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Investment Objective The objective of this fund is to generate both capital appreciation (or growth) and income, while maintaining a relatively low level of risk and ensuring short-term preservation of capital.
†Growth is calculated based on compounded monthly returns. Canadian Equities Highstreet Asset Management - Quantitative Core Manager Highstreet uses a multi-factor quantitative model which must meet their specific criteria for Growth, Value, Quality & Risk (GVQ+ R(tm)) when considering buy and sell decisions. Uncertainty regarding the health of the world’s financial institutions and the negative implications for economic growth, led to a sharp sell off in the markets. The S&P/TSX composite was not immune, shedding 18.2% during the quarter, effectively erasing any of the gains captured during the last two years. The fallout led to a significant decline in the price of Energy commodities as investors expected curtailed demand. The sector accounted for almost half of the index’s decline. Led by Fertilizers and Golds, the Materials sector witnessed a reversal of fortunes from prior periods, also contributing significantly to the index’s slide. Surprisingly, Financials north of the border added a modest amount of positive return for the TSX benchmark. Overall the rationality of the market was tested, as those companies with weaker growth and valuation profiles outperformed. The portfolio benefited from not holding Cameco or Yamana and holding Royal Bank. Fertilizer stocks Agrium and Potash detracted the most relative value. The markets remain fixated on the unfolding global credit crisis and its implications. While the ultimate impact of these events on the real economy remains uncertain, we continue to focus on companies that exhibit strong relative earnings growth and attractive valuations. In addition, we pay close attention to risk and the revision of analyst estimates. These short-term measures will help to ensure the sustainability of the earnings profile for the portfolio in a market that is in transition. Heightened volatility and a market that is driven by events, underscore the need to stay the course with a consistent and disciplined approach to stock selection. Lincluden Management - Value Manager Lincluden, using a “value-buyer” approach, favours companies that its analysis shows to be undervalued. Identifying trends that will enhance future value is important. Equity markets around the globe were strongly negative as markets were faced with the prospects of a slowdown in global growth combined with continued uncertainty in the financial system. The first part of the quarter was marked by rapidly declining commodity prices as signs of slowing global demand took the steam out of what we had believed were speculatively high commodity prices in general. Energy and Material sectors declined in excess of 30% in the quarter. With the failure of Lehman Brothers in mid September an already precarious banking sector suffered another series of shocks culminating in the most significant financial institution failures in U.S. history. While Canadian banks appear sound many of the gains this sector had made earlier in the quarter were erased as fear sideswiped the price of virtually all Financial stocks. With this backdrop 9 out of 10 sectors of the broad market declined in the quarter with the Financial sector posting an anemic gain. Our portfolio was well positioned for the commodity decline managing a positive result through August. However the declines in late September were broad based involving all sectors and our portfolio suffered marked declines in the period. Over the quarter we initiated a new position in West Jet Airlines and increased our holdings of Barrick Gold, CanWest Global Communications and Bombardier. J. Zechner Associates - Top-Down Growth Manager Zechner’s expertise is the identification of economic and business trends and the weighting of industry sectors. Stocks selected must have good growth characteristics and be liquid. The S&P/TSX posted its worst quarterly drop since the Asian economic crisis and pre-LTCM bailout in Q3/98. The index fell by 18.2% in the third quarter. In terms of relative performance for the Canadian market, the cyclical sectors of the market took the largest hits in both September and the third quarter overall as worries about global economic growth and substantial redemptions by levered investment funds sent prices sharply lower. The index fell by 14.0% in September alone, even though that month included the two strongest single daily point gains in the index since its inception and the single strongest daily percentage gain ever. Copper tumbled to its worst quarterly decline on record while the overall commodities index overall fell back to 2005 levels. We definitely see the current panic in the stock market as a long-term buying opportunity, not only from the point of view of the value of stocks relative to bonds, but also due to the valuations we are seeing in the stock market compared to historical levels for these companies. Even assuming a very negative economic outlook, stocks already seem to be discounting this weakness and pricing it in. Oil stocks have trades down to 2005 levels, when oil prices were near $60 per barrel versus the current price of $90 while copper stocks have given back most of this cycle’s gains and are trading back to where they were when copper was under $1 per pound versus the current price of $2.50. Technology stocks as well are priced for a recession which has yet to occur; and most of these companies have ample cash and are therefore not at all impacted in their operations by the credit crisis. U.S. Equities Analytic Investors - Core Manager Analytic Investors uses a 70-factor quantitative approach to select stocks currently ‘in favour’ and maintain risk consistent with the S&P 500 Index. Thematically, economic uncertainty ruled the quarter, while investor sentiment swung between optimism and pessimism. In this crisis-like atmosphere, dispersion rallied and persistence waned. Value factors such as cash flow to price and dividend yield were handsomely rewarded during the month, while growth factors such as recent earnings per share growth and growth in profitability were penalized. In addition, stocks with