The High Income Fund returned -2.57% in September with North American stock and bond markets down; while the appreciating US dollar (+2.9%) pushed the S&P 500 (CAD) up. It was a difficult month for global stocks with commodities tumbling on concerns about slower Chinese growth. Stocks also reacted negatively to the commencement of air strikes by a US-led Arab coalition on Iraq and Syria, economic weakness in Europe and profit-taking in the Tech sector led by Apple. Bond prices also started the month sharply lower on positive North American economic data, only to later partially recover as weakening stock markets spurred a “flight-to-safety”. Foreign buying of North American bonds on the appeal of relatively higher yields and the appreciating US dollar accentuated the trend.

The Fund performed below its benchmark on asset mix (overweight stocks) as stocks were down more than bonds. Underperformance of energy-based stocks and slightly wider corporate yield spreads also weighed down results.

We are adhering to our overweight equity and defensive bond strategy. Bond yields remain relatively unattractive and North American economic fundamentals are trending favorably on balance. As the volatility in the market continues into October, we will remain vigilant in our focus on companies with high-quality cash flow streams which we believe will produce the best long-run risk-adjusted returns.

Bonds in Canada (FTSE TMX Canada Universe Bond Index) returned -0.63%, with prices initially falling sharply and then partially recovering. North American economic data was generally positive in September, although most data indicated that the pace of economic expansion was slowing after months of more rapid acceleration.

In the United States, the August jobs report came in below expectations at +142K after staying above 200K in previous months. Housing activity slowed with fewer than expected housing starts and existing home sales; but a spike in new home sales lent support for continuing strength in the sector.  Auto and retail sales as well as manufacturing activity also posted strong readings. The Federal Reserve once again kept its overnight rate unchanged and reduced its bond buying program.

In Canada, after a strong upward revision to the July employment report (+42K), August showed a loss of 11K jobs carrying on the volatile trend. Meanwhile, low interest rates continued to support the housing sector with Canadian existing home sales rising 10% above their 10-year historical average.  Again, the Bank of Canada kept its overnight rate unchanged holding to its view of persistent economic slack and concerns of elevated consumer debt levels.

September bond transactions included profit-taking on Power Corporation 2039 bonds.

Stocks in Canada (S&P/TSX) returned -3.99% driven by an 8.02% drop in the Energy sector and -11.5% in Basic Materials. The resource-based sectors were clear losers with commodity prices declining across the board as the U.S. dollar rallied. The Health Care sector was the strongest group as Valeant advanced on improved sentiment around their successful pursuit of Allergan. The normally stalwart Financial sector offered limited protection with a 2.46% decline.

Stocks in the US (S&P 500-USD) returned -1.40% (S&P 500-CAD +1.78%) led by the Energy sector which declined 7.64%. Utilities and Consumer Discretionary stocks also under-performed while Telecom and Health Care was slightly in positive territory, each gaining around 0.30%. The correction in the stock market has provided us with an opportunity to put cash balances to work and to position the Fund to benefit from US dollar strength. We replaced the Labrador Iron Ore holding with Methanex, sold Verizon in favor of Johnson & Johnson and added positions in Kinder Morgan and Veresen.