Monthly Income Balanced Fund

Monthly Income Balanced Fund Commentary

Portfolio Advisor: Industrial Alliance Investment Management Inc.

Fund Commentary - March 31, 2013

World stock markets opened 2013 on an optimistic note. It seems that reassuring news about the U.S. economy, the resolution of the fiscal cliff, avoidance of a difficult landing in China, and the return to relative calm in Europe were all well perceived by investors. The trials and tribulations of Cyprus at the end of the quarter were not enough to upset the trend.

The story in Canada over the last few years is basically the opposite of the one in the U.S. While U.S. households were cleaning up their balance sheets, Canadian households were accumulating debt and consuming at the same rate as before the recession. Real estate also maintained its ascent, with rising prices and the rate of construction starts causing finance minister Jim Flaherty to worry.

Yet the winds are about to turn. GDP grew a mere 0.7% in the second half of 2012 and car sales were down sharply in December and January. Businesses are not planning any major investments in 2013, to the extent that analysts are now expecting the smallest non-recession increase in capital stock since 1995. Construction starts were down for a fourth consecutive month (worst performance in a decade) and building permits have suffered three drops of more than 10% in the last five months. It seems, therefore, that regulatory efforts to slow the real estate market frenzy are starting to bear fruit.

The quarter still ended on a slightly positive note, with a rebound in job creation as well as a slight narrowing of the trade balance in March. It remains to be seen whether the downtrend will carry into the next quarter.
Canadian monetary policy is much less exciting than our southern neighbour. The Bank of Canada renewed its key rate twice during the quarter, specifying in its March 6 statement, in a very dovish tone, that "the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required." Inflation remains below the bank's projections and the output gap is currently between 1.5% and 2%, reducing the chances of an inflationary trend in the medium term.

The Canadian stock market, represented by the S&P/TSX Composite Index, had a more moderate first quarter, Growth was concentrated in a few sectors, including Health Care, Information Technology, Industries and Consumer Discretionary. 

Stocks (S&P/TSX Composite Index) outperformed bonds (DEX Universe Bond Index) during the quarter, the asset allocation of the Fund was a contributor factor to performance. Also, within the equity portion of the Fund, Canadian equities were reduced in favor of international and U.S. stocks which was also a positive contributing factor as foreign equities (MSCI EAFE Index) outperformed Canadian equities (S&P/TSX Composite Index).  At the end of the period, the Fund was underweighting bonds, cash and REITs and overweight stocks relative to the S&P/TSX Composite Index.

In the energy sector, Nexen was sold from the portfolio. Also, the Portfolio Advisor sold Crew Energy and Athabasca Oil. Bought with the proceeds were bought Penn West Petroleum, Crescent Point Energy and Husky Energy. The Fund is slightly overweight in energy stocks and underweight in materials.  In the financial sector, National Bank was sold and Canadian Imperial Bank of Commerce and Royal Bank of Canada were trimmed. The Fund is underweight the banking sector.

The Fund remained overweight corporate bonds over federal government bonds. The bond market continues to show a very high valuation, with historically low long-term rates. At the moment, it seems premature to state that we are at the beginning of the "Great Rotation," but several signs are pointing in that direction.

The recent rise in the Canadian stock market was concentrated in a small number of sectors. Together with concern over the future growth of Canadian corporate earnings, causes many to doubt the solidity of the index's current level.