Bond Fund Commentary
Portfolio Advisor: Industrial Alliance Investment Management
Fund Commentary- December 31,
Investors' gradually regained confidence in the second half of
last year, as several central banks adopted anticipated measures to
help stimulate the global economy.
In Canada, economic growth slowed down on a few fronts. The housing
market eventually cooled, as a result of stricter mortgage
amortization rules put in place in July. The strength of the
Canadian dollar continues which hurts export-oriented industries.
Despite these headwinds, the Canadian economy remains relatively
stable and should benefit from the anticipated U.S. growth in 2013
and continued economic activity from emerging market countries.
Despite an ongoing environment of extremely low interest rates,
bond yields continued to decline and longer- term bonds offered the
greatest appreciation (+ 5.2%) during 2012. Medium-term and
short-term bonds generated returns of 4.7% and 2.0% for the year
respectively. High demand for Canadian bonds by foreign investors
has helped push up prices and further reduce
The relative overweight position in provincial government and
municipal government bonds was a detractor to the Fund's
performance. For the majority of the period, The Portfolio Advisor
maintained a shorter duration relative to the Fund's benchmark, the
DEX Universe Bond Index. The Fund's shorter duration was beneficial
to performance during the year, with the exception of the second
quarter. The Fund's significant underweight in federal government
bonds and overweight in corporate bonds in comparison to the
benchmark index was a contributor to performance.
Reigning in government debt throughout much of the developed
world should continue to characterize the economic backdrop in
2013. Equity markets finished the fourth quarter rising, but
at a more moderate pace due to concerns surrounding the U.S. fiscal
cliff. As we enter the new year, it appears that this concern
has been alleviated for the time being. With respect to the
global economic context for 2013, the Portfolio Advisor expects
that it could be similar to that of 2012, moderate economic growth
and a sustained low interest rate environment.
The strategy of the Portfolio Advisor is to continue to take
advantage of the new fixed income offerings in order to fine-tune
the portfolio positioning. In current market conditions, it is
important to remain active and vigilant as the Portfolio Advisor
expects that the heightened volatility will remain a reality for
the foreseeable future.