Manager commentary - Q4 2019

IA Clarington Canadian Balanced Class Series A returned 1.7% in the fourth quarter and 10.3% for the year. The Fund’s blended benchmark returned 1.6% in the fourth quarter and 16.3% for the year. The Fund invests substantially all of its assets in units of IA Clarington Canadian Balanced 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.

The bond’s defensive interest rate strategy added to relative returns over the quarter as the yield curve shifted upwards, causing the strategy’s relatively short-term bonds to outperform the benchmark’s longer maturity profile. Over the past 12 months, however, the strategy’s bonds detracted from relative returns as interest rates fell significantly during the year.

The Fund closed the year with 2.5% invested in cash and treasury bills, 36.0% in fixed-income securities and 61.6% in Canadian equities. The Fund’s equity exposure has increased during the year as equities have outperformed bonds.

Major central banks provided ample stimulus and liquidity to markets over the year, fueling strong market gains in most asset classes. Investors who held steady during the extreme volatility of December 2018 (i.e. those who didn’t panic and sell their stocks) were rewarded with double-digit returns from a balanced portfolio. One year ago, we were concerned that 2019 would be a tumultuous year (in some respects it was), which goes to show it doesn’t pay to make large portfolio shifts based on short-term market predictions. The past decade has seen U.S. equities grow 343% (in CAD) and Canadian stocks grow by only 95%. We won’t make market return predictions, but we wouldn’t be surprised if over the next decade: (1) stock markets provide much more modest returns than in the past decade, (2) Canadian stocks perform more in line with global markets, and (3) risk management and defensive investing come back into style.

The strategy’s stocks appear to offer superior return potential versus its bonds. However, there is the relative safety of bonds over equities, due to their primacy in the capital structure and fixed maturity dates. Bonds therefore belong in investment portfolios as ballast for when equities inevitably experience a significant drawdown.

The strategy remains well positioned to take advantage of reasonable equity valuations, while keeping enough “safe stuff” to weather a storm.

Fund and benchmark performance as at December 31, 20191 year3 year 5 yearSince inception (Jul. 2011)
IA Clarington Canadian Balanced Class - Series A10.3%0.6%1.2%3.5%
40% FTSE TMX Canada Universe Bond Index, 60% S&P/TSX Composite Index16.3%5.7%5.2%5.4%

 

Learn more about IA Clarington Canadian Balanced Class

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 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 may have different sector exposure, credit quality and interest rate sensitivity than the benchmark. 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 December 30, 2014, the investment objectives and strategies of the Fund changed.