iA Clarington Investments -Perspectives on Market Volatility

Dan Bastasic MBA, CFA

Senior Vice-President, Investments & Portfolio Manager

IA Clarington Investments Inc.

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 Tactical Income Class

What is causing this volatility and how long do you think it will last?

• Towards the end of 2021, we believed that this year would likely have at least two periods of high volatility, with one likely occurring in the first part of 2022.
• The reasons were based on a reversion to the mean for a number of factors that supported excess valuations and the flow of funds, particularly into stock markets.
• We are of the opinion that this year will be trending lower from multi-year peaks in economic growth, earnings growth, low interest rates and excess liquidity. This expected normalization process seems to be right on schedule for the first part of the year.
• We expect there to be a consolidation and improvement in market sentiment and prices as we exit the first quarter and an adjustment occurs to account for “lower highs” in all things that support equity prices.

How is this volatility impacting your mandates?

• We have raised cash during the first part of January in most of our mandates to account for the expected volatility.
• Our fixed income is in the higher-quality part of the high-yield market, reducing business risk.
• Our equity exposure is defensive compared to passive investment strategies.

Are you buying during this sell-off and, if so, in which sectors/asset classes?

• We are not actively or broadly buying at the moment, as we believe our portfolios are well structured and in line with our expectations for higher volatility of returns during the coming 12 months.
• Our cash levels have increased since the end of 2021, and we plan on investing in individual names as those opportunities present themselves.

• As the markets move from trend and momentum investing to more of a fundamental approach, dividend growth stocks as well as financials stocks are attractive given earnings prospects and current valuations, which are not stretched relative to history.
• From a fixed-income perspective, higher-yielding bonds with low duration will get most of our attention until the risk and return dynamics shift from economy-sensitive credit to interest rate-sensitive fixed income. That could come at any time, but likely not until sometime next year.

Where do you see the opportunities and risks going forward?

• Geographically, we believe North America-centric security selection with some European exposure will provide the best opportunity for risk-adjusted returns for our clients over the next 12–24 months.
• Sectors with exposure to economic growth and interest rates will likely be better places to allocate capital during this year.
• We think the risks to cyclical stocks are elevated during a normalization process; however, we believe there will be an opportunity to increase exposure at some point in the next quarter or two. This thesis, if correct, bodes well for exposure to Canadian-based securities.
• From a fixed-income perspective, we expect defaults to remain low, rates to increase slowly and the economy to continue to grow at higher levels than generally experienced over the past eight years, leading us to favour high-yield bonds.

Matthew J. Eagan MBA, CFA

Executive Vice-President & Portfolio Manager

Eileen N. Riley MBA, CFA

Vice-President & Portfolio Manager

David W. Rolley CFA

Vice-President & Portfolio Manager

Lee M. Rosenbaum MBA

President & Portfolio Manager

Loomis, Sayles & Company, L.P.

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

What is causing this volatility and how long do you think it will last?

• We believe much of the volatility is driven by a foggy inflation outlook and the Federal Reserve’s recent hawkish pivot.
• Distortions in economic data may continue to cause some uncertainty over the next few months; as a result, volatility may remain somewhat elevated until the market has more conviction about the path of interest rates.

How is this volatility impacting your mandates?

• While there has been downward pressure on stock prices, the underlying fundamentals of the businesses we own have not changed.
• Accordingly, we have not made significant changes to our portfolio as a result of this month’s volatility.
• We continue to focus on long-term alpha drivers: quality, intrinsic value and valuation.
• The companies in our portfolio have sustainable competitive advantages and strong balance sheets. This enables our holdings to weather challenging environments.

Are you buying during this sell-off and, if so, in which sectors/asset classes?

• Broadly speaking, we are opportunistic investors. Short-term volatility often provides us with entry points to build long-term positions in high-quality companies.
• The portfolio is built from the bottom-up; our decision to add to names is driven by each stock’s scenario valuation framework.

Where do you see the opportunities and risks going forward?

