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• For a 65 year old couple, there is a 90% chance at least one will live to age 80.
• For a 65 year old couple, there is a 48% chance at least one will live to age 90.
• Since 1926, average returns for the S&P500 have been 9.8%. 4% came from dividends and 5.8% from capital appreciation.  41% of total return came from dividends.
• In 2006, the top Corporate tax rate in Canada was 34%. In 2016 it was 27%.
• In 2006, the top Corporate tax rate in the U.S. was 39%. In 2016 it is still 39%.
• The U.S. unemployment rate is now 4.7%. The last two times the unemployment rate was that low, the 10 year bond yield was at 4.14% and 5.24% respectively.   Today it is at 2.37%.
• In the past 14 years, when comparing returns to volatility, High Yield bonds have been among the best asset classes averaging a return of 9.2% while maintaining a relatively low level of volatility compared to all major asset classes. Commodities have had a 1.2% annual return with a much higher level of volatility.
• In 1990 the 5 year GIC rate was 11%. Today at the Big banks, 5 year GIC rates are only 1.5%.  In order to generate $50,000 in annual income using 5 year GICs, you would have needed $454,000 of savings in 1990.  Today you would need $3.33 million.
• There is $12.3 trillion sitting in cash and money markets in the U.S. today vs. being efficiently invested.
• The asset mix of the Ontario Teachers’ Pension Plan at December 31, 2015
  1. 2% Canadian Stocks
  2. 44% Non-Canadian Stocks
  3. 41% Bonds
  4. 6% Natural Resources
  5. 14% Real Estate
  6. 10% Infrastructure
  7. 11% Absolute Return Strategies
  8. -28% Money Market (or borrowing to invest)

What the facts above mean to us is that while short term interest rates are heading higher in the United States, we live in a time of increased longevity and very low risk free returns on investments like GICs.  In order to achieve positive investment returns after inflation and taxes, that will carry through a long life, you need to look at stocks that pay dividends and you should have meaningful exposure outside of Canada and Commodities.  You also want to have exposure to high income investments that reduce volatility and do not act so much like stocks, such as high yield debt and alternative income strategies.  While stock markets today are trading at historically higher valuations in the U.S. and Canada, clients should still be invested because earnings are expected to rise, there is the positive potential impact of meaningful corporate tax cuts in the U.S., and the massive amounts of money that remain invested in cash and money markets that need a higher return.  If you think that the people that manage the Ontario Teachers’ Pension Plan are pretty smart (they are), then why are they borrowing $47 billion to invest?  The answer is that they believe so strongly that cash is a bad investment today and that with cash being so cheap to borrow, why not borrow to invest?

These facts don’t change under President Trump.  What does change is that in a world of unfiltered tweets that reach around the world in a second, we will have some days or weeks or months in 2017 that may shake investors’ faith in these 10 facts.  Despite the noise, facts still count in life, in financial plans and in investing.

While we certainly saw gains across our stock portfolios, we did not get the full benefit of the surprising Trump election win, and the surprising Trump rally.  We always find it surprising how many people state that they expected both to happen….. after the fact.  It is worth noting that for the small percentage that thought Trump would win, there were even fewer that thought the stock market would rally on the news.

On the stock side, most clients were up between 1.25% and 2.25% on the quarter.

On the bond side, TriDelta’s active management really shone brightly.  While broad bond indexes had a terrible quarter, down over 3%, the TriDelta Fixed Income Fund was down just 0.6%.  Our Fund was up nearly 6% over the course of the year.  Among the reasons for this outperformance was a focus on Corporate Bonds, Preferred Shares as well as some higher exposure to High Yield Corporates.

Preferred Shares continued their strong rebound, especially on the rate reset side of things.  TriDelta’s preferred holdings were up over 6% on the quarter and over 14% on the year – handily beating Preferred share indexes over both time frames.

The TriDelta High Income Balanced Fund ended off a great year, with a decent fourth quarter gain of 1.25%.  For the year, the fund was up 15.6%.  It has had 11 consecutive positive months.

The million dollar question is whether Trump will accomplish most of what he says.  If that is the case, there will be lower corporate tax rates, higher inflation, higher interest rates, greater infrastructure spending, more protectionist trade policies and less regulation on the Energy, Financial Services and Health Care industries.  The market has already assumed that much of this will take place, and has acted accordingly.  If some of these don’t take place or take place much more slowly or in a watered down way, the market will adjust back a little bit in the affected sectors.

We believe the following:

• While there will likely be higher inflation and interest rates in the United States, this will not likely be the case for Canada. Canada is in a different place economically than the U.S. and along with the possibility of a tougher export environment to the U.S., Canadian increases on inflation and interest rates will likely be muted to non-existent.
• While there will likely be higher inflation and interest rates in the United States, it will not be as high on either front as some are predicting, at least not in 2017. Among the constraints on increased Government spending will be the debt ceiling (remember that issue from yester year?) to pay for greater infrastructure.  This will not be easy to push through a Republican House, and will likely slow the growth and inflation some currently predict.
• Large cap dividend payers will remain a popular investment. In the weeks since the Trump election, there was a pullback in some of the traditional large cap dividend paying utilities, health care, consumer staples, and telecoms.  We believe that there remains a great deal of interest in these stocks for two reasons.  The first is that all of those bailing out of bonds need to go somewhere.  If you were 60% invested in bonds and now you are 40% in bonds, what type of stocks might you buy?  It is most likely for a bond alternative, you would buy the highest quality stocks that pay a decent dividend yield.  The second reason is that as per point number two, we believe that some of the U.S. growth story is overdone, especially in terms of expected infrastructure spending.  If that is the case, the shift to higher risk stocks that we saw this past quarter may shift back.    
• Oil will struggle to top $60 for a long time. This is tied somewhat to lowering regulatory hurdles on various ‘dirty’ energy sources, and also tied to the opportunities for increased supply at $60 Oil.  There are more and more U.S Shale energy sources that are ramping up again as the Oil price increases.  In addition, supply will likely increase in Canada and other oil exporting nations outside of OPEC.  Lastly, OPEC members have not proven themselves the most disciplined bunch in the past decade.  It is unlikely that they will be able to hold back on supply if they can get decent prices.  As new supply hits, it will significantly constrain meaningful growth in prices.  This will also limit the opportunities for the Canadian market to do nearly as well as in 2016.

US Dollar will be stronger than the Canadian Dollar – U.S. interest rate hikes while Canada remains steady.  Some possible trade issues for Canada.  Lower commodity price growth than 2016.  All of these point to Canadian dollar weakness.

Canada will not be a top performing equity market in 2017 – In 2016, the TSX was up 18% after declining 11% in 2015.  In Canadian dollars, the S&P500 was up 6%.  Most of Europe and Asia were negative.  We believe that for Canadians, there will be better Canadian dollar returns found in Europe and Asia and the U.S. than in the TSX.

Preferred Shares will continue to provide good returns.  Preferred shares should continue their ascent, following a strong year as the fear of lower rate resets recede.  There remains the allure of tax preferential preferred yields and the prospect for potential capital gains in an asset class that has been deeply disadvantaged in 2014 and 2015. 2017 looks to be shaping up for another friendly year for this asset class as investors continue to search for 5%+ yield in an environment where interest rates may have found a bottom.

Canadian interest rates and inflation will remain quite low – The catalysts for growth don’t seem to be there at this time.  Despite lots of U.S. news media talk on rising rates and inflation, we need to remain focused on the Canadian experience.

