Investment Performance: Selected Rates of Return

• Equity Index Returns
• DEX Universe Bond Index Returns

Investment Performance: Equity Data

• S&P/TSX Composite Index
• S&P 500 Index

Investment Performance: Fixed-Income Data

• Bank of Canada (BoC) Target Rate
• Bank of Canada Bond Yield Curve
• DEX Universe Bond Index
• DEX Universe Bond Index Credit Quality Mix

Quarterly Highlights: Noteworthy Developments

• Corporate Cash
• Consumer Credit Demand
• Sovereign Debt
• U.S. Bond Market Issuance

To discuss any of the content in this issue of Synopsis, contact your Segal Advisors investment consultant or the nearest office. Alternatively, send an e-mail message to contactus@sibson.com.

The Economy: Key Indicators

This section focuses on on Segal Advisors’ commentary on select economic indicators for the first quarter (Q1) 2010.

CPI: Percentage Change Year over Year

Headline inflation slowed as consumer prices in Canada rose by 1.4 percent in the 12 months to March from a year ago, following a 1.6 percent increase in the 12 months to February and a 1.9 percent increase in January. Similar to the previous four months, the 12-month movement in energy prices, primarily gasoline, was still the main driver of inflation.

Excluding energy, the consumer price index (CPI) rose 1 percent in the 12 months to March, compared with a 1.3 percent increase in February and January. Food prices advanced 1.3 percent, following a 1.2 percent increase in February and 1.4 percent in January. Transportation prices rose 6 percent in March, following the trend of the previous months; a 5.9 percent rise in February and 7.7 percent in January.

The only two components of the CPI that fell in the quarter were shelter and clothing/footwear. Shelter costs fell 0.7 percent in March and declined 1.1 percent in both February and January; mainly the result of declines in mortgage interest cost and natural gas prices.

Source: Statistics Canada

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Labour Market and the Unemployment Rate

Canada’s job market added 18,000 jobs in March. The unemployment rate remained unchanged at 8.2 percent after a fall in February of one-tenth of a percentage point from 8.3 percent in January. It was the third consecutive monthly gain after 21,000 jobs were added in February and 43,000 in January. A total of 176,000 jobs have been added since the market bottom in
July 2009, at an average of more than 14,000 jobs per month.

Source: Statistics Canada

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U.S. vs. Canadian Dollar Exchange Rate

The Canadian dollar ended Q1 2010 at 98.49 cents U.S., versus 95.06 cents at the beginning of the quarter and up 24.1 percent from 79.35 cents U.S. one year ago. The dollar appreciated 3.6 percent against its U.S. counterpart and reached a high of 98.97 cents mid-March.

The Canadian dollar continued to derive benefit from signals that the Canadian economy appears to be growing faster. The currency continued to be supported by strong commodity prices amid optimism of a global recovery.

The Canadian dollar outpaced other leading currencies over the quarter, such as the Japanese yen, British pound and the Euro.

Canadian-U.S. Exchange Rate, January 2009-March 2010

Source: Bank of Canada

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Percentage Change in GDP

Canadian gross domestic product (GDP) grew at an annualized rate of 5 percent during Q4 2009 (the most recent data available), faster than economists’ consensus estimates (4 percent). It was the strongest increase since Q3 2000. Net trade contributed robustly to growth, with 15.6 percent growth in exports that was not matched by import growth.

Consumer spending was up an annualized 3.6 percent in the fourth quarter; final domestic demand grew 4.8 percent. The housing recovery was a significant source of growth during the fourth quarter; residential investment rose a hefty 30 percent.

Investment in nonresidential structures was down for a fifth straight quarter (-8.5 percent), while machinery and equipment spending fell 9.2 percent.

Source: Statistics Canada

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Investment Performance: Selected Rates of Return

This section presents rates of return for selected equity, fixed-income, and other indices. The graphs illustrate returns for Q1 2010. The tables of data show returns for the latest quarter and one-, three-, five- and 10-year annualized time frames. All data in the tables are percentages.

