iA Clarington 2021 Mid-Year Review

Dan Bastasic MBA, CFA

IA Clarington Focused Balanced Class
IA Clarington Focused Balanced Fund
IA Clarington Strategic Corporate Bond Fund
IA Clarington Strategic Equity Income Fund
IA Clarington Strategic Equity Income Class
IA Clarington Strategic Equity Income GIF
IA Clarington Strategic Income Fund
IA Clarington Strategic Income GIF
IA Clarington Strategic U.S. Growth & Income Fund
IA Clarington Tactical Income Class

What was the initial outlook in January 2021?

After all the uncertainty related to the events of 2020, we were relatively certain at the beginning of the year that the historic injection of liquidity by central banks and their commitment to keep borrowing costs low were going to backstop the economy and most securities markets until economic normalization returned. We expected economic growth and earnings to accelerate to levels not seen in decades as a result of the combined efforts of central banks and a return of our economic engine.

We expected this abnormal growth to propel equities and high-yield bonds for years to come relative to interest rate sensitive government bonds. Financials, cyclicals and consumer-related securities would most likely be the largest beneficiaries of current monetary policies and the backstop provided by excess liquidity in the economy.

Within fixed income, we preferred to allocate capital towards high-yield corporate debt while maintaining a low-duration strategy. We predicated this decision on many of the same arguments that shaped our expectations for the economy, including excess money supply and pent-up demand, coupled with lower defaults and a lack of alternatives for yield.

How have the portfolios been positioned to take advantage of this outlook?

We increased our exposure to financials as well as some consumer-related equities at the end of last year and during the first two quarters of 2021. Our primary exposure in fixed income came from high-yielding bonds with a BB- average credit quality. Low duration remains a key focus of our investment strategy as we expect interest rates to follow economic growth higher during the year and into 2022, creating headwinds for interest rate sensitive portfolios.

We increased our overall equity exposure during the first half of the year relative to the prior year, as we believed the risk-to-reward ratio favoured a higher exposure to equities within our funds. Our focus was to increase exposure to securities that would benefit from expanding economic growth, higher prices and higher interest rates. We remained majority hedged in our U.S. dollar exposure, as we expect the

What has transpired this year?

There have not been many surprises this year in terms of the return behavior of different asset classes. Stimulus is high, consumer savings rates are high and global economies have just begun to reopen after many fits and starts over the past 12 months. Sectors that did well last year have generally lagged in the first half of 2021, including technology, materials and gold, while those that were overly burdened with last year’s lockdowns have done well to recover, including financials, energy, and consumer-related, as well as the high-yield bond asset class.

As expected, interest rates have increased during the first half of the year, causing problems for long-duration portfolios while being a source of economic growth confirmation for corporate credit. The Canadian dollar has appreciated relative to the U.S. dollar as growth has shifted to economies with higher cyclical and commodity exposure.

What is your outlook for the rest of 2021?

We remain positive on equities and high-yield corporate credit for at least the next 12 months. Although the rate of economic growth has likely peaked during the current quarter and will probably decline from current high levels, it will remain relatively strong, underpinned by $2.5 trillion of excess consumer savings and loose monetary and fiscal policies. We expect a value bias to continue for the remainder of the year and interest rates to continue moving towards 1.90% on the 10-year U.S. government bond. Recent U.S. dollar appreciation will likely be short lived and we expect a weaker U.S. dollar from current levels as the year progresses.

There will be periods of higher volatility as we approach year-end, but we expect them to be relatively brief. We believe 2022 and 2023 are more likely to see pronounced corrections and higher bouts of volatility – a bull market lifts all boats, until it doesn’t. We remain balanced in our investment approach between economic-sensitive securities and defensives that provide higher yield potential and favourable characteristics for those unforeseen moments that are sure to arrive.

Matthew J. Eagan MBA, CFA

Eileen N. Riley MBA, CFA

David W. Rolley CFA

Lee M. Rosenbaum MBA

IA Clarington Loomis Global Allocation Class
IA Clarington Loomis Global Allocation Fund
IA Clarington Loomis Global Equity Opportunities Fund
IA Clarington Loomis Global Equity Opportunities GIF
IA Clarington Global Opportunities Class
IA Clarington Global Opportunities Fund

What was the initial outlook in January 2021?

We were encouraged by the growth outlook coming into the new year. Consumers were healthier in aggregate, the housing market was recovering, central banks remained accommodative, and the positive developments on vaccines suggested there was light at the end of the tunnel.

We anticipated further volatility in global equities as the world continued to contend with the pandemic. However, we believed – and continue to believe – our portfolio of companies had the flexibility to navigate the environment through sustainable competitive advantages and strong balance sheets.

In fixed income, investment grade credit spreads (the incremental yield relative to comparable-maturity Treasuries) looked fairly expensive at the end of 2020, given the strong rally at the end of the year. Nevertheless, we felt there was better value in corporate bonds given the positive economic outlook. Our view was that near-record-low interest rates, sizeable liquidity and strong investor demand for yield would help keep volatility at bay while additional fiscal stimulus, solid consumer health and vaccine efficacy would provide a considerable tailwind for corporate profits.

