IA Clarington Strategic U.S. Growth & Income Fund
Manager commentary - Q4 2019
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 higher-yielding corporate bonds. We expect to see a continuation of this trend, where small but upward sloping interest rates may cause headwinds for investment grade debt while being relatively benign for high yield. 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 from financials, the consumer sectors and global health care securities. A broad-based approach with a tilt towards quality securities within equities and the high-yield fixed-income space, and less exposure – at least for the next several quarters – to interest rate sensitive securities should provide a good mix of income and capital gains potential during the year.
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. Our exposure within fixed income had an overall average credit rating of BB, while our duration remained low to shield investors against upward moves in interest rates. The Fund posted a return of 8.49% for the last three months of the year, outperforming most fixed-income securities as well as being in-line with the surging S&P 500 Index during the quarter. Our largest contributors to performance were our investments in the financials and technology sectors. Within fixed income, exposure our largest positive contributors came from the consumer and industrials sectors.
Two of the Fund’s top contributors to performance during the past three months were holdings in Apple Inc. and Royal Caribbean Cruise Ltd. Apple continues to perform well on most business fronts and has benefited from its recent growth in services and some of its hardware business lines. 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, 2018||1 year||3 year||5 year||Since inception|
|IA Clarington Strategic U.S. Growth & Income Fund - Series A||13.7%||6.8%||5.5%||5.3%|
|25% Barclays U.S. Aggregate (CAD Hedged) Index, 75% S&P 500 Index||20.6%||11.4%||11.5%||13.4%|
Learn more about IA Clarington Strategic U.S. Growth and Income 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 25% Barclays U.S. Aggregate Index and 75% S&P 500. The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. The Barclays U.S. Aggregate Index is composed of securities from the Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and Asset-Backed Securities Index. The S&P 500 Index includes 500 leading companies in leading industries of the U.S. economy and is widely regarded as the best single gauge of the U.S. equities market. Although the S&P 500 Index focuses on the large cap segment of the market, its coverage includes approximately 80% of the market. The Fund’s equity component invests in dividend paying stocks while the benchmark is comprised of companies which may not necessarily pay a dividend. The Fund's fixed-income component can invest in both investment grade and high yield bonds while the benchmark has exposure only to investment grade bonds. 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. Effective November 4, 2013, the investment objective and strategies of the Fund were changed, and IA Clarington Investments Inc. was appointed sub-advisor to the Fund.