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.

In Canada, growth in the third quarter of 2018 was disappointing, especially where corporate investments are concerned. In mid-October, the Bank of Canada published its Q3 Business Outlook Survey, which indicated a sharp increase in investment intentions despite the uncertainty surrounding NAFTA renegotiations. Recent data, however, shows that Canadian corporations have not yet concretized their intentions and have put new projects on hold.

A factor that probably contributed to the slowdown was weakness in Canadian oil prices. In fact, not only have oil prices been under severe pressure across the world in the fourth quarter (the price per barrel for American crude fell from $75 to $45 at the beginning of October), but the price per barrel of Western Canadian Select slid to around $13 in mid-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.

In the last quarter of the year, the Canadian bond market, represented by the FTSE Canada Universe Bond Index, posted a gain of 1.7% (1.4% in 2018). The FTSE Canada Short Term Bond Index posted a return of 1.4% (1.9% in 2018). Finally, the FTSE Canada Long Term Bond Index rose to 1.9% (0.3% in 2018).

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 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.

The European market, represented by the MSCI Europe, posted a return of -11.2% in the fourth quarter and -10.6% in 2018 (-7.7% and -6.6%, respectively, in Canadian dollars) while the MSCI EAFE Index posted -12.2% for the quarter and -11.0% for 2018 (-7.6% and -6.0%, respectively, in Canadian dollars) and the MSCI World Index posted -13.1% during the quarter and -7.4% in 2018 (-8.5% and -0.5%, respectively, in Canadian dollars). Emerging markets, represented by the MSCI Emerging Markets Index, posted a return of -7.4% for the quarter and -9.7% in 2018 (-2.2% and -6.5%, respectively, in Canadian dollars).

IA Clarington Yield Opportunities Fund invests across all asset classes, including Canadian and foreign equity funds, but mainly in fixed-income funds or securities. The Fund’s return is primarily determined by the mix and performance of the underlying funds.

The fund manager actively manages the Fund with the objective of providing an attractive yield to unitholders with the potential for capital appreciation over the long term.

Over the quarter, the manager maintained an underweight exposure to bonds and an overweight exposure to equities. Throughout the quarter, the fund manager increased the Fund’s exposure to U.S. equities, while reducing its exposure to emerging market and Canadian equities. The fund manager dynamically hedged the Fund’s currency exposure during the period, as the Canadian dollar was volatile during the quarter. The fund manager also tactically used ETFs to add exposures to gold miners, which normally act as a safe haven in a risk-off environment.

The Fund’s overweight position in equities detracted from performance as global stock markets sold off during the quarter. All of the Fund’s holdings underperformed their respective benchmarks, with the exception of IA Clarington Dividend Growth Class, whose successful stock selection allowed it to outperform the S&P/TSX Composite Index.

At quarter-end, the Fund was overweight equities and floating rate income securities, and underweight sovereign bonds and high-yield securities. The Fund maintained a 4% position in preferred shares via an ETF throughout the quarter.

Over the next quarter, the fund manager will be monitoring several risk factors, including a return of negative investor sentiment that could push markets into bear market territory, a return to a more hawkish tone from the Fed and a potential deterioration of trade talks between the U.S. and China.

Fund and benchmark performance as at December 31, 20181 year3 yearSince inception
(Dec. 2015)
IA Clarington Yield Opportunities Fund – Series A-2.3%1.7%1.7%
25% S&P 500 Index, 75% FTSE TMX Canada Universe Bond Index2.4%3.8%3.8%


Learn more about IA Clarington Yield Opportunities Fund

The Fund gains exposure to the asset classes discussed by investing 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 S&P 500 Index (25%) and FTSE Canada Universe Bond Index (75%). 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 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 market capitalization 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.

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.