The “Sideways” Market
Remember Dow at 10,000
When the Dow Jones Industrial Average Index first surpassed 10,000 in March 1999, Merrill Lynch took out a full page newspaper ad with a headline saying “Even those with Merrill Lynch took out a full‐page newspaper ad with a headline saying “Even those with a disciplined long term approach like ours have to sit back and say WOW”*
Over the last decade, the Dow Jones Industrial Average Index has crossed 10,000 numerous times 15,000 Mar 1999‐Jun 2010 14,000 13 000 13,000 12,000 11,000 10,000 9 000 9,000 8,000 7,000 6,000
*Source: Robert Shiller “Irrational Exuberance” **Source: Bloomberg March 1999‐June 2010. Upside only.
Why Do Sideways Markets Happen?
Stock Prices have been pushed to overvalued levels i.e. Tech stocks in the late 90s
An “event” has occurred causing a significant decline in markets over a relatively l ti l short h t period i d off titime
Lingering uncertainty in the market over a “big picture” issue
Weak investor confidence i.e. money sitting on the sidelines
W k economic Weak i growth th
Sideways Markets Are Common ? Market* 1
1906‐1924
2
1937‐1950
3
1966‐1982
?
2000‐Present
3 2
1
1900
Dow Jones Industrial Average ($US)
Source: Bloomberg and Tuttle Asset Management LLC Dec 1900 June 2010 Chart uses a logarithmic scale * See Appendix Source: Bloomberg and Tuttle Asset Management LLC. Dec 1900‐June 2010. Chart uses a logarithmic scale * See Appendix
2010
A Closer Look at Sideways Markets 4400
S&P/TSX Composite Index S&P/TSX Composite Index
1987‐1993
Index Level
4000 3600 3200
‐25.3%
‐31%
12 5% ‐12.5% 42%
28.6%
21.4%
2800
Source: Bloomberg
Characterized by volatility with large swings both positive and negative
Commonly occur after a sharp‐sell off in the markets due to a crisis of confidence (i.e. Great Depression, Inflationary Crisis)
Us all occ r in periods of positi e b t eak economic gro th Usually occur in periods of positive but weak economic growth
Typical Investor Emotions During Sideways Markets Frustration Frustration “My My account seems to go up, then down, then up again account seems to go up, then down, then up again” Temptation to try Market Timing
“Buy Gold, Buy Oil, Isn’t Fixed Income in a bubble?!?!”
3 Years...3 Different Markets 2008
“The Fall”
2009
2010
“The Rally”
“Sideways?” Sideways?
900
1200 1100
800
850
1000 900
700
800 600
700 600
500
500
Investment Solution: l Cash, Bonds, GICs
750
Investment Solution: l Equities
Investment Solution: l ?
Source: Globe HySales as at June 30, 2010. Calendar Year Returns of the MSCI World Index (Local Currency) Source: Globe HySales as at June 30 2010 Calendar Year Returns of the MSCI World Index (Local Currency)
INVESTING IN SIDEWAYS MARKETS
Things to Consider
Sources of Return During Sideways Markets During Range‐Bound markets investors gain little through capital appreciation. A focus on income producing investments is key. • Dividend Paying Equities
Di id d Dividends
Income
Cash Distributions
• Preferred Shares P f d Sh • Dividend & Income Funds • Government and Corporate Bonds Government and Corporate Bonds • High Yield Bonds • Fixed Income Funds • Income Trusts • Real Estate Investment Trusts (REITs) • Cash‐Distribution Mutual Funds
Active or Passive Investing?
