Manager commentary - Q4 2019

Both the MSCI World Index (Canadian dollar terms) and the S&P/TSX Composite Index delivered impressive fourth quarter results to cap off a strong 2019 for global and Canadian equities. A third rate cut by the U.S. Federal Reserve, improving manufacturing Purchasing Managers’ Index (PMI) levels and a pragmatic multi-phase strategy to the trade negotiations between the U.S. and China eased escalating tariff concerns and set a floor for equity markets to continue their rally into year-end. 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. Against this backdrop, the Canadian bond market declined during the period.

During the quarter, fixed-income, global equity and income fund strategies added value relative to benchmarks while the Canadian equity strategy detracted. The Fund held significantly higher than normal levels of cash heading into the fourth quarter as anxiety among market participants was elevated with an uncertain economic outlook and increasing levels of geopolitical and financial risks. However, the three positive catalysts (rate cut, economic indicators and trade) saw the narrative pivot and allowed the fund manager’s sentiment to improve substantially and reduce the Fund’s defensive cash levels.

In terms of ESG and engagement activity in the second quarter, Vancity Investment Management Ltd. (VCIM) engaged with financial companies on gender pay equity, filing shareholder resolutions with Royal Bank of Canada, Canadian Imperial Bank of Commerce, Manulife Financial Corp. and Sun Life Financial Inc. VCIM filed shareholder resolutions with Toronto-Dominion Bank and Bank of Nova Scotia requesting that their boards of directors consider adopting a moratorium on financing oil and gas projects in the Arctic. VCIM filed shareholder resolutions with Canadian National Railway and Canadian Pacific Railway Ltd., calling on both companies to provide quantitative disclosure on pesticide use along rail corridors. VCIM filed a shareholder resolution with Gilead Sciences, Inc. requesting that the company report on the provision of equitable access to pre-exposure prophylaxis for HIV/AIDS prevention. VCIM co-filed a shareholder resolution requesting Alphabet Inc. to address human rights risks associated with Google LLC’s provision of products and services. VCIM supported a collaborative shareholder initiative calling on quick service restaurants to increase disclosure on policies, practices and targets related to production of animal protein.

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.

With 2019 being one of the best years for Canadian equity markets since 2009, we remain optimistic that Canadian equity fundamentals will continue to offer opportunities for patient investors in 2020. Canada has not escaped softening earnings expectations that have been evident globally, but profitability remains elevated, cash flows are above historical averages, dividends and buybacks continue to grow and valuations are relatively attractive. Continued positive macro forces in the U.S., our largest trading partner, will be a key factor supporting renewed corporate investment, commodity price stability and further economic growth for Canada. Although our outlook for positive global equity market returns in the coming year has support from economic indicators, it will likely be bumpy at times as central bank liquidity has again suppressed market volatility levels to historic lows. Company fundamentals will matter, and we do not expect returns driven solely by multiple expansion alone, as in 2019. Sector rotation, profit taking and shorter-term market corrections may be a factor in a presidential election year that may offer opportunities for long-term investors to further deploy defensive cash holdings to own high-quality businesses at attractive valuations.

Investing in a diversified portfolio of fossil fuel-free investment strategies remains an attractive approach to managing risk while seeking competitive returns to meet an investor’s long-term goals.

Fund and benchmark performance as at December 31, 20191 year3 year5 year10 year
IA Clarington Inhance Conservative SRI Portfolio – Series T610.8%4.0%3.3%4.3%
15% MSCI World Index1, 35% S&P/TSX Composite Index, 50% FTSE Canada Universe Bond Index14.5%6.0%5.7%6.5%



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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 benchmark is a blend of 50% FTSE Canada Universe Bond Index, 35% S&P/TSX Composite Index and 15% MSCI World 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 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 has exposure to securities of companies which meet the fund manager's socially responsible investment principles, while the holdings in the benchmark may not align with these principles. The Fund’s market capitalization, geographic, sector exposure and credit quality 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. 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.