Distinction Balanced Portfolio

Distinction Balanced Portfolio Commentary

Portfolio Advisor: Industrial Alliance Investment Management Inc.

Fund Commentary - December 31, 2011

The 2011 economic year ended on a fragile note due to the European sovereign debt crisis, which continues to have repercussions on financial markets worldwide, overshadowing any positive economic news. In the second half of 2011, the financial markets witnessed a significant resurgence in equity market volatility as concerns of a Greek debt default reached their peak. Additionally, the market began to focus its attention on Italy which also experienced a significant increase in their government bond yields. 

Stock markets have behaved according to investor mood. The MSCI World Index, which represents the majority of industrialized countries, posted negative returns in 2011 of -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.

With the dramatic spike in equity market volatility in the second half of 2011, investors sought to place assets in what they considered safe havens, as U.S. and Canadian bonds. Bond yields dropped during the year, while prices climbed, pushing up bond returns. The Canadian bond market, represented by the DEX Universe Bond Index ended the year up 9.7%.

The Fund invests across all asset classes including fixed income, Canadian equity and foreign equity funds. The Fund's return is primarily determined by the mix and performance of the underlying funds. The Fund's fixed income and global equity components were the primary detractors to the overall fund performance.

IA Clarington Bond Fund, the largest fund weighting of the fixed income component, slightly underperformed its blended benchmark index. The Fund maintained a shorter duration throughout the period when compared to that of its benchmark. In an environment where interest rates continued to test new lows, longer maturities outperformed shorter maturities by a significant amount. IA Clarington Short Term Bond Fund ended the period with positive returns; although returns are minimal in an environment where historically low interest rates are resulting in lower yielding short-term securities. IA Clarington Tactical Bond Fund underperformed its benchmark in 2011 as it was overweight higher yielding bonds and underweight long-term investment-grade bonds.

Canadian equities were a positive contributor to Fund performance. The IA Clarington Canadian Conservative Equity Fund outperformed its benchmark index. The Fund's focus on high quality, dividend paying stocks and defensive sector allocation provided downside protection as well as capital growth in a difficult market. The IA Clarington Strategic Equity Income Fund is the successor fund to the IA Clarington Dividend Income Fund. The Fund underwent a name change, a change in management, and a change in its investment mandate during the third quarter of 2011. The Fund outperformed its benchmark index during the year. The Portfolio Sub-Advisor significantly changed the composition of the Fund in the fourth quarter by reducing exposure to higher volatility equity holdings and increasing lower volatility securities. In the fourth quarter, the Fund increased its exposure to energy infrastructure, utility, Real Estate Investment Trusts and Health Care related securities, while also reducing its exposure to commodity-related securities. The IA Clarington Canadian Growth Fund underperformed its benchmark index. The Fund was underweight defensive sectors such as Telecommunications, Utilities and Consumer Staples, which all outperformed the Canadian index significantly in a volatile market. Due to their more volatile nature, the Fund's small-cap weight was reduced from 10% to 8% during the second half of the year. Large-cap stocks were increased as the Portfolio Advisor looks to maintain a more prudent overall Fund positioning in 2012. The Portfolio Sub-Advisor of the IA Clarington Canadian Small Cap Fund kept the Fund well-diversified throughout the year, which benefitted relative performance. The blended benchmark is highly concentrated in the resource sectors, with Materials and Energy making up in excess of 50% of the index. The Fund maintained a combined weight of roughly 26.1% in these two sectors and, as a result, was able to generate gains in both of these sectors.

Underperformance from IA Clarington Global Equity Fund occurred in multiple sectors due primarily to stock selection. Energy and Information Technology, which were the Fund's most overweight sectors, were also the primary detractors to overall performance. A new Portfolio-Sub-Advisor was named to the Fund in November. As for the IA Clarington Global Dividend Fund, positive sector and geographic allocations in the European component were not enough to offset weaker performance from stock and sector allocations in the North American component. The Fund also experienced a challenging year from the Asia-Pacific component as overweight geographic allocations in China and India detracted from Fund performance. The Mackenzie Cundill Value Fund ended the period with a negative return and underperformed its benchmark index.