China’s tightening rules on the foreign flow of money will lower housing prices in Vancouver and likely Toronto – I know this one is a tough prediction for Toronto considering it hasn’t had an annual decline in 20 years.  The point is that foreign funds from China are a significant driver on the real estate market in Vancouver and Toronto.  Toronto has had a bigger push of late because we do not have a Foreign Buyers Tax (yet).  The view is that this will have a bigger impact overall than some people predict.  There is also the continuing impact of tighter mortgage rules and slightly higher mortgage rates.  If we do see lower prices (they won’t likely be large declines), it will be another small weakness on the Canadian economy overall.

Alternative Income Investments remain a strong investment option for a part of your portfolio.

Given the low yields offered on most bonds, we have focused considerable time and energy reviewing and incorporating alternative assets, particularly in private investments, into client portfolios.  These investments offer favourable economics, along with high levels of income that are typically in the 6-10% range.  These investments have very low volatility and provide additional diversification benefits as they have low correlation with stocks and bonds.  These benefits will continue to be valuable in 2017 and for the foreseeable future.

The year ahead has more uncertainty than most.  As a result, we will continue to try to reduce overall volatility of portfolios and to reduce the downside risks that can come up in any market cycle.  Steady income – whether from solid dividend growers, preferred shares or alternative income investments – will be a good friend in 2017.  It is an even better friend if the yields achieved are meaningfully higher than inflation rates – and are not very connected to the ups and downs of the market.

As a final comment, we wanted to thank our clients for their trust and confidence in us.  We appreciate it greatly, and will work hard to earn that trust and confidence in the year ahead.

All the best to all our readers for a healthy and prosperous year ahead.

Cameron Winser VP, Equities	Edward Jong VP, Fixed Income	Ted Rechtshaffen President and CEO
Anton Tucker Exec VP and Portfolio Manager	Lorne Zeiler VP, Portfolio Manager and Wealth Advisor

When looking at interest rates, currencies, real estate risk, Oil and the overall economy, the Canadian market is looking weaker than the U.S. market.

We believe, in particular, that real estate risks are much higher in Canada than the U.S., and it is playing an important factor in our investment philosophy.

As a result, we have lower Canadian stock weightings than we have ever had, but remain quite positive about other investments – including U.S. stocks – where we feel we will benefit from currency gains and some post election strength assuming a Clinton victory.

The third quarter was a pretty solid period, with most TriDelta clients up between 2% and 3.5% on the quarter. 

The TSX was up 5.5% and the S&P 500 (U.S. Market) was up 4.7% in Canadian Dollars.

The Canadian Universe Bond Index was up 1.2%.

Highlights for TriDelta clients included the TriDelta High Income Balanced Fund which was up 5.8% and our Preferred Share portfolio which was up 6.5% and meaningfully outperformed the index.  Our overweight positions in corporate bonds with long terms to maturity led to some solid outperformance on our bond portfolios as well.

Of interest, in such a strong quarter, even solid Alternative Investments that have delivered 8% annual returns, would have ‘hurt’ performance by returning about 2%, but helped reduce portfolio volatility.

Our more conservative clients have continued to have a stronger performance this year overall than our growth oriented clients.  There will, of course, be a time when this reverses itself, but the trend has continued.

For TriDelta, we aim for lower volatility in all markets, and as a result, the highs may not be as high in good markets, and the lows should not be as low in bad ones.  Q3 is a good example of this.

Real Estate

We have some heightened concerns on Canadian real estate – in particular in Vancouver.  The impact of a decline in Vancouver real estate prices could be reasonably contained to BC, or could spread to impact real estate across many markets in Canada.  The reason for this concern is a combination of events.  The foreign buyers tax in BC has slowed sales dramatically and will hit the higher end market.  The tightening of mortgage rules will likely dampen increases in the lower end.  At the same time we are seeing all the signs of a traditional market bubble (an outsized run up in prices while there are many empty houses and condos – owned by investors).

Either with a local Vancouver or broader Canadian decline, the impact won’t be great for the overall economy.  It has put a damper on our view of the Canadian stock markets. 

Oil

While a rally in oil was driven off of hopes of increased cooperation from OPEC, there are still many factors keeping a lid on prices.  One of the biggest issues is that even with a glimmer of co-operation, OPEC is not able to truly work together in an environment where key players Saudi Arabia and Iran are at such odds.

Other factors include:

*Global economic growth isn’t sufficient to pull demand higher, and

*U.S. oil supply is standing at the ready to increase if prices move high enough.

As a result, we don’t see strong improvements in Oil, certainly not to the degree that would help Canada see higher growth.

Interest Rates

With slow growth from Oil, concern on real estate price declines, and a general lack of growth in Canada, Bank of Canada Governor Stephen Poloz announced that they were much closer to lowering rates than raising them.  This is a very clear indicator that Canadian interest rates are not at risk of going up any time soon, and have some chance of declining in the near term.

The investment impact of this is that higher income investments will continue to be in favour and remain overvalued from a historical perspective for the foreseeable future.

In the United States, it is likely that they will finally raise rates in December post election, after having raised them once in 2015.  Having said that, there does not seem to be much momentum behind sizable rate hikes.  This could be another ‘one and done’ rate hike, which will keep the U.S. in a very low interest rate environment.

Canadian Dollar

Lower real estate, range bound Oil prices, widening interest rate gap between Canada and the U.S., all suggest that the Canadian dollar will see declines in the coming months – possibly back to the low 70s.

If you are in need of U.S. dollars for winter holidays, we would suggest buying now.

From an investment perspective, it encourages us to be more exposed to U.S. dollars.

U.S. Presidential Election

We believe that this will largely be a positive in the markets. It looks increasingly likely that there will be a new President Clinton in the White House, and that there will be fewer surprises ahead than the uncertainty that a Trump Presidency would bring.  Markets will appreciate a little more political calm than it has seen for much of this year.

The above views lead us to a few investment actions.

• Our Canadian equity weighting is now at our lowest level – in the 30% range. As a Canadian firm, we recognize that there is a natural bias to owning Canadian stocks.  There is no currency risk or costs.  There is a tax advantage with Canadian dividends.  We are all familiar with the investment names and nuances of the Country.  For those reasons we will always have Canadian exposure, but after a period where the Canadian market was among the best performers in the world for much of 2016, we believe there are some better opportunities outside of Canada at the moment. 
• We do believe that there are better options in stock markets in the U.S, and feel that the currency will be at our back to support overall returns. We will maintain high U.S. equity exposure.
• We are maintaining bond and preferred share weightings as we can see a long period of low rates ahead. While this isn’t great for yields, low or declining interest rates are generally good for bond prices.  It is a useful reminder that the Canadian bond universe has averaged almost 6% returns over the past 3 years.  High yield bonds should outperform in this environment, and we are keeping a higher than normal weighting in this area.  We also have a little more exposure to US$ bonds than we have had in the past to take advantage of currency moves.
• We continue to like Alternative income investments in a low interest rate environment, and will seek to opportunistically add to clients positions.

Dividend Growth Check

As we do every quarter, we check on dividend growth among our holdings.  This quarter saw 8 dividend increases with no declines.  The largest 4 were all U.S. companies and the fifth was Restaurant Brands International – which is Tim Horton’s and Burger King.

There seems to be a feeling of doom and gloom in some areas, and we believe that this may be overstated.  Having said that, we believe that the U.S. will be a better place than Canada for near term investment, in part as the Canadian dollar is prone for some declines.

Other points of optimism, in the U.S. markets the 3 month period from November 1 to January 31 is the best performing 90 days of the year.

