Investment Strategy Comments December 31, 2011


Fixed Income

Global central banks, including the Bank of Canada, have committed to create ongoing global liquidity through low interest rates, in support of a Euro zone recovery effort. This does not change our Coleford bond strategy. We continue to own a broadly diversified portfolio of bonds, with maturities extending approximately 10 years while keeping the average term short. This strategy should continue to provide good support for our overall portfolios in this low interest rate environment.

Bond Risks – Financial Repression

One important risk in the current interest rate environment is the risk of financial repression. Financial repression can occur when bond yields are lower than inflation for any prolonged period of time, which effectively erodes purchasing power. We will continue to pursue our current strategy of keeping our average bond term short to limit this repression risk, and avoid longer-dated bonds.


On a relative basis, our equity holdings have held up well in a difficult environment. Our fundamental approach and company-specific analysis – with special attention to balance sheet strength and capital management – continues to serve us well.

Despite the difficult macro environment, many of the names in our model portfolio continue to deliver sound financial/operating performance. For the quarter ending September 30, approximately 85% of our holdings exceeded quarterly earnings expectations and, during the last 12 months, almost 90% of the companies we own have increased their dividends.

Consistent dividend policies and regular dividend increases reflect sound capital management discipline and provide another positive economic indicator. Most of the companies we own are expressing a relatively high degree of comfort with their respective businesses.

Average dividend yields also remain at or near 3.0%, meaning they offer an attractive investment alternative to lower yielding bond and short-term money instruments with considerably more upside capital appreciation potential.

Valuation levels also continue to be attractive relative to history in both Canada and the US. For most of 2011, the US equity market traded at a significant discount to the Canadian market on a forward earnings basis, although this discount has narrowed considerably, especially during the most recent quarter. Most sectors in the US continue to trade below historical averages.

We continue to review new equity opportunities in both Canada and the US as current valuation levels offer compelling value for long-term investors.