• We see opportunities across technology with names spanning semiconductor manufacturing and equipment, digital payments, software, and consulting companies.
• We also have select exposure to consumer names that we believe are uniquely positioned, companies capturing e-commerce demand, physical retailers with a differentiated value offering and companies with valuable brands.
• Lastly, we have focused our health care exposure on higher-growth areas in the industry, and away from areas that are 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.

Jeffrey Adams CFA, CIM, RIS

Director & Portfolio Manager

Wes Dearborn CFA

Portfolio Manager, Fixed Income

Kelly Hirsch CFA

Head of ESG

Jeffrey Lew CFA

Portfolio Manager

Marc Sheard CFA

Portfolio Manager, Equities

Vancity Investment Management Ltd.,

IA Clarington Inhance Bond SRI Fund
IA Clarington Inhance Canadian Equity SRI Class
IA Clarington Inhance Global Equity SRI Class
IA Clarington Inhance Monthly Income SRI Fund
IA Clarington Inhance Monthly Income SRI GIF
IA Clarington Inhance Conservative SRI Portfolio
IA Clarington Inhance Moderate SRI Portfolio
IA Clarington Inhance Balanced SRI Portfolio
IA Clarington Inhance Growth SRI Portfolio
IA Clarington Inhance High Growth SRI Portfolio

What is causing this volatility and how long do you think it will last?

• For most companies, nothing fundamental has changed over the past month; the volatility and drawdown in the equity market is due instead to investor sentiment based on a few factors: fear of rising interest rates, persistent inflation, and pockets of excess valuation.
• Drawdowns are a natural part of equity investing. On average, we see a drawdown of 10% or more within a calendar year 63% of the time (going back to 1928). The equity markets, however, produce positive returns ~70% of the time, demonstrating their resilient nature.
• We see these market pullbacks as the price of admission for investors to gain access to the long-term compounding nature of equity markets.
• Unfortunately, nobody knows how long the current volatility will last or when the drawdown will end, but certain metrics such as the VIX (a measure of volatility and fear in the equity market) and U.S. Investor Sentiment are at stretched levels, indicating that we are probably closer to the end than the beginning.

How is this volatility impacting your mandates?

• Since we manage fossil fuel-free, responsible investing equity funds with a quality-growth mandate, the current market has been challenging as investors are crowding into energy, materials and banks while selling technology stocks.
• The performance of value stocks versus growth year-to-date is at extreme levels relative to history.
• Overall, bond markets have not experienced the elevated levels of volatility that equity markets have. With the recent risk-off tone, though, credit spread product has underperformed modestly as credit spreads have widened.

• Our bond mandate is overweight credit spread product as a yield enhancer, but has a bias towards higher-credit quality issues, which has dampened some of the degree of credit spread widening.

Are you buying during this sell-off and, if so, in which sectors/asset classes?

• Volatility provides opportunities for long-term investors and the current market is no exception, as high-quality growth stocks are currently being sold indiscriminately, providing very attractive valuation levels.
• Within the equity markets the technology and consumer discretionary sectors in particular are offering compelling opportunities. We are currently finding companies that we think can grow revenue at 15%+ for the foreseeable future trading at depressed multiples versus their historical levels.
• After trimming preferred shares at the end of 2021 and the start of 2022, within the bond mandate we have been opportunistically adding back to preferred share holdings with the most recent sell-off. We continue to view preferred shares as an attractive yield enhancer with acceptable levels of risk.

Where do you see the opportunities and risks going forward?

• The pandemic has proven to be unpredictable – we have achieved key milestones and felt hopeful for the end, only to be hit with yet another wave. Although we are cautiously optimistic because of high vaccine uptake and effective protection against known variants, the evolution of the pandemic remains a considerable risk.
• Persistent inflation could result in a rapid rise in interest rates, potentially resulting in further selling of growth stocks, which could be detrimental to our short-term equity returns.
• With a longer time horizon, we are unwavering and confident in our process of investing in high-quality progressive companies with long runways for revenue growth, offering compelling compounding opportunities over time.
• With wider credit spreads, there will be opportunities in the bond mandate to add credit exposure and enhance expected returns over time.

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