One last positive thought.  Based on Ned Davis research of the Dow Jones Industrial Average from 1900 to 2008, you can see that if the incumbent party wins, the Dow Jones average has returned an average of 15.1% in the year following the election.  You can ignore the bottom two lines if you want to remain positive.

May the beautiful colours of the Fall give hope to us all.

Cameron Winser VP, Equities	Edward Jong VP, Fixed Income	Ted Rechtshaffen President and CEO
Anton Tucker Exec VP and Portfolio Manager	Lorne Zeiler VP, Portfolio Manager and Wealth Advisor

In a research study (by Ned Davis Research) of the Dow Jones index in the United States, it showed that strong performance generally follows a major loss day.  On average, among all the major losses reviewed, there was 6.7% in average losses on that down day, and the gains on the index following that loss date were as follows:

One of the major reasons for the numbers above is that including all the bad days, the long term average annual return of the S&P500 has been 10% a year.  The long term average for the TSX is closer to 9% a year.  Over time, stock markets go up and that is why when you decide to sit in cash for investment reasons, you are often swimming upstream.

The key message is that it is better to stick to your overall investment plan before, during and after a major event, than to try to make major asset mix changes to outperform.  It is too easy to be left on the sidelines as the markets rise again.

This quarter, most TriDelta clients were up between 2% and 3%.

Our TriDelta High Income Balanced Fund had a very good quarter – up 7.9%.

The best investments in our Pension portfolio models were Mondelez and General Mills, both up 14% during the quarter.

The best investments in our Core Growth portfolio models were Tahoe Resources up 49% and Barrick Gold up 31% during the quarter.

The worst investments in our Pension portfolio models were Computer Programs and Systems (discussed below, which we bought after it had already fallen a little), down 23%, and Apple down 11% on the quarter.

The worst investments in our Core Growth portfolio models were LyondellBasell down 22% and Concordia Healthcare down 16% during the quarter.

The TriDelta High Income Balanced Fund benefited from higher exposure to materials names that were very strong performers.  The fund also benefits from its ability to leverage allowing for higher yields on the bond portfolio.  Essentially we are able to borrow within the fund at a rate of 1.4%, and invest in bonds that typically have a yield of 3% or higher.  This leads to the higher income in the fund. 

Our overall performance reflects an investment strategy that aligns with that of our clients.  We want to do more to protect on the downside, while we aim to achieve or beat the long term return targets in your financial plans.  Most of our clients are OK being up 6% in a year and not beating the ‘market’, but are not OK to be down 10% or more even if we meaningfully outperform the ‘market’.  This quarter was a good example of achieving that goal.  We certainly have clients who are looking to beat the market, and their portfolio is set up accordingly, but even in those cases, there is some risk management in place to try to soften the blow of bad investment markets.

This quarter we are going to take a closer look at some trades, how they have turned out so far, and the reasons for those moves.

1. We recently added ARC Resources to our growth portfolios. The company is mostly gas related but also has some oil exposure and has some of the lowest production costs in the industry.  Their production cost on gas is around $0.57/MMBtu and $16 for oil/barrel.  Management has done a great job protecting the company in the downturn while also preparing for the future.  Top analysts have a target of around $25.  We bought it around $20.  We wanted more exposure to Energy, but chose a name with lower volatility and an almost 3% dividend.

   It is very early, but so far the stock is up almost 4%.

2. In late April in growth portfolios we sold a long term holding in 3M that we had done very well with, and bought Barrick Gold (ABX) with the proceeds. We sold 3M because the valuation was getting up to levels where the stock has previously corrected and technically the stock was starting to weaken after a great period of significant outperformance.

   In the case of Barrick Gold, the company is the largest gold miner in the world and is newly focused on the basics of gold mining and has made some great steps in significantly reducing leverage and also reducing production costs.  With cyclical stocks the time to get in is when earnings have troughed and the Price/Earnings ratio looks high.  Production costs are currently at a 4 year low of around $830 an ounce and the company is trying to get the cost down to $700 in the next couple of years.

   As mentioned, this has been a great trade for us.  Barrick is up about 35% while 3M is up about 7% since we sold it.

3. On April 13th the asset mix committee met and we decided to reduce our exposure to the Developed EAFE markets and add exposure to Emerging markets. We wanted to maintain our overall Global weighting but were concerned about ongoing developments in Europe.  We also felt that Emerging Markets had underperformed for quite a period of time and is better poised for a rebound.

    
   In Pension portfolios we reduced our Ishares MSCI EAFE Min Vol (EFAV) by 1/3 and bought Ishares MSCI Emerging Market Min Vol (EEMV). 

   So far the trade has been marginally positive.  The EFAV that we sold is down 0.7%, while the EEMV that we bought is up 0.9% for a 1.6% swing.  We did a similar trade in our growth portfolios as well.

4. On April 8^th we sold Cal-Main (a U.S. egg producer with a high dividend) in our Pension portfolios. We sold the company because they had made negative estimate revisions for future earnings, and as a result it no longer met the criteria we set for buying the stock.

   We switched into Computer Programs and Systems (CPSI).  CPSI is a healthcare information technology company that designs, develops installs and supports IT systems to hospitals.  They focus on specifically patient care systems which cover a full range from financial to clinical applications.  Valuations seem to be very fair.  The company trading at 26x’s this year’s earnings per share and 15x’s next year.  The company is also growing at a pace well above the S&P 500.  CPSI has also been able to stockpile cash, and has a large portion of earnings tied to reoccurring revenue from  support and maintenance, so the recently increased dividend of 4.9% looks to be safe with the strong possibility of future increases.      

   So far this trade is what you might call ‘two wrongs don’t make a right’.  The good news is that Cal-Maine fell 13.1% after we sold it, however, CPSI is down 12.1% from where we bought it.

   The next question would be what we do with CPSI.  The view is to hold it for the following reasons:

   At the beginning of the year, CPSI closed a deal to buy a competitor.  While this is viewed as a good acquisition there were a few lost clients from the integration and that hurt the stock.  At the same time there are some industry compliance changes that will cause some of their smaller competitors to potentially exit the business.  Partly as a result, the company currently has its highest sales backlog since 2010/2011.  After the decline in stock price, the current dividend yield of 6.3% and we believe this is sustainable and may grow.  Next earnings come out on July 28^th.  We will watch this closely for signs of decline or earnings turnaround, and act accordingly, but at this point we believe the stock is good value.

As we do every quarter, we look at dividend changes for stocks that we own.  We believe that dividend growth is a key component of long term returns for conservative clients, and track these changes carefully.  This quarter, there were no dividend declines and 9 companies grew the dividends, with the leading dividend growth coming from Apple at 9.6%, LyondellBasell at 8.9% dividend growth and Restaurants Brand International (Tim Hortons and Burger King) at 7.1%.

In the Bond world, the continuing decline in government debt yields helped produce solid gains in the 2.5% to 3% range for the quarter.

In early April we sold a Government of Canada 2045 bond and purchased a Royal Bank of Canada 2025 bond.  The Government of Canada bond had already gone up 4% in price, and we decided to lock in that gain.  By moving from Government bonds to Corporates, and we were able to add almost 1 percent in yield.

We probably shortened the bond duration a little too early, as the Government of Canada bonds have continued to do well, but when it comes to bonds, if you can lock in decent capital gains on a trade, this often adds significantly to overall returns.

On June 13^th we sold Cineplex Debentures with a 4.5% coupon coming due 2018.  We have actually owned this twice.  The first time we bought it at $105.90 and sold for $108.44.  This time we held it for about 7 months and made about 0.4% capital gain on top of the coupon.  We then purchased a Fairfax Financial bond with a 4.95% coupon that expires in 2025.  This bond is up over 1% since we bought it, and it has a higher coupon and much higher yield to bond maturity.

