The High Income Fund returned 0.78% in September, in line with its benchmark.The Fund’s year-to-date return is 5.56% and the one year return is 10.19%. Stocks in Canada (S&P/TSX) returned 1.40% during the month, advancing for the third straight month led by industrials and telecom services. In the United States, stocks (S&P 500) returned 3.14%, more than erasing last month’s loss, but the depreciating US currency trimmed the gain in Canadian dollars to 0.52%. Bonds in Canada (DEX) gained 0.52%, with yields falling on the month as the US Federal Reserve left its benchmark rate unchanged and did not announce the widely anticipated tapering of its Quantitative Easing program.

The Fund remains at its maximum equity weight of 60% on our favorable outlook for stocks relative to bonds, which re#ects our optimism of continuing growth in the North American economy. However, we now believe that the pace of growth will be more modest, causing the Federal Reserve and the Bank of Canada to continue with their current policies for longer than expected. Our tilt towards equities also re#ects the significant yield advantage over bonds. Within each segment, we have made tactical shifts to buffer the returns from near term volatility. We trimmed our exposure to US stocks while negotiations continue on various US funding bills and the US debt ceiling. We expect that delays in achieving an agreement could erode investor confidence and transfer into increased stock market volatility. We, also increased our holdings of bonds as we believe that overall bond yields in the near term will fluctuate within a relatively narrow range after the significant increase since May.

Stocks in Canada (S&P/TSX) returned 1.40%. Top performing sectors included airlines, which reported stronger travel data, and telecom services which retraced earlier losses on the news that Verizon was no longer interested in entering the Canadian wireless market. The weakest performing group by far was gold which led the materials sector to underperform with a loss of 5.12% for the month. The surprise announcement by the US Federal Reserve of continued Quantitative Easing was not enough to offset fundamental concerns of lower commodity prices giving rise to large outfows from resource-based funds. We have taken a more conservative stance in the portfolio, reducing our exposure to gold, raising cash and adding positions in Enerplus and Vermillion Energy, two quality energy companies with high free cash flow visibility.

Stocks in the US (S&P 500-USD) returned 3.14% (S&P 500-CAD 0.52%). Returns in the US were driven by the more economically sensitive sectors of Industrials and Consumer Discretionary at the expense of more interest rate sensitive Telecom and Utility Stocks.The more important theme for the month, however, was the pending shutdown of the US government over a disagreement between parties on health care and the debt ceiling. In advance of this process we adopted a more conservative stance in our US holdings and took profits on Johnson and Johnson and Lockheed Martin. We expect to redeploy cash in the US market before the end of the year but the uncertainty created by the current stalemate suggests reduced exposure to US stocks for the near term.

Bonds in Canada (DEX) returned 0.52%, with yields falling after reaching new yearly highs early in the month. Thee most notable development was the US Federal Reserve’s interest rate announcement which left its key overnight rate unchanged at 0.25% as well as the pace of its purchases of government and agency securities (i.e. Quantitative Easing Program).The announcement was a major surprise to the market as expectations were high that the Fed would at least set a time frame for tapering. Also surprising the market was the lowering of its estimates for economic growth to 2.0-2.3% in 2013 from 2.3-2.6%, and to about 3% in 2014. Bond yields dropped swiftly on the announcement.

Global economic data was generally mixed during the month. US data on employment growth, housing construction, retail sales and consumer confidence underwhelmed the markets. In Canada, a slightly different picture emerged with the economy adding 59,000 jobs in August, three times more than expected. The Canadian housing market also defied expectations with a higher pace of sales and price gains, meanwhile Statistics Canada reported that the ratio of household debt to disposable income rose to a record 163.4% on increased mortgage borrowing in the second quarter. Notwithstanding the resiliency of Canadian housing and consumer spending, national economic growth measures suggested that the economy has been growing more slowly on weaker trade data and business spending. Subsequent to month-end, the Bank of Canada lowered its forecasts of third and fourth quarter growth to a moderate pace of 2.0-2.5%. In Europe, past difficulties seemed to be under control and there were some bright spots in some of the monthly economic releases; however, concerns remained about rising government and consumer debt levels and increasing loan losses within the finnancial system. Data on China’s industrial output, which grew in August at the fastest pace in several months, contributed to increased confidence in the sustainability of its recovery.

Transactions in the month included purchases of Canada Housing Trust 2020 and Government of Canada 2023 bonds, reducing our cash position. With the relative price appreciation of Sobeys 2023 bonds, we sold them to buy the Loblaw 2023 issue, a higher quality security with an equivalent yield.