Manager Commentary - Q4 2019

While the geopolitical context has rarely been as eventful as in 2019, the major stock markets around the world have held up remarkably well. The U.S. economy remained in pole position throughout the quarter, as the final effects of President Trump's budget reform continued to support consumer spending.

Beyond trade tensions, U.S. data continued to demonstrate the strength of the world's largest economy in the fourth quarter. In fact, almost all of the data released at the beginning of the quarter exceeded forecasters' expectations, pushing the Citigroup economic surprise index to nearly an 18-month peak. The U.S. economy stood out once again by recording, for the third consecutive quarter, GDP growth of 2% or above, annualized.

Unsurprisingly, consumption, once again, explained nearly all of the GDP growth. Several tailwinds have supported household wealth in the last quarter of the year, including a vigorous job market (job creation seemed to have accelerate at year-end), anticipated wage growth, strong stock market returns and healthy real estate price appreciation.

Further, the chairman of the Federal Reserve, Jerome Powell, made it clear that his mid-cycle adjustment is complete, after a third consecutive rate cut at the end of October. Similar adjustment occurred in 1987, 1995 and 1998, each time resulting in a re-acceleration of the U.S. economy and the stock market. The bar is now set very high for an increase in U.S. interest rates. Powell also said that he needed to see a significant and sustained increase in inflation before even considering raising interest rates. Such a clear statement deserves careful consideration. For the time being, leading economic indicators suggest that the chances of such an inflationary surge over the next 12 to 18 months are very slim.

The S&P 500 performed well over the quarter, returning 6.83%. Of the eleven index sectors, nine posted positive returns, with only real estate and utilities posting negative returns. The three top performing sectors were information technology, healthcare, and financials. Information technology and healthcare both posted double-digit returns, while the performance of the financials sector was in the mid single digits.

In terms of relative performance, the fund slightly underperformed its benchmark during the fourth quarter of 2019. Sector allocation contributed to the Fund’s performance, while security selection detracted.

Within sector allocation, the Fund’s underweight position in consumer staples, coupled with its overweight positions in healthcare and information technology, contributed to the fund's relative performance. Consumer Staple was one of the worst performing sectors during the quarter, while healthcare and information technology were the top two performing sectors of the index. Security selection slightly detracted from the Fund’s performance and offset the contributions from sector allocation. Within information technology, Dropbox Inc., Elastic NV and Proofpoint Inc. detracted from the Fund’s performance, as they both underperformed the sector during the period. The underweight position in Microsoft also detracted, as it returned double-digit returns during the quarter. In communication service, the underweight position in Walt Disney Co, coupled with the overweight position in Take-Two Interactive Software, Inc. were also a drag on performance, as Disney delivered strong returns, while Take Two posted negative returns.

The Law of Accelerating Returns states that the same exponential growth factors that made Moore’s law possible, doubling of semiconductor capacity per square inch every 18 months, have extended themselves to all forms of technological progress. In the fund manager’s opinion, ignoring the indisputable parabolic curves emerging across industries and economies is not an option. Thus, the nature of the Fund's strategy is to add value by benefitting from an understanding of the pervasive impacts of disruptive technological innovations. Those impacts are having an increasing influence in every sector of the economy, creating multiple winners and multiple losers from an investment perspective. The fund manager believes that the continuing evolution of the internet and the emergence of artificial intelligence, DNA sequencing, robotics and battery technology makes it a particularly interesting time in history, comparable to the rise of the automobile, electricity and telephone technologies at the beginning of the 20th century.

While U.S. stock markets delivered strong returns for the quarter and for the year, the past 24 months have seen increased volatility and outperformance from defensive, recession-prone sectors (utilities and real estate in particular). While the fund manager avoids forecasting the timing of a recession, he believes that the odds of having a repeat of the 2009 recession are slim, as there are no significant excesses in valuation and/or market behaviour, to justify this rationale. The fund manager believes that we are in the final phases of economic growth deceleration and that a reacceleration is likely in the next few quarters. The fund manager is contemplating the possibility that the U.S. economy is currently living through a productivity shock, which would explain the resilience of economic growth, while inflation remains low. Furthermore, with the Federal Reserve willing to extend the current economic cycle and a U.S. equity cash flow valuation in line with historical averages, the fund manager remains constructive on market returns, but believes that there will be periods of heighten volatility in 2020.

There are many risks on the geopolitical front. The fund manager will be monitoring the tensions with Iran, the upcoming 2020 U.S. election and the trade war with China, even if things have been more constructive on that front recently. The fund manager also sees risks with regions of the global economy that might slip into recession.

In such an environment, the fund manager will continue to closely monitor the Fund’s risk level plans to maintain the Fund’s significant exposure to dominant firms that have strong visibility on their earnings growth.

The fund manager continues to see opportunities in certain segments of the healthcare, communications services and information technology sectors, which have strong exposures to the Fund’s innovation themes, mostly in the small-mid cap space right now.


Fund and Benchmark Performance as at: December 31, 20191 year3 year5 yearSince inception (June 2014)
IA Clarington Thematic Innovation Class - Series A17.2%-2.3%3.6%3.8%
S& 500 Index24.8%13.9%14.2%15.7%


Learn more about IA Clarington Thematic Innovation Class

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 Fund’s benchmark is the S&P 500 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. The Fund’s market capitalization, geographic and sector 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. 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 May 30, 2019, Taylor Asset Management Inc. was removed as subadvisor and Industrial Alliance Investment Management Inc. remained as portfolio manager. Further, the Fund name was changed from IA Clarington Focused U.S. Equity Class to IA Clarington Thematic Innovation Class.