IA Clarington Growth & Income Fund
Manager commentary - December 31, 2018
North American equities declined during the fourth quarter, despite continued constructive macroeconomic fundamentals. In Canadian dollar terms, Canadian stocks lagged their U.S. counterparts largely as a result of a historically wide spread between Western Canadian Select and West Texas Intermediate oil prices, which negatively impacted energy stocks. Although the new United States-Mexico-Canada Agreement alleviated concerns around North American trade, there were still worries about Brexit, the U.S.-China trade war, Iran and the independence of the U.S. Federal Reserve (Fed).
Equity market weakness spilled into the credit markets, resulting in materially wider credit spreads in investment grade, high yield and senior loans. One of the few bright spots during the quarter was government bonds, as they lived up to their traditional role as a safe haven for investors in times of market turmoil.
Both senior loans and high-yield bonds posted outsized negative returns in the fourth quarter, the bulk of which came in December. Record-setting outflows from U.S. retail loan funds and ETFs caused the average price of the loan index, as represented by the Credit Suisse Leveraged Loan Index, to plummet in December. In the six-week period ended December 27, 2018, outflows totaled almost $15 billion, representing approximately 13.5% of assets under management. While retail investors form only a small part of the loan buyer base, they at times can move prices materially as the incremental seller. These investors have been selling due to reduced expectations for further U.S. rate hikes in 2019, combined with heightened concerns around weak loan covenants in recent new issues that may result in higher default loss in the future. The fund manager believes that the decline in average loan prices is due to technical conditions in the marketplace and not based on fundamentals that would lead to above-average credit loss. Despite the sharp sell-off in December, loans still posted a positive calendar year return in 2018 – one of the few asset classes that can make that claim.
The 3-month London Interbank Offered Rate (LIBOR), the floating component of most loan coupons, increased by 41 basis points over the quarter to 2.81%. LIBOR has been steadily increasing through 2018 in tandem with Fed interest rate hikes. However, a less hawkish forward guidance by the Fed during its policy meeting in December has resulted in the market expecting fewer rate hikes in 2019 than originally anticipated.
The Fund’s floating rate holdings were the largest contributors to performance during the quarter, followed by its equity exposure to the health care and information technology sector. On the fixed-income side, notable contributors to the Fund’s performance included holdings in World Triathlon senior secured term loan (LIBOR + 4.25%, 06/26/2021), Array Canada senior secured term loan (LIBOR + 5.00%, 02/09/2023) and WKI Holding Co Inc. senior secured term loan (LIBOR + 4.00%, 05/02/2024). On the equity side, Aecon Group Inc., Badger Daylighting and Broadcom Inc. were among the Fund’s largest individual contributors to performance. Aecon performed well during the quarter as it continued to add to its record backlog, while Badger Daylighting surprised, with quarterly results above expectations. Broadcom managed to weather the downturn due to its low valuation, combined with its diversified businesses and strong free cash flow generation.
Global Tel*Link Corp. senior secured term loan (LIBOR + 4.25%, 11/29/2025), West Corp. senior secured term loan (LIBOR + 4.0%, 10/10/2024) and Charlotte Russe Holding Inc. senior secured term loan (LIBOR + 5.5%, 05/21/2019) were the top detractors from performance within fixed-income.
The Fund’s relative overweight allocation to equities negatively affected its performance. Exposure to the industrials, energy and materials sectors detracted from performance. Birchcliff Energy Ltd., Goeasy Ltd. and Hardwoods Distribution Inc. were among the Fund’s largest individual detractors from performance, driven mainly by market softness.
During the period, the fund manager initiated positions in Premium Brands Holdings Corporation and International Game Technologies, while utilizing market softness to add to positions in Hardwoods Distribution, Savaria Corp, North America Construction Ltd. and Chorus Aviation Inc., among others. The Fund’s position in AltaGas Ltd. was eliminated ahead of an announced distribution cut. Maxar Technologies Inc. and Sleep Country Canada Holdings Inc. were sold after quarterly results indicated that softness in their respective businesses may be ongoing for a period of time. Aecon Group, Badger Daylighting and Cargojet Inc. were trimmed in order to maintain target weights in the Fund.
The fund manager believes that global growth will continue, albeit at a slower rate than prior years, which should help raise demand for Canadian products. Although housing and government policies are a concern, low inflation and low unemployment rates should ensure that the Canadian economy remains on a solid foundation. Canadian equities continue to be historically inexpensive relative to U.S. equities. Due to these factors, the fund manager has maintained the Fund’s overweight exposure to Canadian equities versus U.S. equities.
|Fund and benchmark performance as at December 31, 2018||1 year||3 year||Since inception (Dec. 2014)|
|IA Clarington Growth & Income Fund – Series A||-8.3%||3.9%||2.7%|
|30% Credit Suisse Leveraged Loan Index, 35% S&P/TSX Composite Index, 35% S&P 1500 Index||1.2%||6.9%||7.3%|
Learn more about IA Clarington Growth & Income 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 Fund’s benchmark is a blend of S&P/TSX Composite Index (35%), S&P 1500 Index (35%) and the Credit Suisse Leveraged Loan Index (30%). 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 1500 Composite Index is a broad-based capitalization-weighted index of 1500 U.S. companies and is comprised of the S&P 400, S&P 500 and the S&P 600. The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. dollar-denominated leveraged loan market. The Fund’s market capitalization, geographic, sector and credit quality 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. 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.