Manager commentary - Q4 2019

While the geopolitical context has rarely been as turbulent as we saw in 2019, equity markets have held up remarkably well. We had expected a rebound from the lows of late 2018, but we were still surprised by the extent of the rebound. The MSCI All Country World Index (ACWI) saw the strongest gain since 2013, rising by nearly 25%, while the major bond indices approached a return of 10%.

This past year was marked by softness in the main economic indicators. The volume of international trade declined in the first three quarters of 2019 – an historic first outside of a recession. Signals that the bottom had finally been reached began to appear in Europe and the U.S. at the end of the year. Simultaneously, China and the U.S. finally agreed on a first phase of bilateral trade agreements.

The Chinese economy continues to show stable growth of close to 6%. Although the middle of 2019 was indeed more difficult for China, the Chinese manufacturing index rebounded at year-end and is currently near the peaks reached in 2011. The slowdown in the Chinese economy in 2019 unfolded in a controlled manner and a rebound is already taking shape, supported by fiscal and monetary stimulus measures.

Beyond the trade tensions, the U.S. economy remained the most resilient throughout the year, as the final effects of President Trump’s fiscal reform supported consumer spending.

The bar is now set very high for an increase in U.S. interest rates. At the press briefing following the October interest rate decision by the U.S. Federal Reserve (Fed), Chairman Powell said that he needed to see a significant and sustained increase in inflation before even considering raising interest rates. Such a clear statement deserves to be taken seriously, and leading economic indicators suggest that the chances of such an inflationary surge over the next 12–18 months are very slim.

The Canadian economy, meanwhile, has been able to rely on its strong labour market to post good returns in 2019. The resilience of the Canadian economy is supported by its historically high population growth, which is mainly driven by immigration. Job creation was excellent in 2019, and wages continue to grow at a healthy pace.

Over the fourth quarter, the Canadian bond market, as measured by the FTSE Canada Universe Bond Index, returned -0.9% (6.9% in 2019). The FTSE Canada Short Term Bond Index returned 0.1% (3.1% in 2019) and the FTSE Canada Long Bond Index returned -1.9% (12.7% in 2019).

The U.S. equity market, as measured by the S&P 500 Index, delivered a total return of 9.1% in the fourth quarter (6.8% in Canadian dollar terms). The Canadian stock market, as measured by the S&P/TSX Composite Index, rose 3.2%. For 2019, the S&P 500 Index returned +31.5% (+24.8% in Canadian dollar terms) and the S&P/TSX Composite Index returned +22.9%.

The European market, as represented by the MSCI Europe Index, posted gains of 4.5% in the fourth quarter and 23.8% in 2019 (6.7% and 18.3%, respectively, in Canadian dollar terms). The MSCI EAFE Index rose 5.2% during the quarter and 21.7% in 2019 (5.9% and 15.8%, respectively, in Canadian dollar terms). The MSCI World Index posted gains of 7.5% for the quarter and 27.3% in 2019 (6.3% and 21.2%, respectively, in Canadian dollar terms). Emerging markets, as measured by the MSCI Emerging Markets Index, returned 9.6% for the quarter and 18.5% in 2019 (9.6% and 12.9%, respectively, in Canadian dollar terms).

Distinction Conservative Class invests 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.

Over the fourth quarter, the Fund outperformed its benchmark before fees. IA Clarington Strategic Equity Income Fund, IA Clarington Global Opportunities Fund and IA Clarington Global Equity Fund, which represent 26% of the portfolio, were the top contributors to the Fund’s performance, as they outperformed their respective benchmarks. Their relative performance was mostly due to successful security selection. IA Clarington Strategic Equity Income Fund, which represents 15% of the Fund, saw its largest contributors emerge from the health care and financials sectors.

The only underlying fund that detracted from performance (posting a negative return during the period) was the IA Clarington Bond Fund, which accounted for 23% of the Fund at quarter-end. Nevertheless, IA Clarington Bond Fund outperformed its benchmark due to duration management and overweight positions in corporate and municipal bonds. Overall, the fixed-income funds contributed positively to the Fund’s performance.

The synchronized fiscal easing by global central banks, including the Fed and European Central Bank, should continue to support risk assets in 2020. The relationship between the net number of central banks resorting to accommodative monetary policies and the global economic cycle has historically been encouraging, suggesting a favourable context for 2020.

Signs of a resurgence of the global economy and the reduction of the main geopolitical risk factors should support the progression of equities and the conciliatory tone of central banks should limit the interest rate increases in 2020. Nevertheless, the fund manager believes that investors must be prepared for healthy volatility throughout the year.

Fund and benchmark performance as at December 31, 20191 year3 year5 yearSince performance start date  (Feb. 2014)
Distinction Conservative Class - Series A9.4%2.6%2.7%3.4%
17.5% MSCI World Index1, 35% S&P/TSX Composite Index, 37.5% FTSE Canada Universe Bond Index, 10% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged).14.9%6.2%5.9%6.5%


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1MSCI 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 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 17.5% MSCI World Index, 35% S&P/TSX Composite Index, 37.5% FTSE Canada Universe Bond Index and 10% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged). 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 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 Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged) is a measure of global investment grade debt from 24 local currency markets that includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. 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 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. Effective February 7, 2014, Distinction Conservative Portfolio merged into this Fund. Historical performance for this series is calculated from the date of the material merger.