Overall our bond view has been to shift out of Government bonds and increase Corporate bond weightings.  We had made a rare shift into Government bonds a couple of quarters ago, as a defensive move given all of the political uncertainty, and to some degree corporate uncertainty that was on the landscape.  We are now much more comfortable back in the corporate bond space, especially as the yield on the corporate bonds is much higher.

At this stage, we remain comfortable with our higher U.S. stock positions.  We believe the Canadian dollar should be fairly stable, but given all of the Global gyrations, the United States is the safer place at the moment.

The U.S. Federal Election will become a bigger influence on the market.  As it turns out, a Republican win would likely hurt U.S. and Global Markets in our view….as it has the drag along effect of having a guy named President Trump running things, who is seen as protectionist and against free trade. 

At this stage it looks more likely that Clinton will be the next President, and while not all industries will be happy (i.e. Pharma companies), the overall market could breathe a sigh of relief.

We do actually believe that the U.S. Federal Reserve will raise rates at some point this year or early next year, and it is even possible that Canada will as well.  However, we don’t believe a small increase and a temperate statement from Central Banks will cause too much concern for markets.

At TriDelta Financial, we are continuing to look at Alternative Investment products to provide higher income and lower volatility to portfolios.  We are also introducing TriDelta Equity pooled funds in the third quarter.  These shifts are meant to provide better overall investment performance, along with greater ability to use investment tools that can lower downside risk and increase income.  Your Wealth Advisor will provide more details shortly.

Growing portfolio values make everyone happier, and we are cautiously optimistic that we will see more growth ahead.  The current challenge is to watch for areas of overvaluation if corporate earnings do not grow to support the increased stock price.  We will also watch for changes in investor sentiment which can happen for any number of reasons.  As you can see from our trade analysis, while we may not always hit a lot of home runs, you can still win games by doing the little things right.  Hopefully the Blue Jays will do a little of both and make the summer ahead even more fun. 

We hope that everyone is having a great Summer so far, and that the current positive investment environment will continue into the Fall.

Cameron Winser VP, Equities	Edward Jong VP, Fixed Income	Ted Rechtshaffen President and CEO
Anton Tucker Exec VP and Portfolio Manager	Lorne Zeiler VP, Portfolio Manager and Wealth Advisor

Most TriDelta clients were up between 2% and 4% on the month, while on the quarter, conservative clients had a small positive and more aggressive clients were mostly a little down on the year to date.

The TriDelta High Income Balanced Fund ended the quarter up slightly.

Our continued focus on capital preservation in times of high volatility has continued to help clients lower their overall volatility and maintain peace of mind during market whipsaws.  The one thing to remember is that investors can’t be momentum investors and dividend growth investors at the same time.   Each style comes with positives and negatives, and one of our goals is to fit the right style with the right client.

There could be a very positive run for the TSX as energy, metals and mining make a rebound.  If you are looking for less volatility and strong income, you will underperform the TSX during these periods.  This doesn’t mean that we won’t participate in some of these gains, but for those who are Pension style clients, expect that your portfolio will not gain as much as the TSX when companies with names like HudBay Minerals and Labrador Iron Ore Royalty lead the charge up (or down).

On a Canadian Dollar basis, stock returns were very mixed.

The TSX was up 3.71%
The US S&P 500 was down 6.12% (despite being up 0.77% in US dollars)
The Euro Stoxx index was down 10.16%

As mentioned, Canada was the place to be in the first quarter.

The DEX Canadian Bond Universe was up 1.4%

Canadian Preferred shares finally saw a big positive move in March, up 9.9%.  Even with this tremendous return, the index was still down 4% for the quarter.

The Canadian dollar went from 72.2 cents to 76.7 cents vs the US dollar.

The price of WTI Oil started the quarter at $40, went under $28, back to $41, and dipped to $36 and change at the end of the quarter.  Of course it has risen back to $42 in the first couple of weeks of Q2.

• A German 10 Year Bond is now paying just 0.11% a year. This tells us a few important things.  The first is that with Canada at 1.24%, there really is still room for interest rates to go lower.  The second is that for many, simply the safety of their capital is of such importance that they are essentially willing to earn nothing on their money as long as it is safe.
• Interest rates can even go negative. Today, Switzerland 10 year bonds pay MINUS 0.40% annually.  The chart below shows rates in 1995 in the 5% range, steadily heading down until it went under 0%.  While that may seem crazy to many of us, many of us are invested to some degree at similar rates, as bank accounts pay 0% in interest and then charge us fees for the privilege of holding our money there.
  
• U.S. Oil Inventories are still going up. Despite cuts in Oil production and supposed agreements among OPEC nations, Oil and Petroleum inventories haven’t stopped growing.  It will stop at some point, and there are some positive signs in terms of increased demand, but this current Oil rally is very tenuous.  We believe that even small negative comments from key OPEC producers can cause a meaningful pullback, and we believe this will happen.  While we do believe that two years from now, Oil will be a fair bit higher than today, it will be a very bumpy ride with many pullbacks along the way.
  
• Canadian Banks are Cheap. The chart below is the Price Earnings ratio for Royal Bank of Canada for the past 12 years.  What it shows is that the company has generally traded between 10 and 16 times earnings.  Today it is at 11.5 and was down close to 10 in February.  There are not that many companies that have such long term strength and happen to pay 4%+ dividend yields along the way.  There are always reasons for lower valuations, but the past 20 years have shown that if there are low valuations the best response is simply to grab it.

  

1. The Big Picture: While the World is always changing, your investment approach shouldn’t be. Our most important job is to ensure that your portfolio is built to meet your long term financial planning needs, your risk profile, your cash flow needs and personal tax situation.  If we are doing those things correctly, then you are will be in good shape over the long term regardless of whatever is happening in the market this day, week or month.
2. The Smaller Picture –
   1. Global Stocks: We are seeing some strengthening in Emerging Markets and some strength in China.  As a result we are reinvesting a little bit back in Emerging Markets, pulling the money from developed economies in the EAFE (Europe, Australasia and Far East).
   2. North American Stocks: We remain ready to add more back into Canada but don’t feel that this is necessarily the right time. We believe that there will be a better entry point after there is a little pull back in Oil and likely in the Canadian dollar as well.  In addition, US Multinationals may see some positive earnings coming up as the US currency decline will improve their Foreign earnings – when converted back to US dollars.
   3. Preferred Shares: We continue to believe that this sector is undervalued, and when you combine undervalued prices, with 5.5%+ dividend yields, and tax preferred income, we see a number of benefits.  It is a tough sector to love, but we do remain very comfortable holding beaten down names.  We believe that the rally seen in March has some room to continue.
   4. Bonds: For now we have moved away from Government Bonds and back to Corporate Bonds.  There seems to be more comfort level with Corporate Bonds in the market place and the increased yield certainly helps.  While we believe that the Bank of Canada will remain steady and that long term interest rates will be fairly range bound, we believe that shorter term bonds may be a safer place to be in the short term.
   5. Alternative Income: We are continuing to add to Alternative Income streams where we can. We believe that in a low yield world, it is worth taking a little added risk in the Private Lending, Factoring and Mortgage space to achieve higher returns.

As always, we believe that Dividends and Dividend Growers play a key role in long term returns and lower volatility.  This quarter, the dividend growth continued.

We actually saw a dividend decline in one of our holdings.  Cal-Maine (an Egg producer) directly ties their dividends to annual profits, and lowered their dividend 41%.  Largely as a result, we sold the stock.