We expected global developed market yield curves would remain fairly anchored at the front end, but longer-term yields could drift higher as the economic recovery took hold. We anticipated an environment fundamentally similar to pre-crisis conditions, characterized by moderate growth and limited inflationary pressure. Under these circumstances, the potential for bond yields to rise would be fairly limited.

Lastly, we anticipated the dollar would continue to slowly trend weaker relative to other world currencies, given strong investor risk appetite and a weakening dollar are historically consistent with cyclical improvement in the global economy. Widening U.S. fiscal and trade deficits also supported this view.

How have the portfolios been positioned to take advantage of this outlook?

As we entered 2021, IA Clarington Loomis Global Allocation Fund was positioned with a majority equity allocation, reflecting our view that valuations were more attractive in equities than fixed income.

In both the global allocation mandate and our pure equity funds, we began the year with significant exposure to the information technology, consumer discretionary and health care sectors. We had no exposure to utilities, real estate and energy stocks.

In fixed income, we reduced relative credit exposure further during the first quarter on valuation concerns, but retained a modest overweight as global central bank support remained significant and economic acceleration was anticipated. We remained short duration as global growth recovered and inflation became more of a concern.

At the mid-year point, we continue to maintain a majority equity allocation in IA Clarington Loomis Global Allocation Fund. Our equity sector positioning across all mandates remains largely the same – we continue to find opportunities in information technology, consumer discretionary and health care and have no exposure to utilities, real estate and energy.

In fixed income, we further reduced duration to an underweight position given our expectation for government bond yields to rise alongside continued economic expansion and potential for progression toward central bank policy normalization. We continue to favour select local emerging markets where high real yields are attractive and a potential recovery may counteract post-pandemic debt challenges.

What has transpired this year?

Global equity markets were strong in the first half of 2021, notwithstanding some volatility. In the first few months of the year, the global growth outlook was buoyed by positive news around the COVID-19 vaccine rollout and a possible ‘return to normal.’

Despite inflation and labour shortages emerging as risks later in the first half of the year, investors continued to support equities, with some indices reaching record highs. The MSCI All Country World Index registered just over 9% in Canadian-dollar terms, with the majority of sectors posting positive results. The energy, financials, communication services and real estate sectors outperformed the broader market, while the utilities sector registered negative returns.

In fixed income, spreads tightened during the first half of the year. Meanwhile, the 10-year U.S. Treasury, which began the year at 0.91%, had risen to 1.74% by the end of the first quarter, only to then move back down to 1.47% by the end of the second quarter.

The uptick in vaccination rates over the last six months has created economic momentum in terms of job hiring, consumer spending, corporate earnings and consumer sentiment. This pickup in growth has led to markedly higher inflation, which has been particularly pronounced in the U.S. Notably, labour shortages and supply chain congestion have disrupted supply in certain sectors.

What is your outlook for the rest of 2021?


The economic recovery in large part continues to depend on the successful rollout of vaccines on a global scale. While much of the developed world has made demonstrable progress in terms of infection rates, COVID-19 cases continue to grow in many emerging markets, which on balance have fewer resources to manage the virus.

A recovery is also reliant on the scope of continued fiscal and monetary support, and other relief packages, in the U.S. and globally. Thus, our focus remains on investing in companies we believe have the ability to successfully navigate the current environment and generate value over the longer term.

We currently hold a diverse group of technology names spanning digital payments, cloud storage and collaboration, and semiconductor manufacturing and equipment. We have selective exposure to consumer-related names, focusing on best-in-class e-commerce platform retailers and physical retailers with compelling value propositions. We also have exposure to the growing online fitness industry.

Our health care exposure is focused on higher-growth areas of the industry and away from areas exposed to reimbursement risk. We continue to have no direct exposure to energy or utilities, as we typically do not find many opportunities in these sectors that exhibit our three alpha drivers – quality, intrinsic value growth and attractive valuation.

As the pandemic continues to evolve, there could be further volatility in global equities. However, we believe the companies in the portfolio have sustainable competitive advantages and strong balance sheets, which should enable them to weather challenging environments and quite possibly emerge stronger.

Fixed income

The pickup in growth has led to markedly higher inflation across a number of metrics and put the fear of higher, sustained inflation on the radar for the first time in decades. We expect inflation to gradually shift upwards after the transitory effects roll off given the enormous fiscal stimulus and the cyclical upturn from a growing economy. We will look to the labour market – particularly wages – and shelter components for evidence of more persistent inflationary pressures.

Credit spreads should remain well supported by the improvement in corporate profits and continued accommodative monetary and fiscal policies. We expect positive earnings momentum to continue, although at a more moderate pace. Companies should be able to pass on higher input costs to their customers, keeping profit margins steady in the near term.

We expect the U.S. dollar to remain broadly rangebound, having recently strengthened on expectations of a slightly firmer U.S. Federal Reserve. This may unwind in the future, if either non-U.S. growth or policy catch up, or the U.S. current account widens from a deferred consumption spree.

As at June 30, 2021, unless otherwise indicated.
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