Manager commentary - December 31, 2018

Credit spreads came under pressure in the fourth quarter amid signs of slowing growth in China and Europe, sharp declines in oil and other commodity prices, the weakest December equity market performance since the Great Depression and a disappointing U.S. Federal Reserve meeting that offered no flexibility with respect to balance sheet reduction. Treasury rates traded lower across all maturities on the curve, with 5- and 10-year Treasury rates decreasing by 44 and 38 basis points, respectively, during the quarter. New issue supply remained subdued; however, retail fund flows were sharply negative during the quarter, creating a challenging technical backdrop.

In November, we reduced the overall allocation to emerging markets debt from 19% to 13% by closing out all local currency positions as well as the Fund’s allocation to Argentinian hard currency debt. We added positions in front-end U.S. Treasuries as yields had increased to levels we felt were reasonably attractive while we waited for more compelling valuations in other areas of credit. In December, on the back of a sharp rally in front-end Treasury rates and a widening in high-yield credit spreads, we closed out our 6% allocation to 5-year Treasuries and shifted 3% to asset-backed securities and 3% to a high-yield ETF holding.

As we look to 2019 and beyond, fears of an imminent recession seem to be misplaced. We expect a modest slowdown, a lack of inflationary pressures, and flexible policymakers to provide a corridor for growth to stabilize and for the cycle to extend. Credit fundamentals remain relatively unchanged away from basics, cyclicals and energy. Current spreads across below investment grade credit imply a rise in defaults to 4%. We believe this is a level that will get visited on the way to a recession, therefore positioning requires a view on near-term recession probability. We remain in the ‘no recession’ camp, implying that leveraged finance asset classes are reasonably inexpensive at current valuations. On the interest rate front, we maintain a hedged duration profile, as we expect Treasury rates to drift higher as volatility in risk asset classes subsides.

Since the Fund’s investment process incorporates multiple sources of alpha that cycle differently, it is our intent that there are no inherent biases toward certain factors, such as credit spread compression or movements in interest rates. Therefore, there would not be specific market environments where we would expect this strategy to underperform. Since security selection is designed to be more consistent than asset allocation, we would expect that when we do have periods of underperformance they would be driven by misjudgments in asset allocation not being completely offset by a steady security selection alpha.

Fund and benchmark performance as at December 31, 20181 yearSince inception
(Oct. 2017)
IA Clarington Global Bond Fund – Series A-4.5%-3.5%
Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged)-1.2%0.1%


Learn more about IA Clarington Global Bond 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 benchmark is the Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged) which is a measure of global investment grade debt from 24 local currency markets that includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The Fund's geographic, sector and credit quality exposure may differ from 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.