One other Q2 note for TriDelta is the introduction of our TriDelta Fixed Income Pool.  Clients will be hearing more about it shortly, but we believe it will allow us to deliver better returns on Bonds for clients.  Through the ability to do better currency management, getting better pricing on trades, and easier liquidity for clients adding or withdrawing Fixed Income money, it should add up to stronger returns.

We believe that while things seem more positive in the investment markets, we are trying to pick our spots.  With a possible pullback in Oil and CDN dollar from here, the possible Brexit or British exit from the European Union, and ongoing Terrorism risks, we are taking only small steps out of our more conservative positions.

Cameron Winser VP, Equities	Edward Jong VP, Fixed Income	Ted Rechtshaffen President and CEO
Anton Tucker Exec VP and Portfolio Manager	Lorne Zeiler VP, Portfolio Manager and Wealth Advisor

Some people believe that the grass is always greener on the other side of the fence. Well in 2015 it was true, if you were a Canadian and your fence looked over at the U.S. border. From an equity and currency perspective, the U.S. meaningfully outperformed Canada.

Although 2015 was a difficult year, with Canadian equities down over 11%, most TriDelta clients, depending on their asset mix, were roughly flat on the year. No one heads into a year hoping to have a flat investment year, but given the very weak Canadian markets, and our focus on protecting capital in tough times, we believe that we added meaningful value to clients in 2015.

It was a challenging 4th quarter and year as a whole, for investors in Canada. Canadian bond returns were mildly positive and Canadian equities remained very volatile, down 2.2% in the quarter. The economic and stock market weakness in Canada, unfortunately, was driven by excess global supply of oil and other commodities, causing commodity prices to fall.

Even with Europe’s issues in the first half of the year, China dominated the world stage this year with its economic slowdown. The lion’s share of growth in global demand for virtually all commodities, including oil, has emanated from China over the past decade. With its economy growing more slowly, prices of most commodities have weakened materially. Moreover, due to China slowing along with many emerging market economies, the U.S. Federal Open Market Committee (FOMC) was reluctant to raise rates until the end of the year. On December 16th, the U.S. Federal Funds rate was finally increased by 0.25%.

China still faces deflationary pressures

• Dragged down by sluggish domestic demand, weak exports and a property downturn, China’s economy expanded by 6.9% year-over-year in the third quarter, the lowest quarterly growth rate in six years.
• China’s consumer inflation (CPI) grew 1.6% year-over-year in December, which is well below the government target of 3%. Moreover, producer prices (PPI), a measure of cost of goods at the factory gate, fell 5.9%, marking the 46th straight month of decline. Price fluctuations usually first appear at the production level before being passed on to consumers; therefore, the deflationary forces acting on China’s PPI does not augur well for its CPI. Prolonged deflation will pose risks to the Chinese economy by eroding growth potential and could possibly put the economy at risk of a downward spiral.
• To combat the economic slowdown, the central bank of China has cut the benchmark interest rates and the reserve requirement ratio of its banks several times since the beginning of 2015. We suspect more aggressive policy easing will be forthcoming to stabilize growth in the coming months. There certainly is ample room for more measures to fight deflationary pressures and stabilize growth, such as reserve ratio cuts, relief in tax and fees, and increases in fiscal spending.

 
A Tale of Two Markets: International Developed Equity Markets were up (in Canadian dollars) and the Canadian Equity market was down

• The Canadian equity market, as measured by the S&P/TSX Composite Index, was down 2.2% in the 4th quarter, ending the year down by 11.1%.
• Due partly to the weakening of the Canadian dollar over 2015, European, U.S. and Asian developed equity markets were up generally for the 4th quarter and for the year as a whole, as measured in Canadian dollars.
  • TriDelta made the decision to not currency hedge our U.S. and International equity investments, which was beneficial to our clients’ portfolios.

• TriDelta remains cautiously optimistic about 2016 as the U.S. and Europe appear to be on more solid ground; however, China will continue to be challenged in its efforts to stabilize its economy as it transitions from an export-based to a consumer-based economy.
• The economic outlook for 2016 is supportive of developed market equities with inflation and oil prices remaining low, a continued mid-cycle U.S. economic expansion with cyclical leadership coming from the U.S., the U.K. and Europe, and with the U.S. FOMC possibly moving rates up gradually.
  • Since 1950, the median performance of different asset classes six months after the first U.S. Federal Funds rate hike has been very positive for markets: U.S. Equities up 9%; Developed Market Equities up 7%; Emerging Market Equities up 8%; Commodities up 4%; and, Investment Grade Bonds up 1%.
  • Oil prices will continue to be weak in 2016 owing to global excess supply, exacerbated by the expected rise in Russian and Iranian oil production, as well as weaker economic growth from China. China has accounted for roughly 45% of growth in global demand for oil during the past decade.
• We have been actively adjusting our clients’ portfolios, reducing our exposure to Canadian equities in favour of U.S. equities, given our concern with continued weakness in the Canadian dollar and commodity prices, especially oil.
• We continue to closely monitor European equities for purchasing opportunities as they represent good relative value.
• With low positive returns expected from bonds in 2016, we believe our clients need to maintain their equity exposure, especially given that many equities have dividend yields in the 2% to 5% range.
• We expect returns to be lower than long-term averages. We are now recommending alternative investments, from our well researched approved list, where appropriate, to clients for additional diversification in their portfolios to reduce risk and to enhance returns.

 
Risks to the Outlook

• China fails to stabilize growth, increasing deflationary forces globally.
  • China’s renminbi continues to depreciate.
• A credit crisis occurs in the emerging markets.
• Heightened geopolitical instability (e.g., Saudi Arabia and Iran tensions, Russia, ISIS, and the like).
• Profit trends weaken in the developed equity markets.
• Faster-than-expected improvement in the U.S. labour market causes the Fed to raise rates faster.

The 4th quarter witnessed a decent bounce in global equities after a very rough 3rd quarter. Most equity markets rallied and came close to recuperating the losses suffered in the third quarter. Unfortunately, Canada did not participate in this rally.

In local currency, global equity markets were some of the top performers. Germany and Japan represented the best performing major equity markets, up more than 11.2% and 10.7%, respectively. Closer to home, the S&P/TSX Composite Index continued its losing streak, down 2.2%; whereas, the S&P 500 Index bounced back, returning 6.5% in local currency. The strong U.S. dollar was again a positive factor for our portfolios as measured in Canadian dollars. The U.S dollar strengthened 4.1% relative to the Canadian dollar, adding to the total return of U.S. holdings.

For the S&P/TSX Composite Index, volatility in the 4th quarter was substantial as the Index had a number of moves up and down greater than 5%. October turned out to be a positive month as the market rallied 1.3%; however, November and December were down months, consistent with the fall in the price of crude oil. November declined almost 2% and December was down 3.4%. The three worst performing sectors in the quarter were Health Care, Consumer Discretionary and Telecommunications, down 37.0%, 5.7% and 2.8%, respectively. In contrast, the three best performing sectors were Information Technology, Materials and Financials, up 10.3%, 3.1% and 0.6%, respectively.

The S&P 500 Index performed much better than the Canadian market, up 6.5% in the 4th quarter. The Index posted a great October, up more than 8%. Despite a couple bumps in the road, it eked out a small gain in November before falling 1.8% in December. All sectors in the 4th quarter were up except for Energy, down 0.6%. The three best performing sectors were Materials, Health Care and Information Technology, up 9.1%, 8.8% and 8.7%, respectively.

