Manager commentary - December 31, 2018

The Fund invests substantially all of its assets in units of IA Clarington Tactical Income Fund (“the Reference Fund”). Its performance therefore largely reflects the performance of that fund. All reference made to “the Fund” hereinafter reflects a discussion of the portfolio holdings and characteristics of the Reference Fund.

As we look back at 2018, we see a mix of good, bad and ugly. The good was accelerating economic growth in the U.S. that drove earnings growth to levels we haven’t witnessed in many years. That growth led to higher market returns for most of the year, while consumer and sentiment levels remained relatively high. The bad came at the beginning of the year and was likely a precursor of things to come, as interest rates increased quickly to levels that had some believing that risk-free rates were close to becoming stiff competition for the equity markets. Equity markets and interest-rate-sensitive fixed income struggled during this period before giving way to better returns as the year progressed. The ugly occurred in the last couple of months of the year as fears of an economic downturn, combined with global trade disputes and a non-accommodating central bank in the U.S., led to one of the worst-performing months of December in many decades.

Although the Fund faired relatively well during the year, we gave up some of our annual gains in December when speculation seemed to have overtaken facts. While we concede that earnings growth and economic growth in the North American markets will likely decelerate during the next 12 months, we see very little evidence of a pending recession and expect earnings growth, while lower, to remain positive, which historically has been associated with higher market returns. Based on these assumptions, we expect equity market returns to rebound as 2019 progresses and credit spreads for less interest-rate-sensitive fixed income to decrease as positive momentum is factored into investment analyses. Other potential catalysts include a thaw in trade war disputes as well as a U.S. Federal Reserve that will likely keep overall liquidity in the system relatively high by not raising short-term rates too aggressively.

In terms of our fixed-income exposure, we remain invested primarily in higher-yielding corporate bonds with low sensitivity to rising interest rates and find that current yields of approximately 8% and spreads at 500 basis points are attractive after over-correcting during the fourth quarter. We believe that for the first time in two years, yields and spreads are at a level that can potentially to produce capital gains in addition to an attractive current yield. Default rates are at historically low levels and will likely remain muted as long as there is positive economic and earnings growth to help support overall expected returns during the next year.

The Fund outperformed its benchmark during the quarter, mainly due to our overall defensive positioning. This included high relative cash levels and a larger exposure to defensive stocks within our equity allocation. We generally avoided one of the worst-performing sectors with a low relative exposure to energy while having a higher exposure to Canadian telecommunications and U.S. health care securities, two of the better performing sectors during the quarter. We increased our defensive positioning and our cash levels during the past quarter while decreasing the Fund’s exposure to the U.S. equity markets. We finished the quarter with higher cash levels than at the beginning of the period and reduced our overall equity exposure during the volatile fourth quarter.

The Fund’s top two contributors to performance during the past three months were Loblaw Companies Ltd. and Agellan Commercial Real Estate Trust. Loblaw’s stock price has benefited from its defensive nature during a volatile period in the markets as well as its divestiture of Choice Properties Real Estate Investment Trust. Agellan has performed well over the past several months, primarily due to being acquired by El-Ad Group Ltd. Within our fixed-income holdings, Netflix Inc. 5.875% of 2025 and First Quantum Minerals Ltd. 7.0% of 2021 bonds had the largest positive contribution to the Fund during the past three months.

The largest detractor from performance during the quarter came from an exposure to Encana Corp. Encana’s negative price sentiment was primarily a result of declining oil prices during the quarter as well as the earlier acquisition of Newfield Exploration Company, which was poorly received by investors. Our exposure to Frontier Communications Corp. 7.125% of 2023 bonds was the Fund’s largest fixed-income detractor from performance. We believe that the majority of the negative price pressure on the bonds is related to near-term weakness in communications products as well as management execution of recent acquisitions.

Fund and benchmark performance as at December 31, 20181 year3 years 5 yearsPerformance start date
(Nov. 2009)
IA Clarington Tactical Income Class - Series T6-3.0%3.9%1.5%3.3%
40% FTSE TMX Canada Universe Bond Index, 60% S&P/TSX Composite Index-4.7%4.7%4.0%5.4%

Learn more about IA Clarington Tactical Income Class

The performance data comparison presented is intended to illustrate the historical performance of the IA Clarington Tactical Income Class as compared with historical performance of widely quoted market indices. As this fund invests substantially in its Reference Fund (IA Clarington Tactical Income Fund), the differences discussed are those of the Reference Fund. 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'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 may have exposure to equities and bonds domiciled both in Canada and outside of Canada while the benchmark only has exposure to equities and bonds domiciled in Canada. The Fund may have currency risk exposure while the benchmark has none. 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. Effective February 23, 2015, the sub-advisor of the Fund changed from Aston Hill Asset Management Inc. to IA Clarington Investments Inc.