Manager commentary - Q4 2019

As of November 4, 2019, the IA Clarington Moderate Portfolio has been renamed IA Wealth Moderate Portfolio. With this change, a number of enhancements were introduced, including the addition of several third-party sub-advisors and refinements to the portfolio’s asset class parameters.

Investor sentiment improved over the last quarter as two important macro risks have diminished. First, the United States and China agreed on a partial trade agreement, which removed the risk of a significant increase in U.S. tariffs on important consumer goods. Second, the probability of a Brexit resolution increased as Boris Johnson’s Conservative Party won a majority during the British election on December 12th.

Global economic fundamentals also improved during the quarter, as some global manufacturing leading indicators began to show signs of reacceleration. Furthermore, many central banks continued to ease their monetary policies by cutting interest rates. The fund manager believes that monetary policies should continue to be accommodative in 2020, as central banks should now remain on the sidelines. In the U.S., the chairman of the Federal Reserve, Jerome Powell, made it clear that his mid-cycle adjustment is complete. The bar is now set very high for an increase in interest rates, without a significant and sustained increase in inflation.

Better economic backdrops and lower geopolitical risks pushed global equity markets to historic highs, with major indices increasing more than 7% during the quarter. The MSCI Emerging Markets Index and the S&P 500 Total Return Index led the group, with returns of over 9%. In the fixed-income market, government bond yields have increased, with the 10-year U.S. treasury yield increasing by approximately 25 basis points. Low credit quality fixed-income assets performed relatively well during the period, with U.S. corporate high-yield bonds returning approximately 2.6%, U.S. leveraged Loans returning 1.7% and emerging market bonds returning approximately 2.1%.

Overall asset allocation contributed to the Fund’s relative performance, as equities outperformed fixed income in the last quarter of the year. Notably, the Fund’s overweight position in emerging market equities and bonds contributed to relative performance, as the region had one of the top performing markets during the quarter.

Fund selection detracted slightly from the Fund’s relative performance; IA Clarington U.S. Dividend Growth Fund was the top detractor and IA Clarington Canadian Small Cap Fund was the top contributor.

Currency hedging on the Canadian dollar versus the U.S. dollar had a positive impact on the Fund’s performance during the quarter, as the U.S. dollar depreciated versus the loonie by approximately 3%.

With no recession in sight over the next 12 to 18 months, the fund manager expects the bull market to continue into 2020 and beyond. Given this context, the fund manager suggests an overweight position in equities, particularly in cyclical and value-oriented sectors. Geographically, this results in an overweight position in EAFE (Europe, Australasia and the Far East), emerging markets and Canadian markets as compared to a neutral or underweight position in the U.S. market.

According to the fund manager, Interest rates should increase modestly over the next 12 months as economic data improves and geopolitical risks gradually dissipate. Based on this, the fund manager’s 2020 bond positioning should remain neutral to underweight, although he believes that this asset class will provide some downside protection in the event of an equity market downturn. Based on the fund manager’s models, the Canadian dollar appears to be undervalued and, as a result, the fund manager will continue to actively hedge the Fund’s exposure to the U.S. dollar until the loonie returns to its fair value of approximately 79 cents versus the U.S. dollar (according to the fund manager’s models).

Looking forward, the main risks are a breakdown in the relationship between the United States and China, signs of disappointment relative to the expected stabilisation of economic data in Europe and Asia and an escalation of geopolitical tensions in the Middle East.

Fund and benchmark performance as at December 31, 20191 year3 yearSince inception (Apr. 2016)
IA Wealth Moderate Portfolio – Series B 8.9%2.5%3.4%
5% S&P 500 Index, 10% S&P/TSX Composite Index, 15% MSCI World Index1, 15% BofA Merrill Lynch U.S. High Yield Master II Constrained Index (CAD Hedged), 55% FTSE Canada Universe Bond Index13.3%6.5%6.8%

 

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1Source: MSCI Inc. MSCI 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 Fund’s strategy is to invest in other investment funds. 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 20% MSCI World Index, 30% S&P/TSX Composite Index, 30% S&P 500 Index and 20% FTSE Canada Universe Bond Index. The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. 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 24 developed market country indices. 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 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 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 BofA Merrill Lynch U.S. High Yield Master II Constrained Index (CAD Hedged) tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The Fund's geographic, sector and credit quality exposure may differ from that of the benchmark. 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’s sector and geographic exposure may differ from that of the benchmark. The Fund may have different currency risk exposure than 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.