TriDelta Core Equity Model

Our Core Equity Model was up 2.1% for the 4th quarter, outperforming the S&P/TSX Index by 4.3%. During the last three months, the Core Equity Model was very active.

• In October, we sold a couple of stocks, redeploying the cash during the November correction. We also increased our weight in U.S. equities in early December to take advantage of a stronger U.S. dollar, which has continued to strengthen since our purchase.
• We purchased the Canadian energy market opportunistically, using the exchange traded fund, XEG, as it looked as if seasonal, technical and fundamental factors were turning positive, but sold it quickly thereafter. Unfortunately, this was a losing trade as Saudi Arabia revealed it would increase production, leading to potentially lower prices.
• Other detractors from performance that were sold at a loss were Valeant Pharmaceuticals, which fell due to some concerns about accounting irregularities; and, Amaya Inc., the online gaming company, which fell as revenue and profit guidance from the company was cut.

In contrast, a number of our stocks, especially those in the U.S., had a great quarter and positive results were found in all sectors, including Energy.

• Our holding in TransCanada Corp. was up over 8%.
• Other top performers were Avago Technologies Limited, AmerisourceBergen Corporation and Verizon Communications Inc., up 20%, 13% and 11%, respectively.
• Five companies, in the Core Equity Model, raised their dividends in the 4th quarter with none reducing dividends: Alimentation Couche-Tard Inc., AmerisourceBergen Corporation, Zoetis Inc., AbbVie Inc. and Sun Life Financial Inc.

 
TriDelta Pension Equity Model

Our Pension Equity Model was up 0.7% during the 4th quarter, as our more conservative strategy, outperformed the S&P/TSX Index by almost 3%. The Pension mandate focuses on stocks with solid and growing dividends and other less volatile characteristics, leading to less trading relative to our Core Equity Model.

• We entered the quarter with excess cash, and opportunistically added a couple of new holdings during periods of market corrections in November.
• Positive performance for the quarter was driven mainly by our U.S. holdings as the strong U.S. dollar helped bolster returns.
• Health Care stocks in the U.S. led the gainers in the portfolio as Abbott Laboratories, Johnson & Johnson and GlaxoSmithKline were all up more than 10%.
• In contrast, Canadian Utilities Ltd. declined along with the rest of the Utilities sector as investors feared higher interest rates would threaten earnings and dividend growth. Home Capital Group Inc. declined on fears that the economy was weakening and the real estate market would burst, leading to an increase in homeowner mortgage defaults.
• Ten stocks that we hold in the Pension Equity Model increased their dividends during the quarter and only one stock reduced its dividend, namely Cal-Maine Foods. Some of the stocks that raised their dividends include Emera Inc., Enbridge Inc., AbbVie Inc., Telus Corp. and the Canadian Imperial Bank of Commerce.

 
Quarter Ahead for Equities

At the end of the 3rd quarter, we believed that the majority of the decline in the equity markets was over, and we were looking for opportunities to be fully invested again in the coming months. Looking forward, we continue to believe that the September 2015 lows will hold for the S&P 500 Index, but may be temporarily breached by the S&P/TSX Index. We still have some cash in the portfolios, and are looking for the right time to become fully invested again.

We believe that the heightened volatility that we have experienced in the 4th quarter, and throughout 2015, will continue in 2016. The equity markets generally appear to be fairly valued, which could lead to more volatility if economic headwinds or geopolitical events surface. Earnings, as usual, will continue to be a major focus for investors, looking to be reassured that earnings are continuing to grow and valuations remain fair.

For the majority of 2015, volatility in the fixed income market was unprecedented. The initial cut to the Canadian overnight interest rate in January, to be followed by another cut in the subsequent months served as a testament to the Bank of Canada’s concern over the negative impact of much lower oil and gas prices on energy companies, and its impact on the Canadian economy.

For most of the year, investors have been wrestling with the following:

• The prospect of the first U.S. interest rate hike in 9 years;
• A substantial decline in commodity prices;
• A strengthening U.S. dollar; and,
• The relentless negative headwinds from the Greek default drama and the Chinese economic slowdown.

As noted earlier, the U.S. FOMC finally raised the Federal Funds rate by 0.25% in December.

TriDelta Core Bond Model

Our Core Bond Model maintained its exposure throughout the year in high yield bonds as we were, and we continue to be comfortable with our holdings. Given the heightened investor concern over the U.S. raising interest rates, we started the year owning bonds that had shorter average maturities and gradually raised the average maturities of the Model through the investment in a 30-year Government of Canada Bond in the fourth quarter.

We were able to add value to the portfolios with this strategy towards the latter half of the 4th quarter. In addition to raising the average maturities of the bonds, another purpose of owning this 30-year high quality Government of Canada bond was to reduce the overall risk of the portfolio, especially in the current environment where investors are uncertain about the U.S.’s resolve to hike interest rates and its ability to continue with a series of hikes in the coming year.

TriDelta Pension Bond Model

Our Pension Bond Model benefited from not having any exposure to high yield bonds this year and in the 4th quarter. The strategy of managing the Model with a shorter maturity bias at the start of the year, followed by extending the average maturity with the purchase of the 30-year Government of Canada bond, mirrored the same strategy as the Core Bond Model.

Quarter Ahead for the Bonds

With an eye towards 2016, we expect the volatility that we have experienced in 2015 to continue. With continued Bank of Canada concerns over our economy, heightened geopolitical risk, and an uninspiring global macro-economic environment, we will continue to limit risk in the bond portfolios by maintaining our bias for the long-dated Government of Canada bond. However, our aim in 2016 is to take advantage of this volatility at the opportune time, and eventually move funds out of Government of Canada bonds and into investment grade corporate bonds.

Not since the financial crisis has the preferred share market witnessed such a negative period. One fundamental difference between 2008 and today was that the drop in 2008 was disorderly – panic driven – while the current environment is slightly less disorderly and driven by three converging factors working to conspire against the preferred share asset class.

• The Bank of Canada’s surprise 0.5% cut to the overnight interest rate was contrary to the market consensus expectation of multiple rate hikes in 2015;
• Bond and equity investors became more risk averse, producing a great deal of volatility in the markets, which negatively impacted the preferred share market; and,
• Canadian chartered banks issued Non-Viable Contingency Capital (NVCC) compliant preferred shares due to a new regulatory requirement. In short, an abnormal supply of preferred shares from the banks was issued into the market, causing downward pressure on preferred share prices.

The beneficial characteristics of preferred shares within a well-diversified portfolio remain very much intact, but the recent weakness in this asset class has left many disenchanted. Considering the attractive yields and the beneficial tax treatment of dividend income, we still believe that preferred shares will be a positive investment in 2016.

• The Fund was up 2.1% in the 4th quarter, but down 4.2% for the year. Since inception, the Fund has earned an annualized return of 5.5%.
• The performance of the bond component of the Fund started 2015 very well; however, the unanticipated interest rate fluctuations – both interest rate levels and corporate spreads – were negatively impacted by the leverage employed in the Fund to generate a consistent targeted overall bond yield of 8%.
• Until December, the Fund had a substantial U.S. dollar exposure to take advantage of U.S. dollar appreciation. This position was held because of the divergent monetary policy in Canada (i.e., a bias towards reducing rates) versus the U.S. (a bias towards raising rates). Given the uncertainty surrounding U.S. interest rates and possible geopolitical events in 2016, the leverage employed as well as the exposure to the U.S. dollar have been reduced.
• In contrast to the bond component, the equity portion of the Fund had a good year in 2015. U.S. equities, which were consistently about half of the equity component of the Fund, were the major driver of positive performance. This positive performance was mainly due to U.S. dollar appreciation, since it was up 19% for the year.
• The performance of the S&P 500 Index, in local currency, was slightly negative for the 2016; however, the hedging strategy used by the Fund with respect to U.S. equities was a positive contributor, adding 1% to the return.
• Canadian equities, which constitute the other 50% of the equity component of the Fund, outperformed the S&P/TSX Index, since the Fund held cash in the range of 5% to 10% throughout the year, and had a very small exposure to Energy relative to the Index. The Canadian equity strategy started out the year overweight income generating financial stocks. These positions were reduced during the 1st quarter and the Fund shifted into some gold and other resource stocks like Cascades Inc. and Claude Resources Inc.
• The Fund also increased its Consumer Discretionary and Industrial sector weightings during the year, including Air Canada, Hardwoods Distribution, New Flyer Industries and Transcontinental, as we were searching for stocks that showed value with earnings growth potential.

