Strategic 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-Advisor's 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 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 Portfolio Sub-Advisor remains positive in their view to
the prospects for the corporate bond market. Strong
fundamentals and credit spreads that are currently above the
long-term average have created an opportunity to achieve higher
risk adjusted returns than would be available under normal
circumstances.
The Fund's largest contributors to performance during the
quarter were its holdings in JP Morgan Chase (JPM) equity and Wells
Fargo & Company (WFC) equity. 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. JPM outperformed the S&P 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. Wells Fargo's positive performance during the
first quarter was due to the improving fundamentals within the US
banking industry and WFC's predominant focus on personal and
commercial banking. WFC is now the largest bank in the US
focusing on asset management and both retail and wholesale
banking. The Portfolio Sub-Advisor remains positive on Wells
Fargo due to bank's relatively defensive positioning in the
industry.
The Fund's largest detractor to performance during the quarter
was its holdings in SNC-Lavalin Group (SNC). 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.