Distinction Monthly Income Portfolio

Distinction Monthly Income 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, 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 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. It 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 Tactical Bond underperformed its benchmark in 2011 as it was overweight higher yielding bonds and underweight long-term investment-grade bonds.

IA Clarington Canadian Conservative Equity Fund outperformed its benchmark index. Its focus on high quality, dividend paying stocks and defensive sector allocation provided downside protection as well as capital growth in a difficult market. During the third quarter of 2011 the IA Clarington Dividend Income Fund changed its name to the IA Clarington Strategic Equity Income Fund and changed its investment mandate and fund management. It 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, it 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. IA Clarington Dividend Growth Fund outperformed its benchmark index. Stock selection 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 Bell Canada Inc., TELUS Corp. and Rogers Communications Inc. also added value for the year.

For the IA Clarington Global Dividend Fund, positive sector and geographic allocations in the Europe component were not enough to offset the detraction to Fund performance from stock and sector allocations in the North American component. It also experienced a challenging year from the Asia-Pacific component as overweight geographic allocations in China and India detracted from Fund performance. IA Clarington Global Tactical Income Fund lagged its benchmark for much of this year. It added to its holdings in high yield bonds throughout 2011, although this asset class has lagged the performance of investment grade bonds.