Manager commentary - Q4 2019

The IA Clarington U.S. Equity Class Series A returned 3.5% during the fourth quarter, versus 6.8% for the S&P 500 TR Index ($CAD).

The information technology and health care sectors were sources of strength for the benchmark index, delivering double-digit gains during the quarter. Over the year, the index returned 24.8% in Canadian dollar terms, driven by outsized gains in the information technology, communication services and financials sectors.

Within the portfolio, underweight exposure to the underperforming consumer discretionary, real estate and utilities sectors resulted in a favourable allocation effect for the quarter. Nonetheless, the Fund’s underweight within the strong-performing information technology sector was the most notable detractor from relative returns. The Fund’s above-average cash position over the period also detracted from relative returns.

The strategy’s top contributing investments in the quarter were JPMorgan Chase & Co., Berkshire Hathaway Inc. and Intel Corp. The largest detractors were Molson Coors Beverage Co., C.H. Robinson Worldwide Inc. and Unilever N.V.

As of December 31, 2019, the Fund held 36 positions across eight market sectors with a cash balance of approximately 3.3%. After the Fund transition in mid-2019, the portfolio is now fully invested and largely reflects the manager’s intended exposures from a sector and individual holdings perspective.

Fund activity during the period was primarily focused on increasing exposure to the industrials, healthcare, financials and consumer discretionary sectors, while trimming exposure within consumer staples and communication services. These actions further improved portfolio diversification while marginally tilting exposure toward more economically sensitive areas of the market that are currently exhibiting lower valuation risk.

UnitedHealth Group Inc. (UNH) was added to the Fund during quarter. UNH is the largest provider of private health insurance in the U.S. The company’s scale and integrated service offering have delivered above-average profitability and intrinsic value growth over the company’s history. UNH shares were acquired at an attractive valuation and offer strong return potential from current levels.

Shares of Booking Holdings Inc. (BKNG) were also added to the Fund. The company is a leading player in the online travel advisor industry and has historically delivered strong per share growth and returns on capital. BKNG is expected to benefit from continued favorable industry trends going forward.

As the decade-long U.S. bull market continues to produce strong investment gains for many investors, the expected return profile for U.S. equities continues to moderate. Valuation levels in many areas of the market remain above their long-term averages and offer little margin of safety. Global monetary policy remains largely focused on stimulating economic growth and sustaining the current cycle. Nonetheless, expectations for economic growth remain muted and below trend levels. Within this low growth environment, businesses are expected to deliver only modest per share earnings growth, with near record levels of share repurchases supporting this expected growth. Against this fundamental backdrop, it is difficult to make the case for a further expansion of valuation multiples.

The portfolio continues to emphasize quality of holdings, valuation discipline and proper diversification. The fund trades at a noteworthy discount on price/earnings, price/book and price/cash flow multiples, while financial leverage stands at less than half of market levels on a net debt/equity basis. The current focus remains on protection of capital rather than trying to chase index returns.

Fund and benchmark performance as at December 31, 20191 year3 year5 yearSince inception (Jul. 2011)
IA Clarington U.S. Equity Class – Series A6.8%-0.9%3.2%8.3%
S&P 500 Index24.8%13.9%14.2%17.7%


Learn more about IA Clarington U.S. Equity Class

The performance data comparison presented is intended to illustrate the Fund’s historical performance 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 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. equity market. The Fund’s market capitalization and sector exposure may differ from that of the benchmark. The Fund’s currency risk exposure may differ from 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, IA Clarington Sarbit U.S. Equity (Unhedged) Class was renamed to IA Clarington U.S. Equity Class. Effective May 30 2019, the sub-advisor of the Fund was changed from Sarbit Advisory Services Inc. to QV Investors Inc ., and the Fund’s investment strategies changed.