Dividend Growth Fund

Dividend Growth Fund Commentary

Portfolio Advisor: Industrial Alliance Investment Management Inc.

Fund Commentary - December 31, 2011

From a global economic standpoint, 2011 ended on a fragile note due to the European sovereign debt crisis, which had repercussions on all financial markets, overshadowing other economic and political issues elsewhere in the world. After tottering for the first nine months on the brink of a "double dip" recession, the United States seems to be gaining some momentum and the job market is slowly gaining strength, showing positive job creation from month to month. Moreover, the balance sheets of U.S. companies are indicative of sound financial health, which bodes well for maintaining current jobs as well as for hiring. However, several risk factors could still slow the U.S. economy in 2012. These include the potential liquidity crisis in Europe that could affect the U.S. banking system, and the real estate market that has still not recovered from its collapse in 2008.

Emerging regions such as China were also affected by the world economic situation as Chinese exports have declined accordingly. In addition, prices in the real estate sector and the level of inflation have dropped in the last few months as restrictive measures aiming to contain inflation and curb real estate speculation in China have borne fruit. To counterbalance its weak exports, China has lowered the capital ratio required for its commercial banks in order to stimulate domestic growth and maintain its rate of economic growth. Stock markets have behaved according to investor mood. The MSCI World Index, which represents the majority of industrialized countries, posted negative returns in 2011, down 3.4%. Meanwhile the U.S. market, represented by the S&P 500 Index, ended the year with a positive return of 4.4%. Interestingly, the depreciation of the Canadian dollar was a benefit to Canadian investors whose foreign investments had been impacted negatively by a strong Canadian dollar in previous years. Given that the prices of raw materials were down in 2011 and that nearly 50% of the S&P/TSX Composite Index is made up of stocks related to natural resources, it comes as no surprise that the Canadian stock market posted a negative year-end return. Defensive sectors such as Consumer Staples, Telecommunications and Utilities posted positive returns.

As for the investment activity within the Fund, Financials continues to be the Fund's most significant sector weight followed by Energy and Materials, with an average allocation of roughly 35% to Financials. This allocation was favourable to the Fund for 2011 as this sector performed slightly better than the broader index. As for the allocation to Materials, the Fund remained significantly underweight throughout the year compared to the index, with an average weight between 11% and 12%. This is roughly 10% less than the TSX, which added value given the more difficult returns for this sector in 2011. Regarding stock selection, the Portfolio Advisor added value in 2011. Some of the strongest contributors relative to the index were the equities selected within the Materials and Industrial sectors. Telecoms securities such as BCE Inc., TELUS Corp. and Rogers Communications Inc. also added value for the year. Technology, although not a large sector for the Fund, also did well for the Fund as it did not hold Research in Motion Ltd. (RIM), which lost more than 30% of its value in the 4th quarter alone and almost 75% for the year.

The Fund's Technology exposure came from U.S.-listed Microsoft Corp., which was up 4.3% for the last three months of the year and only retreated by 7% for the year. The Fund slightly underweighted the gold sub-sector versus the index with approximately 8% in Barrick Gold Corp. and Goldcorp Inc. This was a detriment to the Fund as these names did better than the broader Materials sector. Finally, the low interest rate environment is making it difficult for life insurance companies to operate profitably. The Fund was impacted by this situation through its relatively large weighting in Sun Life Financial Services of Canada Inc., a 2.6% weight at year-end.