Equity Index Returns

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DEX Universe Bond Index Returns

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Investment Performance: Equity Data

The tables of data in this section present equity data broken down by the Global Industry Classification Standard (GICS) for selected indices. The GICS is a classification system developed by Morgan Stanley Capital International (MSCI) and Standard & Poor’s consisting of 10 sectors, 24 industry groups, 68 industries and 154 sub-industries. The tables show returns by sector for both Q1 2010 and one-year periods. Each sector’s weight in the overall index return as of March 31, 2010 is also noted.

S&P/TSX Composite Index

The Health Care sector had the highest return for Q1 2010. However, with such a small weight in the index, this return is closely tied to one or two companies. The two biggest sectors in the Toronto Stock Exchange (TSX), Financials and Energy went in opposite directions during the quarter. Financials continued to add positive returns during the quarter, increasing the one-year return to 68 percent, whereas, Energy detracted slightly for the quarter. All sectors except Energy provided positive returns to the TSX for the quarter. The table below shows the breakdown of each equity sector for Q1 2010.

Source: Mellon Analytical Solutions, LLC

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S&P 500 Index

The Telecom and Utilities sectors produced negative results while the Consumer Discretionary, Industrials and Financial sectors produced double-digit returns in Q1 2010. The Financials sector had a strong rebound in Q1 2010 compared to the Q4 2009 when it was the only negative contributor. Information Technology and Financials continue to be the highest weighted sectors at the end of Q1 2010. The table below shows the breakdown of each equity sector for Q1 2010.

Source: Standard & Poor’s

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Investment Performance: Fixed-Income Data

This section focuses on selected fixed-income data.

Bank of Canada (BoC) Target Rate

The Bank of Canada (BoC) announced that it may relinquish its commitment to maintain the target rate at 0.25 percent due to signs that the Canadian economy was growing faster than expected.

The BoC maintained that the persistent strength of the Canadian dollar was a factor for concern for the economy and would retain flexibility on its policy mechanisms.

Interest Rates: Central Bank – Overnight Target Rate, (Percent, NSA) Canada

Source: Statistics Canada

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Bank of Canada Bond Yield Curve

Yields rose slightly January through March, the average yield on the DEX Bond Universe Index finished at 3.4 percent. The
two-year rate rose 26 basis points (bps)* to 1.7 percent, while long-term rates dipped 1 basis point to 4.1 percent.

March saw the first negative month of the year in the Canadian bond market, as rising yields caused bond prices to decline. Economic data in early March that showed considerable strength in the Canadian economy prompted hawkish comments from the Bank of Canada, which were the principal factors behind the rise in yields.

* As a reminder, 10 bps equals 0.1 percent.

Treasury Yield Curve

Source: Statistics Canada

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DEX Universe Bond Index

The Corporate sector continued to lead the DEX Universe Bond Index for both Q1 2010 and the year. The “modified
duration”* is longest in the Provincial market. The table below shows returns for the sectors of the DEX Universe.

*“Modified duration” is a formula that expresses the measurable change in the value of a security in response to a change in interest rates.

DEX Universe Bond Index: Breakdown by Corporate, Municipal, Provincial and Federal Sectors

*Note: Modified Duration in parenthesis.

Source: PC-Bond

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DEX Universe Bond Index Credit Quality Mix

The credit quality of bonds in the DEX Universe Bond Index remains very high. The majority of issuers have a rating of AA or better.

The breakdown of bond quality based on AAA, AA, A and BBB ratings is shown in the graph below. Anything below BBB is deemed below investment grade.

DEX Universe Bond Index Credit Quality Mix

Source: PC-Bond

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Other Quarterly Highlights: Noteworthy Developments in the U.S. and Global Economy

Segal Advisors finds the Q1 2010 U.S. and global developments discussed below to be noteworthy for institutional investors in Canada.

