Equity Fund Commentary

Market Overview

The Canadian market (S&P/TSX Composite Index) fell 8.7% in 2011 on the back of weakness in commodity stocks and waning investor confidence.
The MSCI World Index was down 2.9% and most foreign markets also closed the year in the red, with the exception of the U.S.

Portfolio Specifics (2011)

The manager’s (CGOV) strategy of focusing on businesses with steady cash flows, strong barriers to entry and rising dividends provided downside protection in a turbulent year.
Foreign stocks played a prominent role in the portfolio. A number of holdings turned in strong gains and several positions were increased (Novartis, Insperity, Unilever, Asia Pacific Breweries).
As a group, consumer-related holdings were the strongest contributors to performance (notably Asia Pacific, CVS Caremark, Unilever), while select technology and resource stocks were the key detractors (RIM, Cisco, Suncor). Birchcliff Energy and Nalco benefited from acquisition activity.
All but four of the fund’s dividend-paying stocks increased their payout. Dividend growing companies have proven to be among the top performing securities over the past several years as the hunt for yield has escalated.
Trading activity was higher than usual in 2011. CGOV was an active buyer when market volatility was elevated, particularly in the summer. Five new holdings were added to the portfolio over the year, while six were sold.
The fund experienced lower volatility than the TSX as a result of its greater exposure to less cyclical businesses outside the resource sector.

Notable Transactions (Fourth Quarter)

The portfolio’s two notable problem children, RIM and Manulife, were sold. Management at both companies failed to execute over a reasonable time frame and CGOV felt it was time to move on.
Kinross Gold was sold (based on operational issues) and replaced by Franco-Nevada. The manager isn’t a gold bug by any means but feels a small amount of exposure to the metal makes sense.
BorgWarner was purchased. The auto parts company has a strong growth profile, is a leader in energy efficiency and is attractively valued.

Positioning

The fund has a defensive structure – CGOV favours companies that offer industry-leading products or services with predictable, recurring revenues.
As a whole, the portfolio’s holdings generate 60% of their sales internationally, with growing exposure to the emerging markets.
With the pullback in economically-sensitive stocks, CGOV has been looking closely at a few cyclicals, but feel that prices are not yet cheap enough.