2015 was a challenging year for Canadian equities and bonds, although the 4th quarter was generally up across international developed markets. As mentioned, there is potential for negative surprises in 2016 given the large number of global issues, including currencies volatility, political turmoil, increased terrorism activity, low oil prices and very low global economic growth. As a result, we forecast markets to remain volatile this year, but expect returns to be generally positive, however lower than long-term averages.

Happy New Year and All the Best in 2016!

Cameron Winser VP, Equities	Edward Jong VP, Fixed Income	Ted Rechtshaffen President and CEO
Anton Tucker Exec VP and Portfolio Manager	David Oliver Chief Operating Officer	Lorne Zeiler VP, Portfolio Manager and Wealth Advisor

Well, that wasn’t a fun quarter for anyone. We do believe that much of the damage is now behind us, and in most cases, clients remain in positive territory for the past year during a time when the Toronto stock market has dropped 11%. In this report, we will explain what happened and why we are generally positive at this point.

Periodically, markets experience corrections of 10% or more. We believe these corrections are necessary to cool off an overheated stock or bond market. Despite these sell-offs, the equity markets have enjoyed historical returns of over 8% per year for long-term investors. Presently, even with the recent declines, equity markets are substantially higher today than in 2007 (pre-financial crisis) and 2011 (last major decline).

In fact, these market corrections create buying opportunities when stocks, bonds or the overall markets have reached lower price levels.

The third quarter witnessed a sharp drop in the price of global equities and commodities. This high market volatility is not unusual from a historical perspective. In fact, some of the best market returns come after turbulent times (e.g., after the 2000-2002 Technology-Media-Telecommunication bust and after the 2007-2009 global financial crisis).

Why are markets so volatile recently? We believe the following are key contributing factors:

• Concerns over China’s weakening economic growth and surprising devaluation of its currency on August 11th, resulting in downward pressure on global inflation. China’s action also negatively influenced emerging market currencies and bonds;
• The fall in commodity prices, including oil prices; and,
• Investor discomfort with the rising likelihood that the U.S. Federal Reserve will move to gradually raise rates this year due to signs of strength in the U.S. economy.

Concerns about China’s weak growth and currency devaluation

China and the other emerging market economies rose markedly over the past 30 years, currently representing 57% of the global economy (30 years ago it stood at 35%) and over 80% of global growth in recent years; therefore, its influence on the global economy and the markets generally, is substantial. So, when the Chinese economy is slowing as it is presently, investors are concerned. Fortunately, China has put in place a number of reforms, in recent years, to transform its economy for sustainability and higher economic development.

Falling commodity prices

Prices of most commodities fell sharply this year. Prices fell because of rising supply, as well as commodities being priced in U.S. dollars, and the U.S. dollar continues to appreciate. The supply of commodities increased owing to rising production and stockpiling over the past number of years in anticipation of strong demand, which did not materialize. We expect commodity prices to continue to fall until these excess supplies start falling.

Expected Rise in the Fed Funds Rate

The argument in favour of a rate hike in the near future in the U.S. is based on reasonably solid economic growth and a falling unemployment rate. In contrast, the argument against a rate hike is based on slower global GDP growth, falling commodity prices and currency devaluations, which reduce the rate of inflation (a key metric for the U.S. Federal Reserve). Regardless of where you stand on this argument, it is important to realize that when rates start rising, which they will at some point, it will likely be gradual and slow. This likely slow and gradual pace of rate rises should not hinder the global economy.

Even with this high volatility, the prudent approach to investing does not change:

1. Suitable investment plan/strategy: In times of uncertainty, you may be tempted to change your investment strategy, but often change is not necessary and may be detrimental to your long-term return. We take great care to ensure that your portfolio’s asset allocation and strategy is consistent with your risk tolerance, goals, financial situation and time horizon. Unless your goals and/or financial situation change, you should not make major adjustments to your portfolio based solely on market volatility.
2. Diversification: Spreading your investable funds across a portfolio of multiple asset classes – equities, bonds, as well as alternative investments such as real estate, infrastructure, and the like – and within each asset class will dampen volatility in your portfolio. Why is it the case? Different securities within and across asset classes do not all move in the same direction and/or with the same magnitude over time; therefore, a well diversified portfolio will fluctuate less than a portfolio with very few securities over time.
3. Stay invested: Trying to time the market can be very costly to investors because a significant portion of the market’s gains historically occur in very short periods of time. If you are not invested during these small windows of opportunity, you may miss most of the up market. Furthermore, many of these short periods of time occur during very unpleasant market environments when you may feel compelled to sell.

The third quarter of 2015 was a rough one for equity investors around the world as fears of a global slowdown, emanating potentially from weakness in the Chinese economy, hit the markets. Other factors came into the fray as the energy market continued to weaken and politicians in the U.S. stirred the pot by raising concerns about pharmaceutical pricing, which hit all stocks in the health care sector.

In local currency, the Chinese market was the worst of the major indices down more than 19%; whereas, the Swiss and Italian markets were some of the best performing, down just over 3% and 5%, respectively. Closer to home, the TSX Composite was down 8.6%, and the S&P 500 was down 6.9% in local currency. The U.S. currency was a positive factor for our portfolios, as measured in Canadian dollars, as the U.S dollar strengthened 6.8% relative to the Canadian dollar, severely curtailing most of the loss in the U.S. equity market.

For the TSX Composite, it was a volatile three months, since all months had decent declines and rallies, but in the end all three months were negative. From a sector level, the three worst performing sectors in the quarter were Materials, Energy and Health Care, which were all down between 17% and 20%. In contrast, the top performing sectors were Consumer Staples, up around 6%, followed by Technology, Telecommunications and Utilities, which were up marginally.

The S&P 500 was a slightly different story. July posted a marginal gain; whereas, August had a big decline, down more than 11% at one point, before rallying at the end of the month to stem the decline to only 6.4%. All sectors but Utilities, up about 2%, were negative for the quarter. Similar to the TSX Composite, the major decliners were Materials, Energy and Health Care. Consumer Staples was the least negative performing sector, down 2%.

Core Equity Model – For higher growth-oriented clients

The Core equity model was down 4.2% for the quarter, outperforming the TSX index by 4.4%. During the last three months, Core accounts were very active. Early in July, we reduced our equity exposure by around 5% for most clients, selling the S&P Mid Cap ETF; and later in the quarter, we also had two other sales that went to cash as we did not find attractive purchases that met our criteria for ownership.

We did two trades in the Energy sector: the first trade was to sell our S&P TSX Energy ETF position, which was one of our bigger negative contributors for the period; and, we purchased Suncor, which we were able to eke out a small gain plus a dividend before it failed our criteria for ownership and was sold due to negative earnings revisions.

