The High Income Fund returned -1.43% in October resulting in a year-to-date return of 7.53%. The Canadian stock market (S&PTSX) was down for a second month in a row on weakness in energy and commodity stocks; while US stock markets staged a strong recovery to finish at an all-time high. Market volatility was unusually high as concerns escalated with respect to global growth and oil prices hit their lowest level in almost two and a half years (Brent Crude US $85.86, -28% from 2013 high). The International Monetary Fund added to these concerns by trimming its global growth forecast for 2014 (to 3.3% from 3.4%) and 2015 (to 3.8% from 4%) and drawing attention to the imbalance between accelerating U.S. growth offset by weaker growth or stagnation in the Eurozone and Asia.

The objective of the High Income Fund is to produce stable income and long term capital appreciation through a conservative mix of stocks and bonds. The current yield on the Fund is 4.16% which compares favorably with the benchmark yield of only 2.51%. Notwithstanding recent market volatility, the fundamental earnings profile and sustainability of distributions of the holdings is strong and the Fund is well positioned for an eventual recovery.

Bonds in Canada (FTSE TMX Canada Universe Bond Index) returned +0.57% withprices rising on a “flight-to-safety” bid.  North American economic data was mixed. In the United States, there were +248K jobs added in September and the unemployment rate fell to 5.9%.  Consumer confidence indicators moved higher suggesting job creation and modest wage gains were having a desirable effect; but September retail sales fell thereby dampening economic optimism.  The Federal Reserve Bank of New York kept its overnight benchmark rate unchanged at 0.25% as expected and ended its bond purchase program.

In Canada, a strong employment report (September +74.1k mostly full time jobs) reduced the unemployment rate to 6.8%.  However, Canadian August GDP contracted -0.1%, retail sales and manufacturing activity were weaker than expected and the August trade balance swung into deficit, bringing into focus the weakness in energy markets and lower consumption of durable goods such as autos.  The Bank of Canada kept its overnight rate unchanged at 1%, but dropped its explicit reference to being “neutral” on the future direction of interest rates suggesting more uncertainty around the risks to its outlook.

In October, we added to our holdings of federally-guaranteed Muskrat Falls/Labrador Transmission 2048s to absorb cash and reduce our defensive positioning to rising rates.

Stocks in Canada (S&P/TSX) returned -2.07% in the month. Strength in Consumer Staples (+4.6%) and Consumer Discretionary (+4.3%) stocks was undone by weakness in Energy (down 8.0%) and Materials (down 11.5%) led by the Gold stocks. October was marked by unusual volatility. The stock market sold-off over 1,000 points from the end of September to a low on October 15th before recovering over 700 points to close.

Stocks in the US (S&P 500-USD) returned +2.44% (S&P 500-CAD +3.05%, up higher on the appreciating USD).  Consistent with the migration to safety in the bond market, investors moved into Utilities (+8.6%) and Health Care stocks (+5.9%) at the expense of Materials (down 2.0%) and Energy (down 2.3%).

With reduced expectations for global growth outside the United States added to geopolitical tension abroad, there is reason to become more cautious in our outlook for the stock market. We have become somewhat more defensive reducing exposure to Materials and adding to REITs and Financial Services.