The High Income Fund returned -0.03% in August lagging its benchmark return of 0.28%. Year-to-date, the Fund is substantially ahead of its benchmark and its one year return is 11.84%. Stocks in Canada returned 1.55% during the month led by precious metals and base commodities. In the United States, stocks declined -2.90%, but the appreciating US dollar reduced the loss to -0.39%. Bonds in Canada (DEX) declined 0.60%, with yields reaching new highs for the year.

The Fund remains at its maximum equity weight of 60% on our favorable outlook for stocks and weak outlook for bonds. Within the equities segment, interest-sensitive sectors on both sides of the border mirrored the sell-off in bonds with the worst performance coming from Financial Services, Utilities and Telecom stocks.

After stabilizing in July, Canadian bond prices resumed the sell-off that took place in May and June, although partially offset by a rally later in the month. The Fund was well positioned for the month-over-month drop in bond prices sticking to its lower asset mix limit on bonds (40%) and holding a meaningful position of cash and floating rate notes. The corporate holdings also contributed positively. In spite of across the board losses on bonds, several bond holdings had positive returns in the month. Most notable gainers were Sun Life Financial 5.40% May 2042 and Newalta 7.75% November 2019. Ahead of the late month rally, we took advantage of the higher yields to buy additional Canada Housing Trust Bonds (3.35% December 2020), but we retained our defensive posture.

Stocks in Canada (S&P/TSX) returned 1.55%.  The Canadian market put in a strong showing during the month of August with almost all the performance coming from surging gold stocks.  The Materials sub-index gained 8.29% for the month on the strength of the golds while the defensive sectors sold off with the worst sectors being Utilities (-7.47%) and Consumer Staples where the High Income Fund was underweighted. The Fund established a small weight in undervalued gold names with positions in Goldcorp (+7.35% for the month) and Iamgold (+19.25%).  The worst performer was Norbord which sold off (-18.43%) on concerns that it might reduce its dividend, but has since recovered more than half of that price movement so far in September.

Stocks in the U.S. (S&P 500-USD) returned -2.90% (S&P 500-CAD -0.39%). Stocks were weak in the month on continuing concerns about the end of quantitative easing by the US Federal Reserve.  In local currency, all subsectors of the S&P500 had negative returns.  Recognizing the inevitable end to the stimulus program has put upward pressure on interest rates.  The interest sensitive sectors which had seen valuations swell during the last five years as investors chased safety and yield were sold in favor of higher growth sectors.  Within the High Income Fund, we sold the positions in Philip Morris International and Wells Fargo and established positions in General Electric and Lockheed Martin.

Bonds in Canada (DEX) returned -0.60% with yields reaching new highs for the year.  Bond prices began the monthon a weakening trend and credit spreads widened, but the losses were partially reversed later in the month on concerns of a US coalition-led military strike against Syria and economic data that suggested that the US and Canadian economic recoveries were losing momentum. On balance, however, global economic data was mixed and the market remained pre-occupied with the potential for the US Federal Reserve to announce the tapering of its quantitative easing program at its September 17-18th meeting. Contributing to the global rise in bond yields was data from Europe showing that the 17-nation euro region led by Germany and France emerged from recession posting better than projected economic growth in the second quarter.  In China, an important market for global exporters, retail sales, industrial production, and data on imports and exports were all stronger than market forecasts. In the US, employment data was slightly weaker than expected and housing data raised concerns that higher borrowing rates were causing activity to slow. In Canada, employment data disappointed with a loss of 39,000 jobs in July and the unemployment rate rose to 7.2%; while data on housing starts suggested that the housing market was heating up again.