Some of our higher growth companies detracted from performance in our Core model as Concordia Healthcare and Valeant were hit by the broad decline in pharmaceutical stocks.

On the positive side, a number of our consumer staple stocks, including Weston and Alimentation Couche Tard, had strong performance. Moreover, O’Reilly Automotive, in the Consumer Discretionary sector, continues to execute on its strategy and had a solid quarter. Three companies in the Core equity model – Altria, Verizon and Royal Bank – raised their dividends during the quarter.

Pension Equity Model – For clients requiring higher income and lower volatility

The Pension equity model was down by 2.5% during the quarter, as our more conservative strategy outperformed the TSX index by 6.1%. Based on its Pension mandate, less trading occurred in the third quarter relative to the Core model: we reduced our equity exposure in the model at the beginning of July by selling the S&P 500 ETF, and late in August we sold our Energy ETF and purchased Potash, which was eventually sold with the proceeds going to cash. For the past 12 months or so, the model has been underweight the Energy and Materials sector, which has reduced the impact of the broader market declines. That being said, Enbridge, Potash and the TSX Energy ETF were the worst performing names in the model along with Home Capital Group. Home Capital declined over the quarter because of concerns over the economy and repayment of mortgages. The company’s stock was further hampered by U.S. short sellers that were taking large short positions in July. We continue to hold the position, since we believe management at Home Capital will continue to grow earnings and dividends and it is trading at less than 8X projected earnings. A number of our stocks had good quarters, including Transcontinental, General Mills and BCE. Five companies in the Pension model increased their dividends during the quarter: Emera, Bank of Nova Scotia, CIBC, Verizon and Royal Bank.

The Quarter Ahead for Equities

It is our view that the majority of the decline in the equity markets is over, and we are looking for opportunities to be fully invested again in the coming months as each model currently has cash available to purchase two equity positons. Overall, the equity markets appear to be fairly valued with a number of undervalued sectors, the cheapest being Financials. For this reason, along with a number of other factors, we added Sunlife to the Core model at the end of September. Potential catalysts to higher equity prices include positive third quarter earnings announcements, and a possible U.S. interest rate hike in December based on the more moderate tone by the U.S. Federal Reserve.   Historically, equity markets tend to have above average performance for about six months after the first rate hike.  

The third quarter was again rife with extreme volatility in the bond market. The cause of such volatility was threefold. First, bond market investors were getting mixed signals from central banks: the high expectation of the U.S. Federal Open Market Committee (FOMC) to start raising overnight rates paired with the softer tone coming from the Bank of Canada (BOC), where the latter lowered rates on July 15^th for the second time this year (taking overnight interest rates to 0.50% down 0.25% from the last ease on January 21^st). Second, the lack of liquidity in the fixed income markets; and third, the sharp moves in global equity markets.

The source of the economic weakness in Canada continues to emanate from the energy fields as oil prices (WTI) ended the quarter down 25.4%. Surprisingly, with such a sizable and sustained move, the BOC did not allow the effects of a 6.6% decline in the Canada-U.S. exchange rate to work its way through the economy, and lowered overnight rates for the second time this year. Perhaps the BOC was also concerned about the economic deterioration abroad, especially in China, and decided that the Canadian economy needed the extra support/stimulus.

The FOMC wrapped up one of their most divided regularly scheduled meetings on September 17^th (economists placed the odds of a hike at 80%, while Fed Funds futures contracts placed the odds at about 40%), highlighting global economic concerns as the source of their hesitation to follow through with their first interest rate hike in over 9 years.

Core and Pension Fixed Income Models

The fixed income models have slightly shorter average bond maturities than the DEX Bond Universe Index heading into the third quarter as the global economic situation still warrants a defensive posture since both the FOMC and the Bank of England (BOE) are poised to hike overnight interest rates, and any economic fallout from Greece has already been eliminated.

Our present strategy is to remain overweight corporate bonds in near term maturities (as we view the BOC and FOMC as incapable of delivering any tightening of monetary policy) and opportunistically adding to longer term maturities because we believe that the weak economic landscape will cause the yield curve to flatten. This strategy should prove beneficial for our models over the next couple of quarters, as we believe any rate hikes by the FOMC would cause long interest rates to fall and short interest rates to rise with credit spreads narrowing, and thus bond prices rising. This forecast is premised on the notion that raising rates may trigger a higher probability of an economic slowdown.

In contrast, should the FOMC not follow through with their many hints of a rate hike as soon as October 28^th, bonds will benefit on the premise that the FOMC’s mandate of price stability (i.e., 2.0% headline inflation – currently at 0.2% year-over-year) has not been achieved, and again, global economic headwinds will continue to play a role in their decision process; thus, validating lower interest rates.

The Quarter Ahead for Fixed Income

As we head into the final stretch of 2015, it appears that monetary policy globally will remain quite accommodative, meaning rates will stay low. As mentioned earlier, China’s economy is slowing and it has devalued its currency; moreover, the FOMC just balked at the much anticipated rate hike, and Japan is planning to restart “Abenomics”.

Prime Minister Shinzo Abe recently unveiled new growth initiatives, including targeting GDP at 600 trillion Yen (i.e., expanding by roughly US$10 billion), and social programs to assist families to care for the elderly. In conjunction with the Bank of Japan (BOJ), the Labour Democratic Party (LDP) will do its “utmost” to lift wages and consumption. As Japan endeavours to roll this program out as soon as possible, the Europe Central Bank (ECB) is under pressure to expand its Quantitative Easing (QE) program by extending it beyond September 2016, and by increasing asset purchases above 60 billion EUR per month. The end of easy money may not be as close as previously thought.

We believe high volatility in the bond market will continue until the end of the year; and, we are prepared to extend/lengthen the maturities of our bonds in the models further as yields approach our target.

Preferred shares experienced the following problems in the quarter:

1. Reluctance by the BOC to raise the overnight interest rate (a cut actually materialized) has caused the Government of Canada 5-year bond yield to remain stubbornly low. In fact, the yield is now roughly 0.55% below where it was at the end of 2014.
2. Equity volatility, credit concerns and ultimately, risk aversion by investors caused a widening of market spreads for all five-year fixed reset preferred shares. As a result, the price of preferred shares fell.
3. The persistently heavy preferred share issuance from financial institutions exacerbated the already fragile preferred share market (because banks and insurance companies are being subjected to punitive tier 1 and 2 capital requirements, thereby forcing them to raise more capital).
4. Energy and resource based issuers (e.g., TA.PR.D & TRP.PR.B) were particularly harder hit because of the depressed level of oil prices and various other commodity prices.

The Quarter Ahead for Preferred Shares

The extraordinary capital gain offered in early 2009 (post financial crisis) on preferred shares may not be repeated this time around; however, the slow appreciation back to higher price levels will come about from the narrowing of credit spreads. In the meantime, the yields at current preferred share price levels are providing a very favourable after-tax income.

Although the markets have been tumultuous year-to-date, we believe that our clients’ portfolios are well positioned to weather the storm and take advantage of market weakness. That being said, it is often good to review, with your TriDelta Wealth Advisor, your investment plan/strategy during these periods of high volatility in the markets; however, staying the course is usually the best policy, assuming that your financial situation, goal(s), time horizon and risk tolerance have not changed.

As a final comment – Let’s Go Blue Jays!!

Cameron Winser VP, Equities	Edward Jong VP, Fixed Income	Ted Rechtshaffen President and CEO
Anton Tucker Exec VP and Portfolio Manager	David Oliver Chief Operating Officer	Lorne Zeiler VP, Portfolio Manager and Wealth Advisor