Manager commentary - December 31, 2018

During the quarter, weak performance was broad-based, with declines in all sectors but utilities and real estate. Within the portfolio, energy holdings were the largest detractor from relative performance, while security selection within financials and consumer discretionary was the largest contributor. On a full-year basis, underperformance was driven by security selection and an underweight in health care, as well as security selection within industrials. The Fund’s top-contributing investments in the quarter were AutoZone Inc., OSRAM Licht AG and Walmart Inc. The largest detractors from performance were Apache Corp., National Oilwell Varco Inc. and Citigroup Inc.

We increased our investments in AT&T Inc. and Michelin. AT&T is near an all-time trough valuation versus its own history and relative to the market. We expect the business to generate stable underlying free cash flow over the next few years and to reduce leverage that was raised to fund the Time Warner acquisition. The shares provide a dividend yield of over 7%. Michelin is a leading global tire manufacturer. Its exposure to the replacement tire market and the industry’s ability to pass through price inflation over time makes it a relatively low-volatility cyclical. Consistent margin improvement and an aligned management team have led to consistent per-share growth over many years. Michelin diversifies the cyclical exposure within the Fund. These increases were funded by exiting the Fund’s positions in Walmart Inc. and Chevron Corp., which are trading at higher valuations and offered lower risk/reward prospects. Walmart was trading at 21x forward price-to-earnings and near the lowest dividend yield in recent years. The sale of the Fund’s holdings in Chevron reduced the portfolio’s energy exposure.

Equity prices began to factor in a potentially more challenging future as monetary policy continued to tighten in the fourth quarter. Macroeconomic policy uncertainty also began to emerge in the form of weaker global economic data. In the ensuing market sell-off, widespread passive and computer-driven trading left very few areas of the market unscathed. With extended corporate leverage, generally elevated asset valuations and high policy uncertainty, stock market volatility seems likely to persist. The Fund trades at a P/E of 12.6x, the lowest since 2012. The Fund’s dividend yield is 3.2%, the highest since 2012. Numerous holdings now trade at decade-low valuations. Balance sheets remain strong and our businesses are largely positioned in areas where either valuations are very suppressed relative to excesses in the broader market, or cash flows are extremely resilient. While near-term volatility is difficult to avoid in widespread sell-offs, as seen in Q4, we continue to believe that the Fund’s differentiated exposures and emphasis on risk management offer superior risk-reward as the current market cycle continues to age.

Fund and benchmark performance as at December 31, 20181 year3 year 5 year10 year
IA Clarington Global Equity Fund - Series T6-5.0%5.0%6.4%8.2%
MSCI World Index1-0.5%%5.8%9.9%10.9%


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1Source: MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

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 MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of 23 developed market country 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 July 2, 2014, the portfolio sub advisor changed from BNP Paribas Investment Partners Canada Ltd. to QV Investors Inc.