American Fund Commentary
Portfolio Sub-Advisor: McLean Budden Limited
Fund Commentary - September 30, 2011
Economic and political headwinds undermined investors'
confidence and raised concerns that global growth was poised for
further setback. The decline in equity prices worldwide gathered
momentum during the quarter led by a general retreat from "riskier"
assets. The major beneficiaries of this accelerating shift in
sentiment were the bond markets, highlighted by the powerful
advance of longer-term U.S. Treasuries. There have been two main
catalysts behind these developments: The first is the concern over
the seemingly inevitable Greek default and the likelihood of it
spreading to Spain and Italy. The second relates to the political
aspect as leadership in the U.S. and Europe have failed to reassure
investors that governments can effectively deal with their fiscal
crises. The angst caused by these factors has contributed to global
economic growth slowdown, including China's, which has hurt
commodity prices. The latter has had a significant impact on
Canadian equities and the Canadian dollar. Central banks have been
forced to reach deeper into their "toolbox" given the political
gridlock. Examples include the Federal Reserve's initiation of what
has been dubbed "Operation Twist" - an effort to drive long-term
yields lower, and the ECB's move to resume aggressively buying
government bonds of high-debt countries. In our view there may well
be more downside to global economic growth; however, expectations
have receded and relative valuations between stocks are largely
reflecting this possibility.
The U.S. market fell significantly led by weak performance in the
Materials and Financials sectors. The Portfolio Sub-Advisor
maintains a focus on high-quality, large capitalization companies,
with strong balance sheets and sustainable earnings growth. The
Fund lagged the Index for the quarter. Stock selection was a
negative factor as weak results in Energy (Apache Corp., Peabody
Energy Corp.) and Information Technology (Hewlett Packard Co.,
Applied Materials Inc.) outweighed strong performance in Health
care (Merck &Co. Inc.). Industry sector allocation also had an
adverse effect on performance due primarily to an overweight in the
relatively weak Materials sector at the expense of Utilities.
The Portfolio Sub-Advisor added to Bank of America Corp. and
Freeport-McMoRan Copper & Gold Inc. positions during the
quarter as relatively weak share price performance provided
attractive buying opportunities. Verizon Communications Inc. was
reduced during the quarter and the proceeds were used to increase
existing positions with higher relative return potential.The Fund
currently favours exposure to industry-leading companies with
sustainable earnings growth and strong balance sheets in the Health
Care, Financials and Materials sectors.