| Market Commentaries for First Quarter, 2010 |
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 Fixed Income Market Review & Outlook |
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We expect a sustained economic recovery in North America throughout 2010. Growth is likely to slow later in the year, as the impact from fiscal and monetary stimulus fades and small businesses and households suffer from lack of credit availability. The commercial real estate market will drag down economic growth over the intermediate term. The Canadian recovery is likely to be more stable and self sustaining than the U.S. recovery, due to healthier housing and labor markets and strong resource prices.
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| High Yield Commentary |
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Despite having the lowest quarterly return since 2009, the Barclays Capital Global High Yield Constrained USD Hedged Index returned an impressive 5.28% in the first quarter. We believe high yield is attractive based on strong yields (at over 8%), potential further spread compression and a declining default rate over the next 12 months. In addition, the economic backdrop is improving, inflation remains at very low levels, and the Fed has continued its accommodative monetary policy. We recommend a moderate overweight to high yield with a focus on BB and B rated bonds.
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| Private Fixed Income Commentary |
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According to Aviva Investors data, new issue volume for traditional private fixed income exceeded $5 billion in the first quarter of 2010. This was a decrease from the sizeable $8 billion level in the fourth quarter of 2009. We expect private debt issuance to remain strong for the remainder of 2010. Investors should continue to see a variety of investment opportunities across industries and countries.
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| Investment Grade Commentary |
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The Barclays U.S. Credit Index outperformed duration-neutral Treasuries by 113 basis points (bps) in the first quarter. All major credit sectors generated positive excess returns versus Treasuries. Financials led the way, with 171 bps of excess return. Non-corporates generated 106 bps of excess return, followed by utilities at 93 bps. Lower-quality credits compressed to higher-quality credits, and financials compressed to industrials – both trends that we expect to continue. We will maintain overweights to financials, particularly banks and insurance. We also continue to overweight BBBs versus As or AAs.
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| Convertible Securities Commentary |
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The convertibles market performed well in the quarter, with a return of 5.6%, driven by underlying equity performance and spread tightening. The market has continued the trend of the last several quarters, as risk appetite continues to increase and investors search for returns in an ultralow interest rate environment. We remain somewhat defensive and look for companies that don’t require significant U.S. or worldwide growth to be successful. We like healthcare, defense, gold and some energy sectors.
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| Core Aggregate Commentary |
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The U.S. has benefited heavily from fiscal and monetary stimulus as well as inventory rebuilding in the first quarter of 2010. We expect slower growth in the second half, however, as the impact of fiscal and monetary stimulus fades and small businesses and households suffer from lack of credit availability. We continue to see opportunities to profit from tighter spreads in credit and securitized markets, but we expect returns to increasingly be driven by security selection and industry allocation as opposed to broad systematic market movements.
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| Market Commentaries for Fourth Quarter, 2009 |
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| Fixed Income Market Review & Outlook |
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The U.S. should benefit heavily from fiscal stimulus and inventory rebuilding in the first half of 2010, resulting in a short-lived V-shaped recovery. We expect slower growth in the second half, however, as the impact of fiscal stimulus fades and small businesses and households suffer from lack of credit availability. The Canadian economic recovery is likely to be stronger than the U.S. recovery, supported by healthier housing and labor markets and strong resource prices.
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| High Yield Commentary |
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The Barclays Capital Global High Yield Constrained Index turned in its fourth consecutive quarter of positive returns, at 6% for the fourth quarter of 2009, ending the year at 62.33% and easily offsetting 2008’s worst-year record of -38.4%. Going into 2010, we expect that declining default rates, tightening spreads, ample money supply, a strong primary market and the risk of rising interest rates will position the high yield asset class attractively against other classes. We recommend a moderate overweight to high yield with a focus on BB and B rated bonds and credit selection.
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| Private Fixed Income Commentary |
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According to Aviva Investors data, new issue volume for traditional private fixed income in the fourth quarter of 2009 was approximately $8 billion. This was a sizeable increase from the $6 billion issuance level in the third quarter. Private debt issuance is expected to be strong in the first half of 2010, as well. Investors should continue to see attractive terms and strong covenants.
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| Investment Grade Commentary |
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The Barclays U.S. Credit Index delivered 267 basis points of excess return for the quarter on 41 bps of spread tightening. The energy and finance sectors were the best-performing sectors. The worst performers for the quarter were higher quality non-corporates, including supranationals and foreign local governments. For 2010, we recommend a moderate overweight to investment grade corporate bonds, and we expect spread tightening to continue due to improved fundamental conditions, supportive technical factors and attractive valuations.
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| Convertible Securities Commentary |
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The convertible market performed very well in the fourth quarter, delivering a 6% return. This ongoing trend upward was driven by increasing risk appetites, underlying stock prices, tightening credit spreads and associated inflows to the strategy. Considering an uncertain recovery trajectory, we remain somewhat defensive in our approach to portfolio construction. We generally favor hard assets, healthcare and energy services and will remain underweight to financials, consumer discretionary and industrials. Any increasing volatility in the market – along with attractive secondary pricing – will make this category appealing in 2010.
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| Core Aggregate Commentary |
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The U.S. should benefit heavily from fiscal stimulus and inventory rebuilding in the first half of 2010, resulting in a short-lived V-shaped recovery. We expect slower growth in the second half, however, as the impact of fiscal stimulus fades and small businesses and households continue to suffer from a lack of credit availability. While fixed income credit spreads have tightened substantially from record wide levels, they remain attractive relative to long-term averages. We continue to see opportunities to profit from tighter spreads in credit and securitized markets.
