Manager commentary - December 31, 2018

Market sentiment shifted dramatically negative in the fourth quarter of 2018 amid signs of slowing global economic growth. Risk assets sold off sharply and bonds rallied around the globe in the flight to quality. Fourth quarter performance for IA Clarington Inhance Conservative SRI Portfolio was supported by a larger allocation to fixed income. Series T6 units of the Fund posted a return of -3.7% for the quarter, compared to -4.0% for the benchmark. The global and Canadian equity components saw the largest absolute market corrections, while the flight towards the safety of bonds resulted in a positive return for the bond component. The portfolio strategy remained consistent in the fourth quarter, with the underlying Fund allocations regularly rebalanced to target weights over the period. The Fund maintains an above-benchmark allocation to equities, with a current asset mix of 46% equity and 54% fixed income.

In terms of environmental, social and governance, and engagement activity in the fourth quarter, Vancity Investment Management Ltd. (VCIM) continues to support increased safety measures for garment factories in Bangladesh. VCIM filed shareholder resolutions with Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Bank of Nova Scotia and Sun Life Financial Inc., calling on each company to evaluate and disclose progress towards achieving gender pay equity. VCIM engaged in follow-up dialogue with Royal Bank of Canada and Manulife Financial Corp. on the same issue. VCIM also filed resolutions with Canadian Pacific Railway Ltd. and Canadian National Railway Co. requesting each company to report on the costs and benefits of eliminating the use of herbicides on rail tracks and property. VCIM wrote to Loblaw Companies Ltd. to initiate dialogue addressing neonicotinoid pesticide use in the supply chain. VCIM filed a resolution with Franco-Nevada Corp. seeking disclosure on scenario analysis for climate risk exposure. VCIM participated in a collaborative engagement with the Retail Council of Canada on the Task Force on Climate-Related Financial Disclosures. Additionally, VCIM requested that Restaurant Brands International Inc., Royal DSM N.V. and Starbucks Corp. engage in dialogue on policies and practices to combat anti-microbial resistance in the supply chain. Lastly, VCIM formally supported shareholder resolutions filed with Starbucks and Costco Wholesale Corp. requesting that each company report on efforts to reduce consumer packaging.

The U.S. Federal Reserve (Fed) raised its policy rate range by 25 basis points (2.25% to 2.5%) at its December meeting, its fourth such hike in 2018, going against a rising chorus of high-profile investors suggesting the Fed may be over-tightening. The Fed’s median forecast at that meeting had two further rate hikes expected for 2019, an interesting divergence from the market, which ended the year pricing in no Fed hikes in 2019 and rate cuts in 2020/2021.

The Bank of Canada (BoC) raised its policy rate by 25 basis points to 1.75% at its October meeting, its third and final hike of the year. At its December meeting, the BoC had a slight dovish tilt in its statement, recognizing the weaker macroeconomic developments and indicating it was in no hurry to get its policy rate to neutral. The market ended the year pricing in less than a 50% probability of a BoC hike through all of 2019.

The Fund’s preferred share holdings dropped sharply in the quarter and accounted for the majority of the Fund’s underperformance against the benchmark. Preferred shares were hit hard by weak market risk sentiment, widening credit spreads and lower bond yields. Tax-loss and ETF-driven selling caused further declines in December, making the fourth quarter of 2018 the worst quarter for preferred shares since Q3 of 2015 and the third-worst quarter since the start of S&P/TSX Preferred Share Index data in 2002.

Trade concerns and interest rate normalization, particularly by the Fed and BoC, weighed heavily on markets heading into the fourth quarter. Falling oil prices globally and the discount applied to most Canadian production had a significant impact on Canadian energy firms and created headwinds for the S&P/TSX Composite Index. In addition to U.S.-China tariff concerns, Canadian business investment has been weak as Canada works through the North American Free Trade Agreement overhang now that the trilateral United States–Mexico–Canada Agreement accord is set for implementation in 2019. Economists see the Canadian economy at capacity and inflationary pressures increasing for the BoC to balance with high consumer debt levels. A rebound in commodity prices could be the swing factor towards rate increases that narrow the differential between Canada and the U.S. and a strengthening of the Canadian dollar. We would expect global sentiment on Canada to improve and interest in Canadian equities to grow from currently depressed levels. In financials, for example, banks remain attractively valued, possess manageable credit risk, provide healthy dividends and continue to generate healthy profits to apply towards share buybacks.

Most investors are relieved to see this volatile year come to a close. There were very few places to hide in 2018. In fact, with cash being the best performer, there wasn’t a major asset class that beat U.S. inflation in 2018. Although we do not see a multitude of flashing red indicators of a recession in the U.S., concerns are permeating, and earnings growth is expected to decelerate in 2019. Valuation multiples have been compressing to compensate for this and we believe that they are squarely in the fair value range for many companies. Compared to fair value in the U.S., valuations in Europe and Japan remain compelling on a relative basis. We expect that our view of maintaining increased exposure to these regions should be a positive contributor to global equity returns in 2019.

Fund and benchmark performance as at December 31, 20181 year3 year5 yearSince Performance Start Date 
(Dec. 2009)
IA Clarington Inhance Conservative SRI Portfolio – Series T6-3.0%1.7%2.7%3.6%
15% MSCI World Index1, 35% S&P/TSX Composite Index, 50% FTSE Canada Universe Bond Index-2.4%4.2%4.9%5.7%



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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 benchmark is a blend of 50% FTSE Canada Universe Bond Index, 35% S&P/TSX Composite Index and 15% MSCI World Index. The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. 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 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 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 has exposure to securities of companies which meet the fund manager's socially responsible investment principles, while the holdings in the benchmark may not align with these principles. The Fund’s market capitalization, geographic, sector exposure and credit quality 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. Around December 7, 2009, a material fund merger occurred. Around December 14, 2009, the sub-advisor changed. These changes may have affected the Fund's performance.