Manager commentary - December 31, 2018

The weakness of global economic data was a cause for concern throughout 2018. European economic data weakened from January onward and the vulnerabilities of several emerging markets were pushed to the forefront in the months that followed.

The fourth quarter was marked by high volatility across all stock markets. The S&P 500 Index suffered a decline of nearly 15% over the quarter, erasing all gains made since the beginning of the year.

The most important factor affecting global financial markets over the year was probably monetary policy tightening by the U.S. Federal Reserve (Fed). The correction in the fourth quarter is a reminder of the impact that tightening liquidity conditions in financial markets can have on portfolio returns.

When the Fed raises its key rate, two phenomena are usually observed: 1) increased volatility in the markets and 2) stock market value, measured by the ratio of price to profit, contracts; that is, investors are willing to pay less to invest in markets despite an increase in corporate profits.

Further adding to uncertainty, trade tensions created by President Trump were omnipresent throughout the year. The renegotiation of the North American Free Trade Agreement (NAFTA) and, more recently, U.S.-China negotiations, took center-stage. At year-end, a truce seemed to have been achieved between the two superpowers, which agreed to speed up negotiations during the first quarter of 2019.

Moreover, several geopolitical risks made headlines throughout 2018, with North Korea, Iran, Brexit and Italian politics topping the list.

Finally, the meltdown of some emerging markets, such as Turkey and Argentina, added to market volatility. For the moment, it appears that these situations are isolated and the risk of contagion is low.

The American stock market, represented by the S&P 500 Index, had a total return of -13.5% in the fourth quarter (-8.6% in Canadian dollars). The Canadian stock market, represented by the S&P/TSX Composite Index, suffered a decline of 8.9%. For 2018, returns for North American stock markets were -4.4 % for the S&P 500 (+4.2% in Canadian dollars) and -7.6% for the S&P/TSX.

Positive contributors to the Fund’s performance included an underweight position in technologies and an overweight position in consumer staples. Security selection in consumer discretionary and telecommunications also proved beneficial. Best-performing securities included Dollar Tree Inc., Dollar General Corp., Mondelez Inc., Abbvie Inc. and Broadcom Inc.

An underweight position in utilities and real estate, as well as an overweight in energy and consumer discretionary, detracted from the Fund’s performance in the fourth quarter. Security selection in financials and consumer staples also detracted from performance. Currency hedging in the Fund accounted for approximately 65% of value subtracted relative to the S&P 500 Index over the quarter. Holdings in Citigroup Inc., Occidental Corp., Fedex Corp., EOG Inc. and DXC Technology Co. also detracted from the Fund’s performance.

During the quarter, the fund manager reduced the Fund’s sector bets. This change is secular rather than cyclical, and limits on sector weights versus the S&P 500 have been established to better manage portfolio risk. The manager believes that these sector limits will ensure the healthy diversification of the portfolio as well as provide for more effective risk management. This change will also enable the fund manager to spend more time on security selection.

As a result of the new sector limits, the Fund’s overweight position in U.S. banks has been reduced, while the Fund’s weighting in rate-sensitive sectors such as utilities, real estate and telecommunications has been increased.

During the quarter, positions were initiated in Nextera Energy Inc. and Sempra Energy, as these companies are expected to deliver excellent dividend growth over the next three to five years. Positions were also initiated in: Welltower Inc., which invests in senior housing, assisted living communities, acute care facilities and medical office buildings; AT&T Inc., Comcast Corporation and Verizon Inc.; Coca-Cola Co., Pepsi Inc., P&G Co. and Wal-Mart Inc., due to their defensive profiles, stability of cash flows and superior dividend yields relative to the S&P 500; and McDonalds Corp., which has renovated a fleet of its restaurants, spurring increased traffic, and made significant investments in technology.

To fund these purchases, overweight positions in financials, energy and consumer sectors were gradually reduced.

The Fund’s position in Apple Inc. was reduced on November 6, prior to the release of the company’s quarterly results. The fund manager is less comfortable with the company’s business model, which is based on price growth, and sees growth in China and revenue growth in its service division as important risk factors. The possibility of a reprisal of the trade war with China along with comments from some suppliers prompted this decision.

The Fund’s position in DXC Technology was completely exited. A disappointing sales outlook led the manager to reposition before the company’s quarterly results, which caused the stock to fall further.

During the quarter, cyclical stocks dropped significantly and thus represent attractive valuations for the portfolio. The Fund is currently slightly overweight cyclical stocks versus the S&P 500 Index. Nonetheless, the Fund still holds nearly half its weighting in defensive companies due to their attractive dividend yields in a context of modest market returns. Currently, the Fund’s dividend yield is 0.4% higher than that of the S&P 500.

At quarter-end, hedging of foreign currencies was down to 0%. Furthermore, there are currently no covered call positions in place. Though the VIX Index is currently high and option premiums appear attractive, the fund manager is not inclined to sell the upside potential of a market rebound at this time


Fund and benchmark performance as at December 31, 2018 1 year3 yearSince inception (Dec. 2015)
IA Clarington U.S. Dividend Growth Registered Fund - Series A-7.2%1.1%1.1%
S&P 500 Index4.2%8.8%8.8%


Learn more about IA Clarington U.S. Dividend Growth Registered 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 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 Fund’s invests in dividend paying stocks while the benchmark is comprised of companies which may not necessarily pay a dividend. The Fund’s market capitalization, geographic and sector exposure 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. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance.