Manager commentary - December 31, 2018

IA Clarington Inhance Monthly Income SRI Fund Series T6 posted a return of -7.2% for the fourth quarter, compared to -5.4% for the benchmark. Despite the Fund’s stock selection generating positive relative performance against the benchmark, risk-off investor sentiment contributed to equities underperforming fixed income during the quarter. The Fund’s underweight allocation to fixed income detracted from performance. Preferred shares were hit hard by weak market risk sentiment, widening credit spreads and lower bond yields, with further downside in December stemming from tax-loss and ETF-driven selling. The Fund’s floating rate AltaGas Ltd. preferred share was the weakest performer, hit especially hard by the decline in yields and widening credit spreads. The Fund’s allocation to short-term corporate bonds increased 1% over the quarter, with the overall allocation to fixed income (bonds and preferred shares) at an average of 26.2%, below the benchmark weight of 35%.

While the Fund’s corporate bonds outperformed the corporate bond portion of the benchmark, short-duration positioning and lack of government bonds caused the bond portion of the Fund’s fixed-income allocation to underperform the benchmark. The Fund’s income-focused mandate targets short-maturity corporate bonds and does not hold any long-dated or government bonds. These asset classes outperformed during the period, as bond yields rallied sharply and the market gravitated towards risk-free government bonds.

Positive equity sector contributions came from real estate, health care and financials. The materials and energy sectors were the primary sources of underperformance over the quarter. Notable positive equity returns came from Chartwell Retirement Residences, Summit Industrial Income REIT, Thomson Reuters Corp. and AltaGas Canada Inc. The underperforming positions were Cineplex Inc., ARC Resources Ltd. and Chemtrade Logistics Income Fund.

During the quarter, the Fund established positions in Exchange Income Corp., Russel Metals Inc., International Business Machines Corp., Labrador Iron Ore Royalty Corp. and AltaGas Canada. The Fund sold positions in EnerCare Inc., Colgate-Palmolive Co. and AltaGas Ltd as a source of funds. During the quarter, the Fund executed a number of short corporate bond extension trades and positions were established in Hydro One Inc., Shaw Communications Inc. and HSBC Bank Canada. Late in the quarter, the Fund took advantage of the sell-off in preferred shares and increased the preferred share allocation by adding a position in Pembina Pipeline Corp.

In terms of environmental, social, and governance, and engagement activity in the fourth quarter, Vancity Investment Management Ltd. (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 also engaged in dialogue with Royal Bank of Canada and Manulife Financial Corp. on the same issue. VCIM filed resolutions with Canadian National Railway Co. requesting the company to report on the costs and benefits of eliminating the use of herbicides on rail tracks and property.

The Canadian equity market, like most global developed markets, endured a very challenging and volatile 2018. In fact, with cash being the best performer, there wasn’t a major asset class that beat U.S. inflation in 2018. Trade concerns and interest rate normalization, particularly by the U.S. Federal Reserve and the Bank of Canada (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.

The Fund’s balanced investment strategy results in a diversified portfolio of short-term corporate bonds, preferred shares and higher yielding equities that continues to be well positioned for volatile markets in 2019 while generating a steady flow of dividend and interest income for investors.

Fund and benchmark performance as at December 31, 20181 year3 year5 yearSince Performance Start Date 
(Dec. 2009)
IA Clarington Inhance Monthly Income SRI Fund – Series T6-6.6%3.9%2.9%5.5%
40% FTSE Canada Universe Bond Index, 60% S&P/TSX Composite Index-4.7%4.7%4.0%5.0%

 

Learn more about IA Clarington Inhance Monthly Income SRI 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 benchmark is a blend of 40% FTSE Canada Universe Bond Index and 60% S&P/TSX Composite 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 Fund holds 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.