IA Clarington Sarbit U.S. Equity Class (Unhedged)
Manager commentary - December 31, 2018
IA Clarington Sarbit U.S. Equity Class (Unhedged) Series A returned -10.1% for the fourth quarter of 2018. The Fund’s benchmark, the S&P 500 Index, returned -8.6% in Canadian dollar terms. The performance gap resulted from stock selection and currency fluctuations. At quarter-end, the Fund held approximately 30% cash (it started the quarter around 40% and came down because of purchases). Over the past three years, it would have been beneficial to be more invested, but with markets at all-time highs and equities trading at expensive prices, we believe it is prudent to exercise caution. Fear in markets can result in falling stock prices, which transforms cash from a burden to the most desired asset. As we have noted before, a lack of great companies trading at bargain prices will lead us to hold more cash in the portfolio.
Berkshire Hathaway Inc. only fell 5% during the quarter, as investors viewed it as a defensive position amid market turbulence. We also think Warren Buffett may have bought back a significant amount of stock during the quarter. Ajit Jain, Warren Buffett’s Insurance Vice Chairman, personally bought $20 million worth of Berkshire stock during the quarter – clearly a positive sign.
We added to our position in ADT Inc. in the quarter. We think that the market is taking a much too pessimistic view towards the company’s business. ADT is a partner of Amazon.com, Inc. and has thousands of voice commands embedded in Amazon’s Alexa. We think there is a lot of low hanging fruit for management to pick to improve the business and potentially double its cash flow. According to our internal numbers, ADT trades below 6x earnings before interest, tax, depreciation and amortization, and has a 15% free cash flow yield on 2020.
Lions Gate Entertainment Corp. was a large detractor from performance in Q4. With no news, it seemed like the stock couldn’t find a bottom. We went to Santa Monica during the quarter to meet with the company’s management team and came away convinced that nothing fundamental had changed with the business. Late in the year, we stepped up and were buying the stock under $14.00. A few days afterwards, it became public that several insiders were buying at this level, a reassuring sign that management believes the stock is undervalued. It has rallied since, but we still think it’s undervalued.
The fourth quarter was one of the ugliest quarters we’ve seen in a while. The Fund was definitely not immune to the pain. Most of the time, when our stocks get caught up in indiscriminate selling, we view it as an opportunity. In this case, it’s a short-term loss, which was driven by investors’ desire to exit “leveraged” names. While some of our companies have more than average leverage (First Data Corp., Lionsgate, Liberty SiriusXM Group, ADT) they also generate a great deal of cash and are less sensitive to general economic conditions. We view these moves down as great opportunities for us, the company or both to accumulate shares. Also, multiple insiders in a number of the companies in the portfolio have disclosed personal purchases.
Markets are jittery as investors believe that the U.S. Federal Reserve is increasing interest rates too quickly, which could put the economy into recession. Trade wars, slowing international economies and a government shutdown are the new fears du jour. We don't pretend to know or even think about the path of interest rates or what the economy will do over any period but the long term. We focus on companies. This pessimism in the market has shown us some opportunities and we have taken advantage of them. Is the market still expensive? Yes. But if we find great businesses trading at attractive valuations, we will purchase them, as over time it has led to great results.
|Fund and benchmark performance as at December 31, 2018||1 year||3 year||5 year||Since inception (Jul. 2011)|
|IA Clarington Sarbit U.S. Equity Class (Unhedged) - Series A||-8.3%||-2.8%||4.1%||8.5%|
|S&P 500 Index||4.2%||8.8%||14.1%||16.8%|
Learn more about IA Clarington Sarbit U.S. Equity Class (Unhedged)
The performance data comparison presented is intended to illustrate the Fund’s historical performance 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 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. equity market. The Fund’s market capitalization and sector exposure may differ from that of the benchmark. The Fund’s currency risk 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.