IA Clarington Moderate Portfolio
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 Fed 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 Moderate Portfolio may invest across all asset classes, including fixed income, Canadian equity and foreign equity funds. The Fund’s return is primarily determined by the mix and performance of the underlying funds.
The fund manager actively manages the asset mix of the Fund as well as the allocation within the asset classes. The Fund may invest 51–70% of its assets in fixed-income funds. During the quarter, the Fund’s fixed-income allocation was partially invested in IA Clarington Bond Fund and IA Clarington Core Plus Bond Fund, which are the Fund’s core fixed-income holdings. The Fund was also invested in IA Clarington Global Bond Fund, IA Clarington Emerging Markets Bond Fund and IA Clarington Floating Rate Income Fund. The contribution of these fixed-income funds was negative during the quarter as they underperformed the Fund’s fixed-income benchmark.
The Fund also invests a portion of its assets in Canadian equity funds in order to improve its capital appreciation potential. IA Clarington Strategic Equity Income Fund and IA Clarington Dividend Growth Class are the core holdings within the Canadian equity portion. These two funds contributed positively as they both outperformed their benchmark.
The Fund invests a significant portion of its assets in four foreign equity funds: IA Clarington U.S. Dividend Growth Fund, IA Clarington Global Equity Fund, IA Clarington Global Value Fund and IA Clarington Global Opportunities Fund. During the last quarter, these four funds had negative returns.
During the quarter, the fund manager actively managed the equity allocation while keeping the overweight position close to the allowable maximum. Within the equity allocation, the fund manager maintained a significant overweight position in foreign equity investments and an underweight position in Canadian fixed-income investments. The overweight position in foreign equities detracted from the Fund’s performance given the stock market sell-off during the quarter and the positive return of the Canadian fixed-income market. Nonetheless, this negative impact was partly offset by the positive impact of the significant underweight position in Canadian equity investments.
The fund manager also dynamically managed the Fund’s exposure to the U.S. dollar through currency forwards. The Fund ended the quarter with a partially hedged position. The fund manager made tactical use of ETFs to add exposure to gold miners, which normally act as a safe haven in a risk-off environment. The fund manager also took profits from put options as volatility jumped and used the proceeds to add to the Fund’s equity exposure. In doing so, however, the fund manager may have acted too soon, as stock markets fell by more than 10% following these actions. The fund manager also tactically managed the Fund’s duration through government fixed-income ETFs.
|Fund and benchmark performance as at December 31, 2018||1 year||Since inception (Apr. 2016)|
|IA Clarington Moderate Portfolio – Series B||-5.5%||1.4%|
|10% MSCI World Index, 15% S&P/TSX Composite Index,1 15% S&P 500 Index |
and 60% FTSE TMX Canada Universe Bond Index
Learn more about IA Clarington Moderate Portfolio
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 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 10% MSCI World Index, 15% S&P/TSX Composite Index, 15% S&P 500 Index and 60% FTSE Canada Universe Bond Index. 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 S&P 500 Index includes 500 leading companies in leading industries of the U.S. economy and is widely regarded as the best single gauge of the U.S. equities market. 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 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.