Manager commentary - Q4 2019

IA Clarington Global Opportunities Fund Series A returned 9.0% during the fourth quarter of 2019. Its benchmark, the MSCI World Index,1 returned 6.3% in Canadian dollars.

The main contributors to performance during the quarter were the Fund’s positioning in health care and industrials. One of the best performers was Qualicorp SA (a leading health care benefits administrator in Brazil), which rerated on signs of a turnaround in the operating trends at the company, as well as the 10% sale in Qualicorp to Brazil’s largest private hospital operator.

The Fund’s underweight positioning in technology was the main detractor from relative performance during the quarter.

We initiated a new position during the period in Sinopharm Group Co., Ltd. We exited our positions in Bank of America Corp. and Legg Mason Inc. during the quarter.

One of the worst years for value stocks, 2019 capped off a 13-year run of growth outperforming value. For instance, 2019 has produced the second-, seventh- and tenth-worst months for value performance since 1996. However, this trend has reached extreme values. A study by QMA2 shows that there have been three main periods where value has underperformed: the tech bubble, which saw a drawdown of 16.5%, the 2008–2009 financial crisis, where the drop was 21.14%, and currently, where the drawdown is 21.08%. In addition, on certain metrics, valuation spreads between value and growth stocks are the highest they’ve been in 25 years. Historically, such extreme valuation levels have led to the strong outperformance of value over future periods. In addition, such changes in leadership typically extend over many years. As a value manager, we are well-positioned to benefit from the potential value outperformance over the next few years, and believe signs of this shift have already begun to appear.

For 2020, we expect markets will continue to be concerned with political uncertainty, global monetary policy and global economic growth. With our global long-term value approach, we will continue to look for the best investment opportunities around the world and take advantage of any opportunities caused by market volatility. Our focus on companies with strong balance sheets or asset value support should help protect on the downside from company-specific or macro events.

We have positioned the Fund to avoid expensive stocks that are priced for perfection. Our view is that stocks with low investor expectations offer much more compelling risk/reward opportunities for long-term investors. We have built a solid value portfolio that is quite a bit less expensive than the market. The Fund’s median forward price-to-cash flow ratio is 7.6x, the forward price-to-earnings ratio is 11x and the dividend yield is 4%, in contrast to the benchmark’s price-to-earnings of 18x and dividend yield of 2%.

Fund and benchmark performance as at December 31, 20191 year3 year5 year10 year
IA Clarington Global Opportunities Fund - Series A0.1%-2.40.9%4.7%
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. 2QMA, “Value vs. Growth: The New Bubble,” September 2019 (https://www.qma.com/assets/pdf/QMA-Value-vs-Growth-New-Bubble-White-Paper.pdf).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 24 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 November 30, 2011, Radin Capital Partners Inc. replaced OppenheimerFunds, Inc. as sub-advisor to the Fund.