Manager commentary - Q4 2019

The Canadian economy once again demonstrated its resilience in the last quarter of the year. For example, the Canadian labour market performed tremendously during the period, despite its poor performance in November. Wage growth also remained strong, generating a strong tailwind for consumption and household wealth.

The Canadian real estate sector was, in the fund manger’s opinion, one of the best stories of 2019, as the Toronto and Vancouver housing markets recovered. Immigration, the increase in household wealth, as well as the decline in interest rates, served as stabilizing factors for the Canadian economy during the quarter.

The message sent by the Bank of Canada was optimistic overall, despite the trade war between China and the U.S. The governor of the Bank of Canada made an interesting analogy during the quarter, comparing the Canadian economy to a healthy adult who is not immune to a cold, but who with his good physical condition, could recover more easily.

The S&P/TSX Composite Index had a positive quarter, with a return of 3.17%. During the quarter, seven of the index’s eleven sectors realized a positive return, with information technology finishing first, posting a double-digit return. Two of the three largest sectors of the index (materials and energy) posted mid single-digit returns. However, consumer staples, consumer discretionary and real estate posted negative returns during the quarter. Healthcare was the worst performing sector, with a negative mid single-digit return.

In terms of relative performance, the fund outperformed its benchmark during the period, mainly as a result of security selection. Within sector allocation, the overweight position in information technology contributed to performance, but was offset by the underweight position in the materials sector.

Strong security selection in the energy sector was the main contributor to the Fund’s performance during the period. The overweight position in Canadian Natural Resources, International Petroleum Corporation and Tourmaline Oil Corporation contributed to performance, as they all posted double- digit returns during the quarter. Within the healthcare sector, Boston Scientific Corporation, UnitedHealth Group Incorporated and Thermo Fisher Scientific contributed to performance, with double-digit returns.

Trade negotiation between the U.S. and China have advanced during the quarter, with the achievement of a partial phase one deal, a truce that the worldwide economy eagerly anticipated. The fund manager expects U.S. growth to reaccelerate in 2020, but perhaps not to the same extent as the market consensus. Nevertheless, the fund manager anticipates that profits per shares should rebound and grow between 5 and 8 % for the market as a whole in the next twelve months. Earnings multiples should increase, at least in certain sectors, such as cyclicals and resources. An accelerating economy could cause the 10-year bonds yield to increase and the yield curve to steepen, making financials attractive. However, the fund manager will be prudent with defensive sectors that are expensive and vulnerable to a rise in the 10-year bond yield. The fund manager has already decreased the Fund’s weightings in these sectors in the third and forth quarter of the year, especially after the latest trade deal reached between the U.S. and China.

Meanwhile, cyclical companies trade at compelling valuations and, as a result, the fund manager has started to invest in industrial, materials and energy securities. The fund manager also continues to favour technology stocks and we will continue to overweight that sector for the foreseeable future.

Fund and benchmark performance as at December 31, 20191 year3 year5 yearSince inception
(Feb. 2014)
IA Clarington Canadian Leaders Class - Series A19.1%5.3%4.5%5.3%
S&P/TSX Composite Index22.9%6.9%6.3%6.8%

 

Learn more about IA Clarington Canadian Leaders 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 Fund’s benchmark is the S&P/TSX Composite Index, which 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 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. Effective February 7, 2014, IA Clarington Canadian Leaders Fund merged into the Fund.