ACTIVE INVESTING
PASSIVE INVESTING
p the Market Potential to outperform
Market Return less fees
Manager can shift portfolio across various asset classes to take opportunities
Only makes moves when stocks are added/dropped from the index
Can raise and deploy cash as opportunities arise
no cash component (to take advantage of opportunities)
Buy undervalued securities, Sell overvalued securities
Own all securities in the index regardless of price
Think Dividends Sources of return for the S&P 500 Index* Average Sideways Market**
Average Bull Market**
Price Appreciation
0.7%
17.6%
Dividends
5.3%
4.2%
Total Return
5.9% %
22.6% %
% Dividends
90%
19%
*Source: Active Value Investing: Making Money in Range Bound Markets, Vitaly N. Katsenelson. Wiley Finance. R t Returns in $U.S. Dollars. **See Appendix i $U S D ll **S A di
Why Dividends Help in Sideways Markets While the prices of stocks can go side to side, dividends will continue to be paid helping
generate income which can also can be reinvested into more shares t i hi h l b i t di t h Historically, companies with a history of paying and increasing their annual dividends
have outperformed the S&P/TSX Composite Index p / p 14.0% 12.0% 10 0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Non Dividend Payers
TSX Composite
Dividend Payers
Dividend Growers
Total Returns (Dec 1986 -Dec 2009, Equal Weighted, %)
Source: RBC Capital Markets Quantitative Research
INVESTING IN RANGE BOUND MARKETS
Some Ideas
Consider A Tactical Approach
A Tactical Approach to investing tends to be more dynamic to immediate market movements and trends
Portfolio manager can shift investments to an asset class that is expected to outperform in the shorter term or help lower portfolio risk
There are a number of wayy a Portfolio Manager g can be tactical in their investment approach:
over/under weight individual securities hold cash (risk free asset) focus on dividend stocks
over/underweight equity sectors emphasize portfolio yield add foreign holdings to portfolio
Tactical Investing in Action
“Fear” at its peak =Deploy Cash
7 6
Spread over 10 Year U.S. Treasuries
% spread
5 4
Lehman and AIG = Raise cash
3 2
Volatility lowers o at ty o e s =Fully Invested
1 0
2008
2010
*asset mix of the IA Clarington Tactical Income Fund Series T6 **Source: Bloomberg ,Corporate BAA spread over 10 Year U.S. Treasuries
IA Clarington’s Tactical Fund Line up Line-up
Each Fund in our Tactical line‐up focuses on a diverse range of asset classes to generate high level of internal yield (income) in the portfolio IA Clarington g Tactical Income Fund
IA Clarington Global Tactical g Income Fund
IA Clarington Tactical g Bond Fund
Fund Category
Tactical Balanced
Global Balanced
Fixed Income
Series
A, T6, T8
A, T6, T8
A, T5
Investable Asset Classes
Canadian Equities Preferred Shares High Yield Bonds Corporate Bonds Income Trusts / REITS Income Trusts / REITS
Canadian Equities U.S. Equities Foreign Equities High Yield Bonds Corporate Bonds
Provincial Bonds Government Bonds High Yield Bonds Corporate Bonds Municipal Bonds Municipal Bonds
Think Dividend Funds IA Clarington Canadian Conservative Equity Fund ‐ “Time, Tested and True for over 60 years” Fund
Inception 1950, managed by Leon Frazer & Associates the oldest investment O Organization i ti in i Ontario O t i established t bli h d in i 1939 Fund
invests in companies with a history of increasing o c eas g ttheir e d dividends de ds Dividend
Income has been a significant contributor to Fund outperformance
Chart date range: 1950‐2009
Active Management During Sideways Markets Gil Lamothe, manager of the IA Clarington Dividend Growth Fund actively trades around his core stock positions By adding and trimming around stock positions Gil can take advantage of short term opportunities in the market #1 Canadian Dividend and Income Equity Fund in Canada over a 10‐year period #1 Canadian Dividend and Income Equity Fund in Canada over a 10‐year period*
IA Clarington Dividend Growth p Fund stock example*
Chart Source: Globe Fund Chart Source: Globe Fund.
*please see disclaimer page for important information
A Balanced Approach
A balanced mix of equities and fixed income remains a popular choice for many investors
Over the last 20 years by combining equities with bonds, portfolio risk is lower while keeping similar growth potential
Source: Zephyr Style Advisor from Dec 31, 1989 to December 31, 2009. Canadian equities are represented by the S&P/TSX Composite Index. Canadian Bonds are represented by the DEX Universe Bond Index. All indices are based on total return.
Success Driven By Value, Not The Benchmark
QV Investors Inc., now sub‐advisor to the IA Clarington Canadian Balanced Fund has one of the strongest track Fund has one of the strongest track records in the country The QV Canadian Balanced Fund – b t best performing balanced fund in its f i b l d f d i it category in down markets over 10 years^ Least volatile stand‐alone Fund in its category over 3 and 5 years^
IA Clarington Cdn.Balanced IA Cl i t Cd B l d Fund*
S&P/TSX C S&P/TSX Composite Index it I d
Canadian Utilities Ltd.
