Inhance Global Equity SRI Class

Inhance Global Equity SRI Class Commentary

Portfolio Advisor: Vancity Investment Management Ltd.

Fund Commentary - December 31, 2012

During 2012 Health Care, Consumer Discretionary and Industrials were the primary positive contributing sectors, while Financials and the Fund's cash position were performance detractors for 2012. Biopharma companies Gilead Sciences Inc., CSL Ltd. and Novo Nordisk AS continued to add value in Health Care, while Spanish clothing retailer Inditex; German automotive firm BMW and U.S. home improvement retailer, Home Depot Inc. were positive contributors within the Consumer Discretionary sector. In the Industrials segment, the Fund benefitted with strong contributions from U.K. testing and certification firm Intertek Group PLC and German logistics and delivery firm, Deutsche Postbank AG. The Fund's underweight to Financials was selectively reduced in the latter part of the year, but still had a negative impact as the sector continued to rally, particularly European and large U.S. financials that rebounded from low bases. The higher than normal allocation to cash, as part of the Portfolio Sub-Advisor's defensive positioning, was a modest drag on performance in the second half as markets shrugged off "fiscal cliff" uncertainty following the U.S. election and maintained a strong finish into year-end.

On a regional basis, the Fund's stock selection in Germany, the U.K. and France contributed positively as did a decision to overweight the U.S. and remain underweight Japan.

During the second half, positions were established in companies expected to benefit from the U.S. housing recovery such as U.S. real estate investment trust Weyerhaeuser Co., The Sherwin-Williams Co., a leading paint and decorative coating firm, building materials producer USG Corporation, homebuilder DR Horton and Fortune Brands Home & Security Inc., a leader in kitchen & bath cabinetry, plumbing and security systems. Additions to Financials were made with the world's largest asset manager BlackRock Inc.; Sweden's leading bank, Swedbank AB and German reinsurance firm Munich Re. Profits were taken in the Health Care sector and allocated to a position in Irish medical devices firm Covidien PLC. The Portfolio Sub-Advisor diversified the Fund's consumer exposure adding Dollar Tree, Inc., the largest single price point retailer, organic and health food company Hain Celestial Group Inc. and Panera Bread Co., a leading U.S.-based fast casual restaurant. Continental Resources Inc. was added as beneficiary of growing U.S. energy independence and rail transport company, Union Pacific Corp., a barometer of U.S. economic recovery. Funds for these additions were sourced from cash on hand and the sale of L'Oreal, AngloGold Ashanti Ltd., Industrial Commercial Bank of China, Praxair Inc., Republic Services Inc., Olam International Ltd., ICICI Bank Ltd. and Intercontinental Exchange, Inc.. The Portfolio Sub-Advisor also eliminated a position in JPMorgan Chase & Co. over governance concerns regarding the company's alleged manipulation of LIBOR rates.

Recent Developments

Through the United Nations Principles for Responsible Investment, the Portfolio Sub-Advisor participated in an engagement on the United Nations Global Compact reporting initiative, a leading initiative on corporate responsibility and sustainability. Companies deemed to be leaders received letters of support from the signatories, while laggards were encouraged to improve their reporting on implementation or risk being de-listed as a Global Compact signatory. In addition, the Portfolio Sub-Advisor participated in a dialogue with other investors and EOG Resources Inc. on company policies and best practices regarding hydraulic fracturing disclosure.

A key turning point for global equity markets occurred in the second half when both the U.S. and European central banks stepped up with unconventional monetary policies that offered a backstop to equities, significantly reducing the overhanging risk of market contagion from the European sovereign debt crisis. Surprisingly, resilient equity markets did suffer a pull back in November as investors took profits amidst renewed concerns, following the U.S. election, over the potential negative economic impact from the impasse between President Obama and the U.S. Congress concerning unresolved tax and spending issues termed the "fiscal cliff". The Portfolio Sub-Advisor's position has always been that rationality would prevail and that some tax resolution would ultimately be worked out, as it was early in the new year. The Portfolio Sub-Advisor maintains confidence that with a forthcoming, more complete U.S. budget resolution, the U.S. economy is poised to reaccelerate modestly on the back of renewed capital spending and pent-up consumer demand for autos and housing. This, combined with a rebound in China's economic growth rate, a modest uptick in European growth and with Japan adopting more stimulative growth policies, should create a more positive economic backdrop throughout 2013. The Portfolio Sub-Advisor has historically maintained limited exposure to Japanese equities but notes that the new government's proposed policy changes may offer favourable opportunities for longer term investment. Also, with central banks maintaining low interest rates and fixed income returns not compelling relative to equity yields, stocks, well-supported by modest earnings expectations, attractive yields and reasonable valuations should again be superior performers in 2013.

The Portfolio Sub-advisor maintains the view that being more conservatively positioned, focusing on earnings predictability and income will continue to be a prudent and rewarding strategy for navigating the current market environment. It will closely monitor for signs of economic acceleration and commodity price strength to exploit potential new, attractive opportunities among more economically-sensitive sectors.