investment review
December 31, 2009 - Report Highlights
Asset Mix
A minor change to restore the targeted asset mix in unconstrained balanced portfolios to a neutral equity target of 60% from 61% was the only change in the quarter. The 1% reduction in equities was allocated to bonds instead of cash as we find short-term interest rates uninspiring. Mildly positive economic news resulting from huge government stimulus as well as continued demand from Asia for resources continued to cause markets to advance, although at a slowing rate. This seems to be ahead of the anaemic economic recovery. Corporate earnings have been driven by expense reductions, not revenue growth; top-line revenue growth is going to be important in sustaining the improvement that's been seen in equity markets.
We continue to have concerns with respect to the constrained U.S. consumer, the dwindling impact of the huge fiscal stimulus as we progress through 2010, the lack of progress on the regulatory front with respect to financial markets, and governments' need to reduce deficits. Thus, in these uncertain times our continued emphasis on individual security analysis and valuation is particularly important.
While the yield spreads between corporate bonds and Canada‟s have narrowed, corporate yields are still quite attractive causing our portfolio to maintain an overweight in corporate bond holdings. However, despite adding 1% to bonds we remain underweight because of the historically low rates on Government of Canada bonds. In the longer term we prefer equities, but the rapid increase in stock valuations in the short term has caused us to be cautious and thus we remain at our long term neutral equity target.
