Manager commentary - Q4 2019

IA Clarington Global Equity Fund Series T6 returned 6.9% during the fourth quarter versus 6.3% for the MSCI World Index in Canadian dollars. The one-year return was 9.1% versus 21.2% for the benchmark.

All portfolio sectors advanced during the quarter, led by double-digit returns from the information technology and health care sectors. Consumer discretionary and industrials holdings were the strongest contributors to outperformance in the quarter but detracted from relative returns over the year. Security selection within information technology and an underweight allocation to the space also detracted over the year.

The strategy’s top contributing investments in the quarter were Spectris PLC, Tesco PLC and WH Smith PLC. The largest detractors were Molson Coors Beverage Co., Apache Corp. and Cognizant Technology Solutions Corp.

We initiated investments in UnitedHealth Group Inc., Cognizant Technology Solutions Corp. and EOG Resources Inc.

UnitedHealth is the largest private health insurance provider in the U.S. The company’s unrivalled scale and vertically integrated health delivery model offer a low-cost value proposition that drives above-average growth and industry-leading returns on capital. We invested in UnitedHealth at a discount to the broader market, a valuable opportunity for a business with superior long-term returns on equity and low earnings volatility. UnitedHealth improves diversification and reduces cyclicality of the portfolio.

Cognizant is a leading global technology consulting and outsourcing firm. Following a distracting activist campaign that ended in 2018, management has set out a realistic plan to improve costs while restoring topline momentum. With the company trading significantly below its peers, we felt it was an attractive opportunity to own this quality business with consistent margins, solid market positions and a strong balance sheet.

EOG is a North American oil and gas producer with some of the highest-quality assets in U.S. shale, the best returns on capital among its peers, and a track record of persistent value creation over the last two decades. This best-in-class operator has an excellent balance sheet and was purchased near trough valuations in December.

We exited PepsiCo Inc., Apache Corp. and NOW Inc. in favour of the more attractive opportunities outlined above.

Falling interest rates and a shift towards more accommodative monetary policy drove significant multiple expansion in developed stock markets during 2019, resulting in double-digit global equity returns. Economic data remained relatively mixed, however, resulting in a very wide divergence in the performance of expensive growth and bond proxy stocks relative to cheap cyclicals. Valuations for growth stocks and bond proxies now trade at some of the highest levels seen in the last two decades, suggesting increased risk and suppressed return prospects for these areas of the market going forward.

The Fund trades at a price/earnings ratio of 14.7x, a meaningful discount versus the market at 18.5x. The Fund’s holdings have stronger balance sheets, with a long-term debt/equity of 0.36x versus the index at 0.57x, which should provide financial flexibility regardless of the economic environment.

Throughout the year we continued to find pockets of opportunity in select high-quality franchises that have consistently generated strong returns on equity, and we expect these businesses to add to the Fund’s long-term compounding profile. We believe our focus on capital preservation and prudent risk management will continue to generate reasonable returns while protecting our clients, especially as we enter later stages of the cycle.

Fund and benchmark performance as at December 31, 20191 year3 year 5 year10 year
IA Clarington Global Equity Fund - Series T69.1%5.2%6.5%7.7%
MSCI World Index121.2%11.3%11.2%11.8%

 

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1Source: MSCI Inc. 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.

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 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 23 developed market country 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 July 2, 2014, the portfolio sub advisor changed from BNP Paribas Investment Partners Canada Ltd. to QV Investors Inc.