Corporate Cash

According to data released in Q1 2010, as of December 31, 2009, the non-Financial constituents* of the S&P 500 Index held
approximately $684 billion (U.S.) in cash and short-term investments on their balance sheets, an 18.3 percent increase on a year-over-year basis. Cash as a percentage of total assets is currently at an all-time high of 7.4 percent, as shown in the line graph below.

Information Technology, Industrials and Healthcare held the most absolute cash on their balance sheets. See the bar graph below.

Over the past year, companies have used a variety of methods to reduce balance sheet liabilities (e.g., a decrease in capital expenditures and increased corporate debt issuance), which have led to a dramatic increase in cash balances.

* The Financials sector is excluded due to regulatory requirements to hold cash.

Cash as a Percentage of Total Assets                          Cash & Market Cap by S&P 500 Sector (as of 12/31/09)

Source: Segal Advisors using Bloomberg data

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Consumer Credit Demand

In the U.S., the availability of consumer credit, which includes loans for households, financing consumer purchases of goods and services and refinancing existing consumer debt, showed signs of improvement during January 2010; however, demand for consumer credit was weaker than economists’ consensus during the month of February 2010.

Credit balances fell by $11.5 billion in February, as shown in the graph below — to $2.5 trillion. The month of February reversed the gain experienced during January, as credit balances stalled.

Revolving credit balances fell sharply, comprising $9.4 billion of the total credit balance decrease in February. The decline translates into a 12.3 percent annualized drop in revolving credit. In addition, due in part to severe winter weather, auto loans slipped in January and February, causing a decrease in non-revolving credit of $2.1 billion or 1.6 percent at an annualized rate.

Change in Consumer Credit Outstanding

Source: Federal Reserve Board

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Sovereign Debt

Investors across the globe have turned their attention to government debt in 2010. The ability of a nation to repay its debt depends on a number of factors, including the amount of debt outstanding relative to gross domestic product (GDP), the interest rate paid on the debt relative to the economy’s growth rate and the size of the government’s primary budget balance (surplus or deficit). As a result, countries experiencing slow or negative growth rates, along with large budget deficits, are viewed as being the most vulnerable to sovereign default.

According to the International Monetary Fund (IMF), sovereign defaults have only occurred in developing countries within Africa, Latin America, Eastern Europe and Asia since the 1950s; however, the countries that currently pose possible systemic risk are developed nations. For example, European Union members Greece and Portugal have large budget deficits and do not have the ability to devalue their currency due to the central monetary policy. The map graph below shows patterns of sovereign debt ratings, as of April 19, 2010.

S&P Sovereign Foreign Currency Long-Term Debt Ratings

Source: Segal Advisors using Bloomberg data

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U.S. Bond Market Issuance

Issuance in the U.S. bond markets increased dramatically during 2009, which was fueled by the Federal Reserve’s 2008 interest rate cuts and government-created programs designed to revive credit markets. During 2009, there was approximately $6.6 trillion in new issuance across the Municipal, Treasury, Mortgage-related, Corporate, Agency and Asset-backed securities sectors. Treasury issuance comprised 32 percent of issuance during 2009.

For Q1 2010, Treasury securities continued to comprise the largest percentage of issuance within the U.S. bond market. See the graph below. Corporate new issuance continued to remain strong across numerous sectors as corporations looked to take advantage of low interest rates and an improved risk appetite from investors.

Issuance in the U.S. Bond Markets

      * Treasury includes interest bearing marketable coupon public debt.
    ** Mortgage-related includes GNMA, FNMA, and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs.
  *** Corporate debt includes all non-convertible debt, MTNs and Yankee bonds but excludes CDs and federal agency debt.
**** Beginning in 2004, Sallie Mae has been excluded from federal agency debt due to privatization.

Sources: U.S. Department of Treasury, Federal Agencies and Thompson Reuters compiled by Securities Industry and Financial Markets Association

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Helpful Online Resources

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