Portfolio Sub-Advisor: Aston Hill Asset Management Inc.

Manager Commentary — December 31, 2014

At the beginning of 2014, many investors expected a stable Canadian dollar, rising long-term interest rates in North America, and relatively firm oil prices. In fact, the Canadian dollar was quite stable against the U.S. dollar from January to June and even strengthened a little at the end of the second quarter. The price of oil was also firm for the first six months of the year as global growth, while slowing, was still healthy. It was only ten-year interest rates that seemed uncooperative in this environment. The U.S. Federal Reserve stuck by its plan to eliminate quantitative easing in 2014, and yet the bond market continued to see prices rally and interest rates decline. Even with interest rates once again moving lower, investors were fairly content that everything was unfolding as it should in the investment world.

The second half of 2014 saw the unravelling of most investor expectations, as the Canadian dollar declined, long-term interest rates also declined significantly, and volatility in stocks picked up. Oil prices ended the year below $55 per barrel, about half the price recorded in June. Stock prices for most energy producers and oil & gas service firms fell in concert with the decline in crude oil prices. Surprisingly, stock prices for pipeline and mid-stream companies tumbled almost as much as prices for producers. Lastly, stock prices for banks also fell along with the decline in crude prices as investors built in expectations for a Canadian economic slowdown. Global growth concerns and declining energy prices also caused credit spreads to widen in the second half. About 15% of most high yield bond indices are directly related to oil & gas. Exposure to the energy sector caused most high yield bond indices to end the year just about flat. The performance highlight of the 2014 bond market was found in 30-year bonds. With long-term interest rates declining and North American growth relatively intact, these two factors created ideal conditions for long duration bonds and long dated investment grade debt.

IA Clarington Tactical Bond Fund did have exposure to bonds issued by energy producers and service companies early in 2014. The Fund sold some of this energy exposure in June and then more in December. The short duration of its holdings also hurt the Fund last year. As mentioned, long duration bonds were the surprise performers in 2014 and the portfolio was very underweight. Lastly, the vast majority of the Fund’s U.S. dollar exposure was hedged in 2014. This currency hedging reduced volatility but hindered performance relative to other Canadian income funds that did not hedge. The Fund currently hedges about 80% of its U.S. dollar exposure, but the portfolio manager is looking for opportunities to reduce that percentage.