Money Market Fund

Money Market Fund Commentary

Portfolio Advisor: Industrial Alliance Investment Management Inc.

Fund Commentary - June 30, 2011

One year later, the same issues that were making headlines at this time in 2010 are in the spotlight again: Europe's sovereign debt troubles, doubts over the economic recovery in the U.S., and fears of rising inflation. These events, combined with the after-effects of the earthquake and tsunami in Japan, and continued political turmoil in the Middle East made the first half of 2011 difficult for the stock market. This resulted in slower growth in Canada and elsewhere in the world.

The Canadian economy must juggle with several opposing winds such as a high dollar, heavy consumer debt, the end of stimulus programs, a more restrictive federal budget, and a primary economic partner that is dealing with its own difficulties.

The last interest rate hike by the Bank of Canada was in September 2010. The latest inflation data showed that inflation has exceeded the 3% upper limit of the target range. The Portfolio Advisor might have expected an interest rate hike in the months to come, but the latest economic statistics from several regions have been rather anaemic. Thus, the Bank of Canada may wait until the situation returns to normal and push its next interest rate increase to the end of 2011 or early 2012. In the U.S., the Federal Reserve has maintained its position, indicating that it will keep its key rate stable until the economy improves.

The Fund underperformed its benchmark index during the first half of the year. The Canadian yield curve moved slightly lower as investors continued to doubt the sustainability of global economic recovery. Canadian government bond yields rose, for the most part, until mid-April of this year and subsequently dropped over the next two months. The Portfolio Advisor expects the Bank of Canada will now keep interest rates on hold in the near future as it waits to see how Canada's economy rebuilds itself in the coming months.

At the end of the period, the Fund primarily held Treasury bills.  The Portfolio Advisor continues to focus on high-quality issuers and maintaining a high degree of liquidity in the Fund. With the main investment objective of the Fund focused on capital preservation and liquidity, the Portfolio Advisor is not taking any unnecessary credit risk in the selection of securities.

The Portfolio Manager is currently waiving a portion of the management fees and absorbing expenses of the Fund in order to ensure that the fees and expenses of the Fund do not exceed the yield on the Portfolio. The Portfolio Manager may change the level of absorption, and waiver of fees and expenses from time to time in response to changing market conditions.