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Market Update Q1 2016

Message from the Chief Executive Officer

April 27, 2016

The first quarter of 2016 provided a definitive example of the perils of market timing. Extreme volatility in the opening weeks was superseded by stronger performance in the closing weeks of the quarter.

January’s sell-off in riskier assets was driven by what we concluded was an overly negative view of global economic growth. As the quarter wore on, stabilizing prices, and eventual gains, for key commodities like oil combined with improving perceptions of China’s growth potential buoyed markets. Other bright spots included bond market performance and returns on international funds.

Against this backdrop, MD funds fared well on a relative basis compared to their benchmarks. During the quarter, MD increased U.S. equity exposure to a neutral underweight position at the expense of Canadian equities, which are now underweight, and EAFE (Europe, Australasia and Far East) equities, which are still overweight. EAFE is being overweighted because we think there are better opportunities there, relative to other asset classes. MD portfolios continue to maintain a slight overweight in overall equity exposure versus bonds. This can be characterized as a “risk-on” position because it favours equities, which generally have higher return potential and corresponding levels of risk, versus “risk-off” positions in more conservative fixed income.

Before the portfolio shifts, the portfolios were strongly underweight in the U.S. These latest moves bring the portfolios closer to their long-term strategic target weights in the U.S. This supports managing the risk of the portfolio because it brings the U.S. component and the Canadian component of our strategic weightings more in line with our long-term view that U.S. growth will continue to improve.

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