Manager commentary - December 31, 2018

The weakness of global economic data was a cause for concern throughout 2018. European economic data weakened from January onward and the vulnerabilities of several emerging markets were pushed to the forefront in the months that followed.

The fourth quarter was marked by high volatility across all stock markets. The S&P 500 Index suffered a decline of nearly 15% over the quarter, erasing all gains made since the beginning of the year.

The most important factor affecting global financial markets over the year was probably monetary policy tightening by the U.S. Federal Reserve (Fed). The correction in the fourth quarter is a reminder of the impact that tightening liquidity conditions in financial markets can have on portfolio returns.

When the Fed raises its key rate, two phenomena are usually observed: 1) increased volatility in the markets and 2) stock market value, measured by the ratio of price to profit, contracts; that is, investors are willing to pay less to invest in markets despite an increase in corporate profits.

Further adding to uncertainty, trade tensions created by President Trump were omnipresent throughout the year. The renegotiation of the North American Free Trade Agreement (NAFTA) and, more recently, U.S.-China negotiations, took center-stage. At year-end, a truce seemed to have been achieved between the two superpowers, which agreed to speed up negotiations during the first quarter of 2019.

Moreover, several geopolitical risks made headlines throughout 2018, with North Korea, Iran, Brexit and Italian politics topping the list.

Finally, the meltdown of some emerging markets, such as Turkey and Argentina, added to market volatility. For the moment, it appears that these situations are isolated and the risk of contagion is low.

In Canada, growth in the third quarter of 2018 was disappointing, especially where corporate investments are concerned. In mid-October, the Bank of Canada published its Q3 Business Outlook Survey, which indicated a sharp increase in investment intentions despite the uncertainty surrounding NAFTA renegotiations. Recent data, however, shows that Canadian corporations have not yet concretized their intentions and have put new projects on hold.

A factor that probably contributed to the slowdown was weakness in Canadian oil prices. In fact, not only have oil prices been under severe pressure across the world in the fourth quarter (the price per barrel for American crude fell from $75 to $45 at the beginning of October), but the price per barrel of 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.) because pipeline capacity and rail transportation were lacking, leading to a stockpile in Alberta.

The American stock market, represented by the S&P 500 Index, had a total return of -13.5% in the fourth quarter (-8.6% in Canadian dollars). The Canadian stock market, represented by the S&P/TSX Composite Index, suffered a decline of 8.9%. For 2018, returns for North American stock markets were -4.4% for the S&P 500 (+4.2% in Canadian dollars) and -7.6% for the S&P/TSX.

The European market, represented by the MSCI Europe,1 posted a return of -11.2% in the fourth quarter and -10.6% in 2018 (-7.7% and -6.6%, respectively, in Canadian dollars) while the MSCI EAFE Index posted -12.2% for the quarter and -11.0% for 2018 (-7.6% and -6.0%, respectively, in Canadian dollars) and the MSCI World Index posted -13.1% during the quarter and -7.4% in 2018 (-8.5% and -0.5%, respectively, in Canadian dollars). Emerging markets, represented by the MSCI Emerging Markets Index, posted a return of -7.4% for the quarter and -9.7% in 2018 (-2.2% and -6.5%, respectively in Canadian dollars).

Over the quarter, the Fund created value through an underweight position in Canadian equities, overweight in international equities, overweight positions in consumer staples and healthcare, and underweight positions in information technology, industrials and energy. Stock selection in telecommunications also proved beneficial.

The Fund’s currency hedging program against fluctuations in the U.S. dollar accounted for most of the Fund’s negative performance over the quarter. Other detractors from performance include underweight positions in utilities, real estate and telecommunications, and stock selection within the financials, industrials and consumer staples sectors.

At the end of the fourth quarter, the Fund continues to be overweight the U.S. market and underweight Canada versus its peer group. Following the fourth quarter correction, the fund managers believe that many quality American companies are trading at attractive valuations, offering a better risk/return profile than what can be found in the Canadian market.

Over the quarter, a position in the iShares S&P/TSX 60 Index ETF, a Canadian market proxy, was closed and replaced by iShares MSCI Emerging Markets Index ETF an emerging markets ETF. Emerging market valuations remain attractive and the fund manager believes that the Fed’s more cautious tone could be favorable to emerging markets. Relative to peers, the Fund is overweight health care and consumer discretionary, and underweight industrials and utilities.

The Fund is currently unhedged to foreign currency fluctuations, and has no covered call positions. Though the VIX Index is currently high and option premiums appear attractive, the fund manager is not inclined to sell the upside potential of a market rebound at this time.

Key risk factors over the next quarter include a global economic downturn and an extension of the trade war with China that could result in additional downward revisions of S&P 500 corporate profits. The risk of a rate hike remains but the Fed now seems more conscientious of its impact. Finally, political uncertainty remains in Europe, particularly concerning Brexit, France and Italy.


Fund and benchmark performance as at December 31, 20181 year3 year 5 year10 year
IA Clarington Global Value Fund - Series A-8.9%0.1%6.1%7.1%
MSCI World Index-0.5%5.8%9.9%10.9%


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Source: 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 9, 2009, Global Currents Investment Management, LLC ceased to be the sub-advisor for this Fund.