Manager commentary - December 31, 2018

Despite an exceptional rise in U.S. business profits, the decision by the U.S. Federal Reserve (Fed) to continue normalizing its monetary policy and the escalation of U.S.‐China trade tensions have created a highly volatile environment on Wall Street. This resulted in the S&P 500 Index posting a drop of nearly 15% in the fourth quarter of 2018, its worst quarterly performance in a decade. The last month of the year was particularly painful, recording a drop of 9.2% – the worst December since the 1930s.

Brexit was the centre of attention during the last quarter of the year. The U.K. parliament’s vote on Brexit was postponed to January 2019 because there was clearly not enough support in December, creating more uncertainty around the globe.

In Canada, the main factor that contributed to the economic slowdown was the weakness in Canadian oil prices. Not only have oil prices been under severe pressure across the world in the fourth quarter (the price per barrel of American crude fell from $75 to $45 in Q4 of 2018), but the price per barrel of Western Canadian Select slid to under $13 in late 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 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%.

As the macroeconomic environment became more uncertain in the fourth quarter, investors lowered their expectations for U.S. Federal Reserve and Bank of Canada rate increases in 2019. The risk-off environment drove flows into safe-haven investments such as bonds, which lead to a significant decrease in yields, thereby elevating returns in the bond market. The Canadian bond market, represented by the FTSE Canada Universe Bond Index, posted a gain of 1.7%. The FTSE Canada Short Term Bond Index rose by 1.4% and the FTSE Canada Long Term Bond Index by 1.9%.

IA Clarington Global Yield Opportunities Fund invests across all asset classes, including Canadian and foreign equity funds, but mainly in fixed-income funds or securities. The Fund’s return is primarily determined by the mix and performance of the underlying funds.

The fund manager actively manages the Fund with the objective of provide an attractive yield to unitholders with the potential for capital appreciation over the long term.

During the period, the fund manager maintained a significant underweight position in bonds and an overweight position in equities, with heavy exposure to foreign equities. Some of these investments were made through ETFs providing specific regional or sector exposure (e.g. emerging markets and European financials). The fund manager initiated a position in Canadian equities, given their attractive valuation, but this exposure contributed negatively to the Fund’s performance given the underperformance of Canadian market during the period. The Fund manager dynamically hedged the Fund’s currency exposure during the period as the Canadian dollar was volatile during the quarter.

The Fund’s overweight position in equities detracted from the Fund’s performance as global stock markets sold off during the quarter. The Fund’s fixed-income fund exposures detracted from performance during the quarter, as they all underperformed their respective benchmarks. IA Clarington Bond Fund, the Fund’s largest holding, underperformed its benchmark by a relatively small margin.

There are several risk factors that the manager will be monitoring over the next quarter, including the bond market’s reaction if the Fed returns to a more hawkish tone and its reaction to a deterioration in trade talks between the U.S. and China.

Fund and benchmark performance as at December 31, 20181 yearSince inception
(Oct. 2017)
IA Clarington Global Yield Opportunities Fund – Series A-4.6%-2.0%
10% S&P/TSX Composite Index, 20% MSCI World Index,1 20% FTSE Canada Universe Bond Index, 50% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged)-1.2%1.2%

 

Learn more about IA Clarington Global Yield Opportunities Fund

1Source: 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 Fund’s strategy is to invest in other investment funds. 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 20% MSCI World Index, 10% S&P/TSX Composite Index, 20% FTSE Canada Universe Bond Index and 50% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged). The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. 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 24 developed market country indices. 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 FTSE Canada Universe Bond Index is comprised of Canadian investment grade bonds and has significantly different portfolio duration characteristics. The FTSE Canada Universe Bond Index consists of a broadly diversified selection of investment-grade Government of Canada, provincial, corporate and municipal bonds issued domestically in Canada. The Fund's fixed income component can invest in both investment grade and high yield bonds while the benchmark has exposure only to investment grade bonds. The Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged) 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. The Fund’s sector and geographic exposure may differ from that of the benchmark. The Fund may have different currency risk exposure than the benchmark. The Fund may hold cash while the benchmark does not. Overall, the Fund's bond and equity exposure can differ, because the Fund does not use a fixed ratio similar to the benchmark. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance.