Manager commentary - Q4 2019

IA Clarington Inhance Monthly Income SRI Fund outperformed its balanced benchmark in the fourth quarter while continuing to add to positive Fund performance year to date. Equities, corporate bonds and preferred shares all generated positive returns over the period while equity stock selection detracted from performance relative to the equity benchmark. The Fund’s overall allocation to fixed income (bonds and preferred shares) averaged 25.1%, underweight the blended benchmark weight of 35%. The underweight allocation to fixed income contributed to performance, as equities outperformed fixed income during the quarter.

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. Government of Canada bond yields were 11 to 34 basis points higher across the curve.

The Fund’s fixed-income allocation outperformed the FTSE Canada Universe Bond Index, driven by the Fund’s allocation to preferred shares, which outperformed bonds significantly and are not in the benchmark index. Some of the Fund’s rate-reset preferred shares rallied sharply as the broad-based increase in bond yields pushed expected future dividends higher. Also contributing to the outperformance versus the index was the significantly shorter duration of the Fund’s bonds. The Fund focuses on short-maturity corporate bonds and does not hold any long-maturity or government bonds. Long-maturity bonds, Federal bonds in particular, underperformed during the period. An overweight to real estate and an underweight to energy detracted from the performance of the equity portion of the Fund. This was partially offset by positive stock selection in communication services and real estate. The renewable power exposure in the utilities sector was once again an important positive contribution from both a sector allocation and stock selection perspective.

Vancity Investment Management Ltd. (VCIM) actively repositioned the fund in the fourth quarter. New portfolio positions were initiated in telecommunications firm BCE Inc.; office properties real estate investment trust (REIT) Allied Properties Real Estate Investment Trust; and U.S. skilled nursing and seniors housing REIT Ventas Inc. Funds were sourced from cash on hand and taking profits in some positions such as Brookfield Renewable Energy Partners LP and engineering firm WSP Global Inc. During the quarter, the Fund also completed some short corporate bond extension trades.

In terms of ESG and engagement activity in the fourth quarter, 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 also filed a shareholder resolution with Canadian National Railway, calling on the company to provide quantitative disclosure on pesticide use along rail corridors.

Following the Fund’s third-quarter transition to fossil fuel free, cash levels remained at higher-than-normal levels as anxiety among market participants was elevated with an uncertain economic outlook and increasing levels of geopolitical and financial risks. However, three positive catalysts (a third U.S. rate cut, a positive turn in economic indicators and trade improvements) saw the narrative pivot and allowed the fund manager’s sentiment to improve substantially and reduce the Fund’s defensive cash levels in the fourth quarter. 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 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.

Fund and benchmark performance as at December 31, 20191 year3 year5 yearSince Performance Start Date 
10 year
IA Clarington Inhance Monthly Income SRI Fund – Series T615.0%4.4%4.4%6.3%
40% FTSE Canada Universe Bond Index, 60% S&P/TSX Composite Index16.3%5.7%5.2%6.0%

 

Learn more about IA Clarington Inhance Monthly Income 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 benchmark is a blend of 40% FTSE Canada Universe Bond Index and 60% S&P/TSX Composite 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 Fund holds 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.