Royal Bank of Canada
BCE Inc.
TD Bank
Metro Inc.
Bank of Nova Scotia
Telus Corp.
Suncor Energy Inc.
Astral Media Inc.
Barrick Gold Corp.
Transcontinental Inc.
Cdn. Natural Resources
Toromont Industries Ltd.
Bank of Montreal
E‐L Financial Corp. Ltd.
CDN National Railway
Husky Energy Inc. k
Potash Corp. of Sask. hC fS k
Transcontinental Inc. PREF. Shares
Goldcorp Inc.
•Source: Source: IAIM and Bloomberg as at June 30, 2010. IAIM and Bloomberg as at June 30, 2010. ^Source: Source: Globe Hysales Globe Hysales as at September 30 as at September 30th, 2010. Canadian Neutral Balanced Category excluding multiple , 2010. Canadian Neutral Balanced Category excluding multiple services.
Fixed Income Securities. Actively Traded to Add Value Fixed Income securities are often held in balanced portfolios to provide stability, predictable
income and portfolio diversification income and portfolio diversification QV Investors Inc., managers of the IA Clarington Canadian Balanced Fund actively trade both
the fixed income and equity components of the Fund to add alpha 40%
Corporate Bond Exposure
IA Clarington Canadian Balanced Fund Proxy*
35% 30%
DEX Bond Universe Index
25% 20%
Active Management Active Management in action
15% 5% 10% 5% Jun-04
Jun-05
Source: CPMS. *See Disclaimer
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Limit Your Downside QV Investors has demonstrated a proven ability to limit investors downside during market downturns in their balanced fund mandate k d i h i b l df d d
During a sideways market it becomes imperative to “keep what you earn”
Calend dar Year Returns (%)
IA Clarington Canadian Balanced Proxy^ Median Canadian Neutral Balanced Category Source: Zephyr Style Advisor
Disclaimer IA Clarington Canadian Balanced Proxy: To provide a better indication of what the past performance may have been, had QV Investors Inc. been the investment manager, a proxy was constructed based upon the returns of the QV Canadian Balanced Fund t May to M 2009 and d the th returns t off the th IA Clarington Cl i t Canadian C di Balanced B l d Fund F d Series S i A since i J June 2009 The 2009. Th proxy performance f numbers have been adjusted to reflect an annual MER of 2.49%. The figures shown represent the performance of the "proxy". It is best viewed as an indication QV Investors’ ability to manage a Canadian balanced portfolio based upon their past history. IA Clarington Dividend Growth Fund is modeled after IA Ecoflex Dividend (Segregated Fund) which is the best performing Canadian Dividend & Income Equity Fund over a 10 10‐year year period (as reported by GlobeFund.com GlobeFund com as at June 30,2010) 30 2010) There is no assurance that any of the securities discussed herein will remain in the Fund’s portfolio at the time this report is received or that securities sold have not been purchased. Nothing contained in this report should be considered a recommendation to purchase or sell a particular security. All trademarks in this document that are not owned by IA Clarington Investments Inc. or Industrial Alliance Insurance and Financial Services Inc. are the property of and trademarked by the corresponding Company and are used for illustrative purposes only. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Any indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional ti l charges h or income i t taxes payable bl by b any security it holder h ld that th t would ld have h reduced d d returns. t M t l funds Mutual f d are nott guaranteed, their values change frequently and past performance may not be repeated. The IA Clarington Funds and IA Clarington Target Click Funds are managed by IA Clarington Investments Inc. IA Clarington and the IA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license. license
Appendix#1- Date Ranges Start and End Date Dow Jones Industrial Average Sideways Markets
Bull Markets
1/31/1906 ‐ 12/31/1924
12/31/1924 ‐ 10/31/1929
1/31/1937 – 1/31/1950
8/31/1932 – 1/31/1937
1/31/1966‐ 10/31/1982
1/31/1950‐ 1/31/1966
1/31/2000 – Present ?
10/31/1982 – 1/31/2000
S Source: Active Value Investing: Making Money in Range Bound Markets, Vitaly A ti V l I ti M ki M i R B d M k t Vit l N. Katsenelson. Wiley Finance. N K t l Wil Fi
