Manager commentary - Q4 2019

The Fund invests substantially all of its assets in units of IA Clarington Strategic Equity Income Fund (“the Reference Fund”). Its performance therefore largely reflects the performance of that fund. All reference made to “the Fund” hereinafter reflects a discussion of the portfolio holdings and characteristics of the Reference Fund.

As we reflect back on 2019, and in particular the final quarter, one cannot help but think about how the year progressed after such a volatile and risky 2018. The U.S. Federal Reserve and other central banks eased rates during the year, there was meaningful progress on trade deals and global economic growth generally improved over the final quarter. While 2019 earnings growth was relatively muted, what matters most for the future is that there seems to be fewer risk factors that could cause a recession. We expect the North American, European and Chinese economies to improve as 2020 progresses.

The fourth quarter of 2019 was strong across most asset classes. While medium-term interest rates increased during the quarter, likely in reaction to a positive outlook, they remained contained and not overly oppressive with respect to equities and most corporate bonds. We expect to see a continuation of this trend, where small but upward sloping interest rates may cause headwinds for defensive equity sectors while likely being a tailwind to other parts of the market, including financials. The current environment – upwardly biased interest rates in the U.S. and Canada with moderate economic growth – should bode well for equity investments across most asset sectors.

Our outlook for investment returns in 2020 is positive overall, and we expect positive relative performance in financials, consumer sectors and global health care securities. We have a broad-based approach with a tilt towards quality securities and are maintaining our current exposure to global markets, in particular the U.S.

The Fund was less defensively positioned as the year progressed, but generally held more cash than normal and had a meaningful exposure to defensive stocks to help protect investors against unforeseen circumstances. The Fund posted a return of 4.26% during the fourth quarter, outperforming the benchmark . The largest positive contributors to performance were investments in the industrials and consumer sectors.

The Fund’s top two individual contributors to performance during the past three months were holdings in CVS Health Corporation and Royal Caribbean Cruise Ltd. CVS continues to execute on its business transformation strategy and is relatively undervalued. Royal Caribbean is considered one of the best operators in the sector. It is benefitting from improving financial results and is undervalued relative to its cash flow.

The largest detractor from performance was the Fund’s exposure to Unilever N.V. In December, the company preannounced operating results that lowered its expected organic growth rates to the bottom of previously disclosed ranges. While fundamentally there has been no change, lower growth expectations caused a stock price correction.

Fund and benchmark performance as at December 31, 20191 year3 year 5 yearPerformance start date
(Nov. 2013)
IA Clarington Strategic Equity Income Class - Series A15.2%5.3%4.5%5.8%
S&P/TSX Composite Index22.9%6.9%6.3%7.2%

Learn more about IA Clarington Strategic Equity Income Class

The performance data comparison presented is intended to illustrate the historical performance of the IA Clarington Strategic Equity Income Class as compared with historical performance of widely quoted market indices. As this fund invests substantially in its Reference Fund (IA Clarington Strategic Equity Income Fund), the differences discussed are those of the Reference Fund. There are various important differences that may exist between the Fund and the stated indices that may affect the performance of each. 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’s invests in dividend paying stocks while the benchmark is comprised of companies which may not necessarily pay a dividend. The Fund may have exposure to equities domiciled both in Canada and outside of Canada while the benchmark only has exposure to equities domiciled in Canada. The Fund may have currency risk exposure while the benchmark has none. 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 October 3, 2013, the investment objective and strategies of the Fund were changed and IA Clarington Investments Inc. was appointed sub-advisor to the Fund.