Manager commentary - Q4 2019

While the geopolitical context has rarely been as turbulent as in 2019, equity markets have held up remarkably well. The fund manager had expected a rebound from the lows of late 2018, but was still surprised by the extent of the rebound. The MSCI All Country World Index (ACWI) saw the strongest gain since 2013, rising by nearly 25%, while the major bond indices approached a return of 10%.

A crucial theme for 2019 that should continue to support risk assets in 2020 is the synchronized fiscal easing by central banks, including the U.S. Federal Reserve and the European Central Bank, but not forgetting those of several emerging countries. The relationship between the net number of central banks resorting to accommodative monetary policies and the global economic cycle has historically been encouraging, suggesting a favourable context for 2020.

The U.S. economy remained the most resilient throughout the year, as the final effects of President Trump’s fiscal reform supported consumer spending. The world’s largest economy – which now depends almost exclusively on consumption – should once again avoid a recession in 2020. The fund manager currently estimates the probability of a recession over the next 12–18 months to be less than 30%.

The Canadian economy also posted strong returns in 2019 due, in part, to its strong labour market. Job creation was excellent in 2019, and wages continue to grow at a healthy pace. The resilience of the Canadian economy is supported by its historically high population growth, which is mainly driven by immigration. Although the fund manager’s enthusiasm is tempered on this side of the border for 2020, he believes that Canada will benefit from a global economic recovery. While the fate of global trade remains the main source of risk, at the end of the year, the Bank of Canada suggested that it has room to manoeuvre and will not hesitate to act in the event of a slowdown.

An important point to remember is that a minority government typically remains in power for an average of two years before it is defeated and Canadians are invited back to the polls. In the meantime, each of the parties, including the elected party, works to prepare for the next election. Clearly, the path was paved for the announcement of expansionary measures and Canadians were served with a tax cut aimed at the middle class. Third-quarter GDP data revealed the importance of strong consumer spending, which alone buoyed Canadian economic growth (1.3% in Q3) with a jump of 1.6%. The message now being conveyed by the Bank of Canada is generally optimistic: a resilient economy, despite the headwinds caused by the trade war between China and the U.S.

Over the fourth quarter, the Canadian bond market, as measured by the FTSE Canada Universe Bond Index, returned -0.9% (6.9% in 2019). The FTSE Canada Short Term Bond Index returned 0.1% (3.1% in 2019) and the FTSE Canada Long Bond Index returned -1.9% (12.7% in 2019).

The U.S. equity market, as measured by the S&P 500 Index, delivered a total return of 9.1% in the fourth quarter (6.8% in Canadian dollar terms). The Canadian stock market, as measured by the S&P/TSX Composite Index, rose 3.2%. For 2019, the S&P 500 Index returned +31.5% (+24.8% in Canadian dollar terms) and the S&P/TSX Composite Index returned +22.9%.

The European market, as represented by the MSCI Europe Index, posted gains of 4.5% in the fourth quarter and 23.8% in 2019 (6.7% and 18.3%, respectively, in Canadian dollar terms). The MSCI EAFE Index rose 5.2% during the quarter and 21.7% in 2019 (5.9% and 15.8%, respectively, in Canadian dollar terms). The MSCI World Index posted gains of 7.5% for the quarter and 27.3% in 2019 (6.3% and 21.2%, respectively, in Canadian dollar terms). Emerging markets, as measured by the MSCI Emerging Markets Index, returned 9.6% for the quarter and 18.5% in 2019 (9.6% and 12.9%, respectively, in Canadian dollar terms).

The Fund underperformed its benchmark during the fourth quarter of 2019. Its negative relative return was mainly due to its higher fixed-income duration relative to its benchmark, as yields increased during the quarter.

The equity component of the Fund posted a positive relative return during the fourth quarter. The portion allocated to equity within the portfolio (approximately 10.78% of the portfolio at quarter-end) slightly improved the Fund’s performance. This is the reason why the Fund generated positive returns despite the poor performance of its fixed-income sleeve.

Series A of the Fund did not “click” during the quarter, as the Fund’s month-end NAV did not achieve a new month-end historical high.

The main global risk in 2020 remains a further breakdown in U.S.-China relations. If the recent contraction in world trade were to continue for a few more quarters, it could significantly weigh on the growth prospects for the global economy and corporate profits. Other factors to watch for are the evolution of Brexit, as well as rising tensions between the U.S. and Iran.

Fund and benchmark performance as at December 31, 20191 year3 year5 year10 year
IA Clarington Target Click 2030 Fund - Series A10.2%3.6%2.4%4.2%
20% MSCI World Index1, 80% FTSE Canada All Government Bond Index9.3%5.0%4.7%5.7%

 

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1MSCI 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 FTSE Canada All Government Bond Index (80%) and MSCI World Index (20%). 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 All Government Bond Index consists of a selection of investment-grade Government of Canada fixed-income securities issued domestically in Canada. The FTSE Canada All Government Bond Index is comprised of Canadian investment grade bonds and has different portfolio duration characteristics. 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’s market capitalization, geographic, sector and credit quality exposure 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. On December 5, 2011, the portfolio manager changed. This change may have affected the Fund's performance.