The High Income Fund returned 0.38% in July, with most stock markets down and bonds advancing in a flight-to-safety move. Market volatility spiked as investors reacted to the escalating Israeli-Gaza conflict and the ongoing Russian-Ukrainian crisis with its potential to negatively impact the struggling Eurozone economy. Investors also reacted to the defaults of Argentina and Portuguese Banco Espírito Santo.

The Fund’s performance moderately lagged its benchmark. The results reflected a beat in asset mix with an overweight position in Canadian Equities and underweight in Foreign Equities and Bonds. Foreign equity security selection was strong, while Canadian security selection was impacted by the under-performance of the Energy Sector which saw some profit-taking after leading in the first half of the year. In Bonds, the underperformance was immaterial as corporate security selection and an overweight in municipals substantially offset the drag from cash and the impact of slightly wider corporate yield spreads.

Geopolitical headwinds continue to affect investor appetite for risk. In this environment, we are adhering to our overweight equity and defensive bond strategy as bond yields remain relatively unattractive. We are encouraged by evidence of an improving US economy and the potential carry-over benefits for Canada; while we recognize that stock markets have been in a long period of recovery without a correction in two years. While not immune to a pull-back, the Fund should hold up on a relative basis due to its defensive orientation.

Bonds in Canada (FTSE TMX Canada Universe Bond Index) returned 0.63%, with prices up on both a flight-to-safety bid and foreign buying, thereby overshadowing economic fundamentals. US economic data supported our outlook for a rebound in activity and forward momentum building. Second quarter GDP was 4.0% after a revised -2.1% in Q1. Employers added 288,000 jobs in June. The unemployment rate fell to 6.1%, its lowest since 2008, and the four-week average of initial claims for unemployment benefits hit new lows. The Federal Reserve left its key interest rate unchanged while upgrading its outlook.  It also acknowledged the recent pick-up in inflation, but cautioned that significant slack in the labor market remains.

In Canada, the economic data was mixed. Manufacturing and retail sales were strong and the housing market defied expectations of a slowdown with existing home sales up 11% year-over-year, surpassing the 10-year average. After adding 26K jobs in May on less desirable part-time positions, employment disappointed again by falling 9K in June; reducing year-over-year growth to only 0.4%.  The unemployment rate worsened to 7.1%. Inflation rose to 2.4%, but this was attributed to temporary sector-specific factors as the Bank of Canada kept its key rate unchanged.

Bond transactions in the month included the sale of Goldman Sachs 2018s to buy the Morgan Stanley 2021s new issue for yield enhancement and diversification.

Stocks in Canada (S&P/TSX) returned 1.42% with Consumer Staples leading the pack as Loblaws completed its acquisition of Shoppers Drug Mart. Financials rose 4.3% and Industrials performed well on good earnings from both major Canadian railroads. Energy gave back some of the gains from the beginning of the year. The best performing security was Loblaws up 12.6%; while names like Bonterra, Enerplus and Crescent Point were down over 5% each.

Turnover on the equity side was very low this month. Notable transactions included the sale of Health Care REIT and a portion of the Bank of Nova Scotia position. We also repurchased Blackstone and Power Financial; while adding to Goldcorp, Royal Bank and Inter Pipeline.