Distinction Conservative Portfolio

Distinction Conservative 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 is continuing 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, U.S. and Canadian bonds. Bond yields dropped during the year, pushing up bond returns. The Canadian bond market, represented by the DEX Universe Bond Index ended the year up 9.7%. The strong returns of fixed income securities continue to help offset increased volatility in the equity markets.

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 fixed income components of the Fund provided positive returns for the year. IA Clarington Bond Fund, the largest fund weighting of the fixed income component, slightly underperformed its 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 and IA Clarington Money Market 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. 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. IA Clarington Strategic Equity Income Fund replaced IA Clarington Dividend Income Fund. The Fund underwent a name change, a change in management, and a change in its investment strategies 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 exposure to commodity related securities. 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 S&P/TSX Composite Index significantly in a volatile market.

The Fund's foreign equity components underperformed their respective benchmarks during the period. 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 the primary detractors to overall performance. The Portfolio Sub-Advisor for the Fund was replaced in November. The Mackenzie Cundill Value Fund also underperformed in 2011.