In conclusion, we are optimistic about the economic recovery proceeding through 2011, but we recognize potential risks emanating from factors such as the European sovereign debt crisis, fiscal consolidation, the still depressed U.S. housing sector, as well as exogenous geopolitical events in countries such as Iran and North Korea. We are confident that the pro-active application of our multi-strategy fixed income approach will ensure continued success in achieving our objectives of attractive, low risk returns and capital preservation.

With the passage of another year, we thought it would be worthwhile revisiting the longer term performance of bonds versus stocks in Canada. In the chart below, the total return of Canadian bonds is compared to that of Canadian equities for the period starting with 1980 to the end of 2010. In the vein of “A picture’s worth a thousand words”, the chart provides a clear indication of why bonds should be a core asset class in any Canadian investment portfolio. Not only has the 9.84% average annual return of bonds exceeded the 9.68% return of stocks over the period, but the difference in volatility is readily apparent. Lest we be accused of “cherry picking” the start date, we note three aspects of using 1980 as the beginning year. First, the DEX Universe Bond index commenced operation at the end of 1979, so the availability of data is a significant consideration. Second, investment returns in 1980 actually favoured stocks (+30.1%) versus bonds (+6.6%) by a wide margin, so there was no advantage to its inclusion. Third, 1980 was the first full year of Paul Volcker’s tenure as Chairman of the U.S. Federal Reserve. We would argue that his approach to eradicating inflation represented a sea change for both central bankers and fixed income markets. With regard to the concern that bonds benefitted from a substantial drop in yields since 1980, we note that stock returns over that period were primarily a function of P/E multiple expansion, which was the direct result of falling bond yields.

So what does this mean for investors? From a tactical point of view, the relative value of stocks and bonds will fluctuate over time. At certain times, such as in the current economic recovery, equities should be emphasized versus fixed income, but a core holding of bonds should always remain an essential part of every portfolio. In these uncertain times, the defensive value of a bond portfolio offers especially good value.

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