Strategic Equity Income Fund Commentary
Portfolio Advisor: IA Clarington Investments Inc.
Fund Commentary - April, 2012
North American equity markets posted solid returns for the first
quarter of the year. Economic conditions and expectations
markedly improved during the first quarter of 2012 compared to the
fourth quarter of 2011. Returns have been supported by
generally positive and improved economic conditions as well as
positive earnings releases. The largest factor supporting
improving securities markets during the first quarter has been the
diminishing risks associated with the sovereign debt crisis in
Europe. Aggressive loan programs initiated by the ECB through
the LTRO (longer term refinancing operation) program to inject
liquidity into the European banking system has been the leading
reason behind reduced risk premiums and financial strain caused by
sovereign debt problems.
The Portfolio Sub-Advisors expectations for economic growth and
financial conditions for the corporate sector are generally
positive for the remainder of the year. The Portfolio
Sub-Advisor expects that there will be continued volatility in the
markets as European sovereign debt issues surface and recede during
the next couple of years. The Fund continues to favour
dividend paying stocks that are relatively less volatile than the
general equity markets. The Portfolio Sub-Advisor sees value
in the Funds holdings in pipelines, Healthcare and U.S Financials
sectors. While the Portfolio Sub-Advisor is cognizant of the
risks associated with slower growth due to deleveraging economies
in the developed markets, they expect that lower beta sectors will
provide attractive risk adjusted returns in this environment.
The Fund's largest contributors to performance during the
quarter were its holdings in Corus Entertainment Inc., and JP
Morgan Chase (JPM) equity. Corus is one of Canada's largest
media companies focusing on specialty TV, radio and production of
children's content. The stock has outperformed during the quarter
based on strong financial results and the acquisition of one of
Corus's main competitors. Corus provides an attractive
dividend yield of 4% and relatively predictable cash
flows. JPM is one of the largest US banks focusing on
retail, commercial and investment banking as well as asset
management both in the US and in international markets. JP Morgan
outperformed the S&P 500 Composite Index during the first
quarter due to the improving fundamentals within the US banking
industry and JP Morgan's ability to take market share. The
Portfolio Sub-Advisor feels the outlook for JPM remains positive
due to an improving US credit cycle based on moderate but stable US
macro fundamentals and a stabilizing US housing
market.
The Funds largest detractor to performance during the quarter
was its holding in SNC-Lavalin Group. SNC is one of the
largest global engineering and construction companies in Canada.
The stock underperformed during the first quarter as a result of an
internal investigation into misallocated funds, compliance
irregularities and a number of employee departures including the
CEO. The Portfolio Sub-Advisor believes the underlying
assets and operations of SNC are of greater value than is currently
reflected in the markets; however, they remain cautious on the
stock until there is greater disclosure related to the
inconsistencies in the daily operations.