above average price momentum and highly leveraged stocks largely underperformed their peers. Our process is based on the premise that investor behaviour changes, but changes slowly, and is fairly persistent from month to month. Thus, market inconsistency presented a challenging environment to add value and the strategy underperformed the benchmark. Active tilts towards several growth factors such as recent earnings per share growth, growth in equity, and growth in profitability hurt performance, as did a sizeable underweight exposure to dividend yield. Our underweight position in highly leveraged stocks helped performance, but not enough to make up for other unprofitable tilts. International Equities Acadian Asset Management - Value Manager Acadian identifies market inefficiencies and exploits them using a structured, multi-factor process and sophisticated portfolio optimization techniques. Equity markets saw negative results for the quarter, as the credit crisis worsened and governments around the world raced to shore up financial institutions. Europe’s collective performance for the period was markedly negative. Germany’s manufacturing and service industries contracted as companies reduced production in response to slowing orders. France saw business confidence decline precipitously, while retail sales in Italy continued to languish. The United Kingdom’s housing slump deepened, with higher mortgage rates and tighter borrowing conditions sending home sales to a record low. Asia performed modestly better than Europe for the quarter. Japan saw household spending drop amid rising inflation and sluggish wage growth, while business sentiment in Australia held at a seven-year low. In Singapore, industrial production fell on declining outputs from drug makers and electronics manufacturers. Hong Kong saw export growth slow due to weaker global demand for products made in China. The U.S. saw considerably negative returns for the period as investors absorbed the bankruptcy of Lehman Brothers, the nationalizations of Fannie Mae, Freddie Mac and American International Group and the failure of a proposed government rescue plan in the House of Representatives. While exports remained a bright spot in the economy, consumer spending stalled as the effect of last quarter’s tax rebates faded and households grappled with mounting job losses, dwindling home equity values and slumping confidence. Recent additions to the portfolio include Japanese electronics giant Panasonic, whose product lines include award wining high definition Plasma and LCD TV’s, digital cameras, security systems and home appliances. Out of the Netherlands, AEGON is a Dutch life insurance and pension group and a strong provider of investment products. Mitsui was also added to the portfolio, Mitsui is one of the largest and most successful conglomerates in Japan, and one of the largest publicly traded companies in the world. Fixed Income Lincluden Management - Credit Analysis & Yield Spreads Continued concerns in world financial markets were the driving force behind a steepening of the yield curve in Canada as short yields declined and longer term yields were unchanged to higher. The failure and forced nationalization or merger of eight sizeable U.S. institutions in a single quarter constitutes the largest financial system collapse in U.S. history. Adding fuel to the fires of fear was the subsequent delays of a U.S. bill to come to the aid of financial markets. In this environment apprehension drove investors to seek the safety of government T-bills. As a consequence spreads on corporate bonds increased quite rapidly driving the overall return slightly into negative territory. Newton Capital Management - Global Thematic Core The turmoil in global markets intensified in the third quarter, with volatility increasing and liquidity decreasing as investors grappled with the continuing credit crunch and deleveraging environment. The continued housing market weakness in the U.S. and Europe, and banks’ unwillingness to lend (as they collectively attempt to recapitalize) combined to push the global financial system to breaking point. The attempts of financial institutions to recapitalize were significantly, and in some cases, terminally thwarted, by the collapse in share prices, exacerbated by widespread short selling. Some of the world’s biggest financial institutions were among the casualties with bailouts and/or nationalizations witnessed in the U.S., UK and Europe. Putnam Investments - Core Manager While we maintained a neutral exposure to term structure in Canada, active term structure positioning in the U.S. was unfavourable. Our swap spread steepening position in the U.S. was detrimental as short-term funding issues pushed swap spreads wider in the front end of the curve. International term structure positioning aided returns due to our long duration stance in Europe, steepening yield curve bias in the U.K., and Europe versus U.S. rates. Prepayment speeds continued to slow this quarter, contributing to rapidly improving fundamentals for interest-only CMO cash flows. However, challenging technicals persisted leading to the underperformance of our strategies in this sector. In credit, our underweight allocation to investment-grade corporates benefited relative returns as the sector underperformed equal-duration government bonds during the quarter. State Street Global Advisors - Enhanced Core/Active Bond Manager The DEX Universe Bond Index posted a -0.37% negative total return for the third quarter of 2008 while 10 year Government of Canada yields remained virtually unchanged to close the quarter yielding 3.72%. This negative market return can be largely attributed to the underperformance of the corporate sector which lagged the Federal index by 1.81% for Q3 while aggregate corporate spreads continued to deteriorate to end the quarter at their widest levels in over 20 years. The market action over the quarter remains consistent with our view that the ramifications of the sub-prime crisis still remain to be fully understood by investors and will remain a source of volatility over the foreseeable future. All performance is presented in Canadian dollar terms, gross of investment management fees. Past performance is not indicative of future results. |
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