Distinction Balanced Portfolio

Distinction Balanced Portfolio 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: Europe's sovereign debt troubles, doubts over the economic recovery in the U.S., and fears of rising inflation. These events, combined with the after-effects of the tsunami in Japan and continued political turmoil in the Middle East, made the first half of 2011 difficult for the stock market. Defensive sectors advanced in the first six months of the year, whereas cyclical sectors detracted from Index performance.

The high representation of the Materials and Energy sectors in the Index played a significant role in the S&P/TSX's retreat 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 25% during the same period, bringing the Materials sector down with it. Measures taken by China to counter inflation had an impact on demand for commodities.

In the United States, the S&P 500 Index returned 2.8% in Canadian dollars. The S&P 500 Index was less affected by declines in the Energy and Materials sectors. On the international front, the MSCI World Index returned 2.1% in Canadian dollars.  Foreign and U.S. equities outperformed Canadian markets in the first half of 2011.  The Canadian equity market has a disproportionate exposure to three sectors: Financials, Energy and Materials.  Foreign markets are more broadly diversified and are therefore less susceptible to the commodity related sector declines.

The Canadian bond market made gains in the last three months, benefitting from the recent upturn in stock market volatility. The DEX Universe Bond Index returned 2.2% in the first six months of 2011.  During the first six months of the year, bond managers who favoured mid- and longer-term securities obtained the best returns.

The Fund invests across all asset classes including fixed income, Canadian equity and foreign equity funds. The Portfolio's return is primarily determined by the mix and performance of the underlying Funds. The Portfolio underperformed the benchmark index for the first six months of the year.

The fixed income components of the Fund provided positive returns during the first six months of the year.  The component's largest holding, The IA Clarington Bond Fund maintained a shorter duration throughout the period, compared to that of its benchmark. this was a detractor to performance as longer dated fixed income maturities outperformed shorter dated maturities during the first six months of the year. The IA Clarington Tactical Bond Fund finished the period with positive returns.  The Fund will continue to focus on investments in companies which offer a reasonable yield and experience minimal effects from geopolitical events and commodity prices.  The Dynamic High Yield Bond Fund had strong returns; its investment strategy of focusing on higher yielding corporate bonds and debt obligations benefitted the fixed income component's performance.

The Canadian equity component returns were mixed. The IA Clarington Canadian Conservative Equity Fund outperformed its benchmark during the first six months of the year. The Fund's focus on dividend paying equities provided downside protection as well as capital growth in a difficult market. The IA Clarington Dividend Income Fund was also a positive contributor.  The addition of foreign energy stocks at the beginning of the year was beneficial to equity component performance. Additionally, the IA Clarington Canadian Small Cap Fund strongly outperformed its benchmark index.   On a relative basis, the majority of Fund outperformance during the past six months came from defensive positioning in the Materials and Energy sectors. Detractors to the Canadian equity component performance came from the IA Clarington Canadian Growth Fund. The Fund's overweight position in the Materials sector, and the general underperformance of the Fund's small-cap holdings were detrimental to the Canadian Equity component's overall returns.

The foreign equity component returns performed well. The IA Clarington Global Equity Fund outperformed its benchmark index.  The Fund's overweight position in the Information Technology and Consumer Discretionary sectors were beneficial to performance during the period. The IA Clarington Global Dividend Fund, Dynamic Global Value Fund and the Mackenzie Cundill Value Fund also finished the first six months of the year with positive returns.