Manager commentary - Q4 2019

The Fund invests substantially all of its assets in units of IA Clarington Strategic 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 higher-yielding corporate bonds. We expect to see a continuation of this trend, where small but upward sloping interest rates 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 3.00% for the last three months of the year, outperforming most fixed-income securities as well as being in-line with the surging S&P/TSX Composite Index during the quarter. Our largest contributors to performance were our investments in the consumer sectors and financials. Within fixed income, our largest contributors came from the energy 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 year5 year10 year
IA Clarington Tactical Income Class - Series T611.9%4.6%3.2%3.9%
40% FTSE TMX Canada Universe Bond Index, 60% S&P/TSX Composite Index16.3%5.7%5.2%6.0%

Learn more about IA Clarington Tactical Income Class

The performance data comparison presented is intended to illustrate the historical performance of the IA Clarington Tactical Income Class as compared with historical performance of widely quoted market indices. As this fund invests substantially in its Reference Fund (IA Clarington Strategic 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 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'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 have exposure to equities and bonds domiciled both in Canada and outside of Canada while the benchmark only has exposure to equities and bonds 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. 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 December 30, 2014, the portfolio manager was changed from Aston Hill Asset Management Inc. to Industrial Alliance Investment Management Inc. Effective December 30, 2014, the investment objectives and strategies of the Fund were changed. Effective March 22, 2019, the reference fund of the Fund was changed to IA Clarington Strategic Income Fund.