Manager commentary - Q4 2019

In the fourth quarter of 2019, the IA Clarington Inhance Bond SRI Fund Series B generated a total return of -0.77%, outperforming the Fund’s benchmark, the FTSE Canada Universe Bond Index, which returned -0.85%.

Global bond yields were broadly higher in the fourth quarter of 2019, as the deterioration in global manufacturing activity showed signs of abating and progress was made on the trade negotiation front. After six consecutive months in contractionary territory, the J.P. Morgan Global Manufacturing PMI moved back into expansionary territory in November and closed out the year just above the 50.0 level that divides expansion from contraction. On the trade front, the U.S., Mexico, and Canada signed the USMCA, with ratification of the deal set to take place in early 2020. Later in December, the U.S. and China completed the first phase of their trade agreement. While the scope of the agreement was quite limited, the agreement at least halted the escalation of the trade conflict, preventing tariff increases scheduled for December 15 from coming into effect and setting a positive risk tone to close out the year.

Government of Canada bond yields underperformed U.S. bond yields, ending the quarter 11 to 34 basis points higher across the curve, with the 10-year part of the curve underperforming. After inverting in late July, the 2-10s yield curve in Canada (the difference between the 10-year Government of Canada yield and the 2-year Government of Canada yield) returned to positive territory on the last trading day of the year. The Bank of Canada (BoC) was on hold throughout the quarter, leaving its rate unchanged at 1.75%, where it has been since the BoC last raised it policy rate in October 2018. Looking ahead, the market ended the quarter pricing in less than one BoC rate cut in 2020, with just a 37.5% probability of a rate cut priced by the December 2020 meeting. This year will see a new BoC Governor, after it was announced that Stephen Poloz will not seek a second term when his seven-year term expires on June 2, 2020.

The Federal Open Market Committee (FOMC) cut its policy rate range by 25 bps to 1.50-1.75% at its October meeting, its third rate cut of the year (following cuts in July and September), before moving to the sidelines the rest of the year. At the December meeting press conference, Chair Powell stated that he would want to see a significant and persistent move up in inflation before moving rates higher, setting a pretty high hurdle for the Fed to begin raising rates. The market ended the period pricing about one FOMC rate cut through the end of 2020.

Driving the Fund’s outperformance versus the benchmark index was its preferred share holdings, shorter duration positioning, and underweighting to long-maturity bonds, particularly long Federals. The Fund’s overweight allocation to corporate bonds also modestly contributed to performance, as corporates were the best-performing bond sector, although this was offset partially by negative security selection in corporates.

The Fund bought several green bonds during the period, bringing its green bond weight to approximately 16.3% at the end of the quarter. The Fund’s total positive impact bond holdings (green, social and sustainable development bonds) was approximately 18.2% at quarter-end.

The Fund remains overweight credit but has selectively decreased credit risk, as corporate bond credit spreads hover near multi-year tights. The Fund trimmed its preferred share holdings modestly during the quarter, ending the period with a 7.5% weight, but continues to believe preferred shares will add value in the long-term, especially in the current low bond yield environment.

Fund and benchmark performance as at December 31, 20191 year3 yearSince inception (Dec. 2016)
IA Clarington Inhance Bond SRI Fund – Series B5.4%2.1%2.1%
FTSE TMX Canada Universe Bond Index6.9%3.6%3.6%


Learn more about IA Clarington Inhance Bond SRI Fund

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 FTSE Canada Universe Bond Index, which 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 Fund's geographic, sector and credit quality exposure may differ from 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.