Canadian Dividend Fund

Canadian Dividend Fund Commentary

Portfolio Advisor: Industrial Alliance Investment Management Inc.

Fund Commentary - June 30, 2011

One year later, the same issues that were making headlines at this time in 2010 are in the spotlight again: Greece's sovereign debt troubles, doubts over the economic recovery in the U.S., and fears of rising inflation. However, the after-effects of the tsunami in Japan and geopolitical trouble in the Middle East have been added to the mix.

The defensive sectors advanced in the first six months of the year, whereas the more cyclical sectors lost considerable value, particularly in Materials and Technology. The high representation of Materials and Energy in the Index played a significant role in the overall retreat, especially in the second quarter. The Energy sector was hardest hit by the drop in the price of oil, which fell from $107 to $95 per barrel during the second quarter, and the CRB Index, representing commodities, plunged during the same period, bringing the Materials sector down with it. Measures taken by China to counter inflation had an impact on economic activity and on demand for commodities.

In the United States, the semester was better for the S&P 500 Index. For the last six months, the Index returned 6.0% in local currency (2.8% in Canadian dollars). The Energy and Materials sectors make up just 16% of the U.S. Index, as opposed to nearly 50% of the Canadian Index. The U.S. Index was therefore less affected by the drop in the price of oil and materials.

As for the investment activity within the Fund, the Portfolio Advisor continues to favour a fairly neutral sector allocation when compared to the S&P/TSX Composite Index. This is typical for the Fund as the Portfolio Advisor prefers to add value through security selection as opposed to sector allocation. Financials continues to be the Fund's most significant sector weight.  This was a positive contributor to Fund performance as the Toronto Dominion Bank, Bank of Montreal and the Royal Bank of Canada all had strong results.  The market weight allocation to Energy was a possible detractor when compared to the Fund's peer group performance. Having said that, the Portfolio Advisor did have a selection of energy stocks, such as TransCanada Corporation, which outperformed compared to the sector. Additionally, the Fund's foreign content also added to performance versus the benchmark.

The Portfolio Advisor added Cameco Corporation late in the first quarter after its share price decreased following the Japanese nuclear accident. The Portfolio Advisor expects that the longer-term outlook for electricity generation using nuclear power will improve. In the most recent quarter, the Portfolio Advisor trimmed its TransCanada Corporation and Bell Canada positions. Inversely, he added to his Freeport-McMoran Copper & Gold Inc. position.