The High Income Fund returned 1.78% in August with stocks outperforming bonds. Market volatility was elevated with tensions between Russia and the Ukraine intensifying and foreign intervention to halt the Islamic terrorist threat in Iraq. The Ukraine crisis was additionally seen as hindering the global economic recovery as the European Union and other nations implemented a wide range of economic sanctions against Russia. Eventually, stock markets reversed earlier losses and finished higher as corporate earnings improved. With increased measures by the European Central Bank to stimulate growth and avoid deflation, European bond yields moved lower and this caused a similar move in Canada leading to higher bond prices.

The Fund performed in line with its benchmark supported by favorable asset mix (overweight stocks) and outperformance of Canadian stocks. We continue to adhere to our overweight equity and defensive bond strategy as bond yields remain low and relatively unattractive; but we reduced our defensive bond posture to capture the bullish move in bond prices into month-end. With stock market levels reaching new highs since the 2008-2009 global crisis, a temporary pull-back is possible which could offer attractive buying opportunities.

Bonds in Canada (FTSE TMX Canada Universe Bond Index) returned 1.07%, with prices extending gains on geopolitical risk, European economic concerns, month-end extensions and demand from foreign investors re-allocating out of European bonds. The extent of the upward move caused the Canada 10 year yield to fall below 2%, a new yearly low.

North American economic data was generally positive. Noteworthy was strength in housing, manufacturing and auto sales.  The jobs data, on the other hand, was mixed with weakness in Canada contrasting with strength in the US. After strong data in June, the US July figures impressed again with 215K new jobs. In Canada, an initial report showed a dismal 200 net new jobs, which was very disappointing coming after the previous months’ weaknesses. Statistics Canada later revised its figure to +41.7K, but on lower quality part-time positions, alleging an isolated technical glitch. July inflation figures cooled in both Canada and the United States suggesting an absence in sustained pressures. The release of the second quarter Canadian GDP report gave a clearer picture on emerging trends with growth at a faster than anticipated 3.1% (a rebound from 0.9% in Q1) coming from a strong pick-up in exports, durable goods consumption and residential construction; while growth in business investment was modest.

August bond transactions included profit-taking on Penske 2018 and WestJet 2019 ahead of anticipated September supply as well as the purchase of Canada Housing Trust 2024 to extend the portfolio’s average term.

Stocks in Canada (S&P/TSX) returned 2.09%. Consumer Discretionary stocks led the market on the announcement of the merger agreement between Tim Hortons and Burger King. Energy stocks were another strong group with outperformance from the smaller capitalization producers and service companies. Materials stocks dragged down the index with a loss of 5.2% with positive returns from Gold equities overshadowed by weakness in Base Metals.  Financial stocks underperformed the market for the month as the market was unimpressed with the earnings releases from the large banks.  The Fund reduced exposure to Royal Bank and TD Bank in favor of National Bank and CIBC.

Stocks in the US (S&P 500-USD) returned 4.00% (S&P 500-CAD 3.70%). Financial, Health Care and Consumer Discretionary groups led the upside while Energy and Telecom stocks were laggards. We added Paychex, Norbord and Republic Services to participate in the improved outlook for growth in jobs and housing.