Bond Fund Commentary

Portfolio Advisor: Industrial Alliance Investment Management Inc.

Fund Commentary - June 30, 2010

Interest rates on Canadian government bonds have decreased significantly with the general movement away from riskier assets during the first half of 2010. Long-term interest rates have come down, flattening the Canadian yield curve, as inflation anticipations have dissipated because of increased concerns regarding the sustainability of the global economic recovery. The Bank of Canada raised short-term interest rates by 25 basis points to 0.50% at the end of the period, however rates still remain low by historical standards.

Ten-year Canadian government bond yields have gone from 3.7% to 3.1% since the start of the year. The more yields decline the better the performance of a bond on the secondary market.

Portfolio Managers who favoured longer-term maturities during the period would have fared better than those who anticipated on shorter term rates, since the performance of long-term bonds rose 7.8% whereas that of mid and short-term bonds rose 5.0% and 2.2%, respectively.

The Fund lagged the benchmark's return during the first half of 2010. The Fund's underweight of Federal bonds detracted from performance in the second quarter of 2010. Government fixed income securities outperformed due to the uncertainty that has developed in financial markets. The Fund has had an overweight position in corporate bonds which was profitable during the first quarter of 2010 but has detracted from performance over the last three months. The Fund's yield curve positioning underperformed, especially in the 10-year term. The cash component of the Fund has also detracted from performance, given the low yields of money market securities. The Portfolio Advisor lowered the duration of the Fund over the last quarter.