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| Market Commentaries for Third Quarter, 2009 |
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| Economic Review & Outlook |
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North American economic growth likely turned positive in the third quarter of 2009, following four straight quarters of negative GDP growth. We are seeing signs of stability in the housing market, and government stimulus programs have given life to consumer spending. Capital markets continued to rally, as liquidity and the outlook for the economy improved, but the markets are likely to remain volatile in the near future.
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| High Yield Commentary |
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Following a record-breaking second quarter, the U.S. high yield market returned 14.21% for the third quarter, as reflected by the Barclays Capital U.S. High Yield 2% Issuer Capped Index. The U.S. high yield market has more than recovered its 25.88% loss in 2008, returning close to 50% year to date. We expect continued volatility in the last quarter and into 2010, as the pace of economic recovery will be slow and drawn out, and consumer activity remains constrained by unemployment and increased savings.
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| Private Fixed Income Commentary |
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We expect private debt issuance to be strong in the fourth quarter of 2009 as issuers take advantage of lower Treasury rates, lower spreads and higher investor demand. We expect new issuance to be more in the BBB ratings range, in a wider variety of sectors and from a variety of countries in the fourth quarter. Investors should continue to see attractive terms and strong covenants.
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| Investment Grade Commentary |
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The Barclays U.S. Credit Index tightened 86 basis points, providing excess return of 498 basis points for the quarter. According to Barclays, this was the second best quarterly performance ever. The best-performing industries were led by financials, and the worst were the lower-beta, higher-quality sectors. Looking toward yearend, we expect investment grade credit to outperform Treasuries, but at much more muted levels than we experienced in the last two quarters. We would expect investors to stay “closer to home” to preserve their 2009 performance.
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| Convertible Securities Commentary |
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The convertible marketplace performed very well in the third quarter, driven primarily by equity returns. Spread tightening and richening also were positive contributors as the return of risk appetite among investors continued. New issuance, at just $2.7 billion for the quarter, was disappointing but has picked up in recent weeks, and market dynamics would support larger issuance. We believe that the high level of federal deficit spending and underlying trends in housing and unemployment make a sustainable recovery unlikely in the near future. We expect increased volatility in late October or early November, which will benefit the valuation of convertibles.
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| Core Aggregate Commentary |
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The Barclays Capital U.S. Aggregate Index outperformed duration-adjusted Treasuries by 198 basis points in the third quarter, with an absolute return of 3.74%. As the economic outlook improved and cash flows into risky assets increased, risk appetites continued to increase and liquidity improved. This led to a tightening of spreads across all asset classes and positive returns relative to U.S. Treasuries. We believe that investment grade and high yield corporate bonds, along with commercial mortgage-backed securities, will continue outperforming Treasuries in the fourth quarter.
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| Market Commentaries for Second Quarter, 2009 |
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| Fixed Income Market Review & Outlook |
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Economic data began showing signs of a recovery throughout the second quarter. Growth is expected to turn positive in the second half of 2009 with a boost from inventory restocking, which was drawn down considerably in the first half of the year. Weakness continues in the housing and labor market, but consumer confidence and spending stabilized and began to turn higher. Many of these increases will likely be short lived, however, because they were spurred by one-time stimulus payments.
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| Canadian Market Review & Outlook |
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The North American economy remained weak in the second quarter, as negative real GDP and contracting employment persisted, and housing prices continued to fall. Despite these negative indicators, talk of economic “green shoots” began to sprout in market rhetoric. North American bond markets continued to sell off in the second quarter, as 10-year U.S. and Canada bond yields increased by 87 basis points (bps) to 3.53% and 58 bps to 3.36%, respectively. Government bonds suffered, as the flight to quality faded and the demand for stocks, commodities, non-government bonds and other risky assets increased.
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| High Yield Commentary |
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After finishing a very strong first quarter, the global high yield market posted solid returns again in the second quarter (24.23%), making this the best quarter in the history of the Barclays Capital Global High Yield Constrained Index. The rally that began in mid-December 2008 continued through June and resulted in a six-month return of 32.52%. April was the best month on record, when the index soared 11.47%. The market has cooled down since then, but still managed to return 7.95% for May and 3.23% for June.
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| Private Fixed Income Commentary |
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New issue volume for traditional private fixed income was approximately $5 billion for the second quarter of 2009, following a $4 billion first quarter. New issuance, with an average quality of BBB+, was distributed over a variety of stable sectors, including food and beverage, utilities, energy and government services. Spreads continued relatively wide compared to historical levels. We expect private debt issuance to accelerate in the second half of 2009, as issuers continue adjusting to the lending environment.
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| Investment Grade Commentary |
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The Barclays U.S. Credit Index turned in excess return of 1,187 basis points for the quarter, with all sectors ending on a positive note. Lower-quality BBBs have performed best, while higher-quality issues underperformed the index. We continue to take a constructive view of investment grade credit and remain confident that it will outperform Treasuries over the next six months. The magnitude of performance may be muted, however, compared to the massive outperformance in the first half of the year.
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| Convertible Securities Commentary |
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The convertible marketplace advanced from rising underlying equity prices and credit spread tightening. As consensus has shifted to a second-half recovery, investors have been quick to add risk to their portfolios. While some predict a return to normalcy later this year, it seems unlikely to us, because the employment situation is abysmal and likely to remain depressed through next year. We believe convertibles will offer investors an opportunity to benefit from expected increases in volatility and a robust issuance calendar.
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| Core Aggregate Commentary |
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The Barclays Capital U.S. Aggregate Index outperformed duration-adjusted Treasuries by 365 basis points in the second quarter, with an absolute return of 1.78%. As risk appetites increased, spreads across all asset classes tightened, leading to positive returns relative to U.S. Treasuries. We believe that investment grade and high yield corporate bonds will keep generating excess returns versus Treasuries, and securitized asset classes will continue to benefit from government-sponsored programs, though not as dramatically as they did in the second quarter.
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