Global Value Fund

Global Value Fund 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 had repercussions for all financial markets, overshadowing other economic and political issues elsewhere in the world. The United States, after tottering for the first nine months on the brink of a "double dip" recession, has gained some momentum, and the job market is slowly gaining strength, showing positive job creation from month to month. The balance sheets of U.S. companies are indicative of sound financial health  which bodes well for maintaining current jobs as well as for hiring.

However, several risk factors could still slow the U.S. economy in 2012; these include the potential liquidity crisis in Europe, which could affect the U.S. banking system and the real estate market that has still not recovered from its collapse in 2008. Although the Portfolio Advisor slightly increased the U.S. allocation during the period from approximately 48% to 53%, the Fund's allocation to the major geographic sectors has been fairly stable. This geographic allocation was generally favourable to the Fund's performance as U.S. equity markets outperformed Europe and Asia. For the U.S. portion of the Fund, the Portfolio Advisor manages a well diversified portfolio of securities in order to reduce stock-specific risk and continues to hold a pro-cyclical view. The Fund is currently overweight in Materials, Energy, Industrials and Technology relative to its benchmark. Conversely, the Fund is underweight in Utilities and Telecommunication Services. This pro-cyclical allocation subtracted value in 2011, although it started to add value during the fourth quarter of the year as the U.S. equity market rebounded with a 9.5% return (in Canadian dollar currency).

During the year, the Fund's top performing securities were found in Consumer Staples and Health Care, while Financials and Materials were the worst sectors for the Fund's returns. During the most recent quarter, securities such as Abercrombie & Fitch Co., Baxter International Inc., Avon Products, Inc., Oracle Corp. and Alcoa Inc. were negative performing U.S. securities in the Fund. However, holdings in Seagate Technology LLC, El Paso Corp., D.R. Horton, Inc., ITT Corp. and EOG Resources Inc. provided positive performance. In the Fund's international sleeve, the Portfolio Advisor maintains a slight procyclical bias with overweight positions in Health Care, Consumer Discretionary, Technology, Industrials and Energy. The largest underweight positions remain in the Financials, Telecommunication Services and Materials sectors. For the year, the international equity sleeve subtracted value as an onslaught of events contributed to increased volatility, resulting in the markets reacting to macro events rather than bottom-up fundamentals. The "Arab Spring" riots of February preceded the Fukushima earthquake and ensuing nuclear disaster in Japan, and the U.S. debt downgrade in August. While all of these events occurred, the debt crisis in Europe worsened and fears about funding the peripheral European countries deepened, with panic spreading across the markets over fear of another "Lehman-like" systemic risk.