportunities to add quality investments at points of maximum pessimism. Bombardier Inc. (BBD) has been on our radar in anticipation of a growing business jet market. We stepped in when the stock price fell after the company missed free cash flow guidance and the Autorité des marchés financiers announced it would review stock transactions made by BBD executives. We believe the sell-off was overdone. The company is deleveraging its balance sheet and is well positioned for the luxury/business jet market, yet the stock trades at the same valuation it did when it struggled through balance sheet and capex issues. We also reinvested in SNC-Lavalin Group Inc. (SNC) when the stock price fell on concerns over Saudi Arabia suspending trade with Canada and news that federal prosecutors declined to negotiate a deferred prosecution agreement regarding earlier fraud and corruption charges. The stock trades at levels below where we held it previously. New management has streamlined the company, business is better and we believe it is an attractive take-out candidate at these valuations.

The Fund is positioned for continued economic growth in the U.S. – not “shoot the lights out” growth, but steady, plodding growth. At this stage in the cycle the market should shift in favour of value stocks and economically-sensitive sectors. We have good exposure to high-quality companies leveraged to the economy and rising rates. We are maintaining the Fund’s exposure to resource equities. We have solid exposure to deeply discounted materials, industrials, financials and consumer goods companies, with investments in Stelco Holdings Inc., Whirlpool Corp., Element Fleet Management, Labrador Iron Ore Royalty Corp. and Martinrea International Inc. We have exposure to U.S. financials through investments in Allstate Corp. and Assured Guaranty Ltd.

After years in the doghouse, Canada is deeply undervalued despite solid fundamentals. We believe favourable conditions for Canadian equities are on the horizon. We’ve been calling for this for a while, but at some point valuations and fundamentals have to matter. A strong U.S. dollar and weak Canadian crude prices weighed on Canada’s commodity producers; however, earnings growth in non-resource companies is strong. The cloud over Canada’s oil sector is lifting. Oil prices are improving and the discount is narrowing. The benefits of strong oil prices reach beyond Canada’s energy producers to other sectors, including suppliers, transportation and banking. We expect the United States-Mexico-Canada Agreement – the replacement for the North American Free Trade Agreement – to be ratified and cooler heads to prevail in the China-U.S. trade negotiations once all the posturing is done. We are starting to see signs of a weakening U.S. dollar, which bodes well for Canada’s commodity sector. Lastly, we’re hopeful that this year’s federal and Alberta elections will produce more business-friendly regulation and tax policy.

Fund and benchmark performance as at December 31, 20181 year3 years 5 yearSince inception (Jun. 2012)
IA Clarington Focused Canadian Equity Class - Series A-14.2%6.7%0.6%4.6%
80% S&P/TSX Composite Index, 20% S&P 500 Index-6.3%7.0%6.1%8.8%


Learn more about IA Clarington Focused Canadian Equity 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 S&P/TSX Composite Index (80%) and S&P 500 Index (20%). The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. 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 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. Although the S&P 500 Index focuses on the large cap segment of the market, its coverage includes approximately 80% of the market. 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.