Investment Approach

The demand for income is a secular trend driven by persistently low government bond yields, an aging population and a scarcity of high income alternatives. While the income trust market is winding down over the next several months, the following new opportunities are emerging that the Fund aims to capture:

• There is a deep pool of ultra high dividend paying equities emerging. Corporations recognize that investors demand a higher dividend payout and are raising payouts accordingly. In addition, most former income trusts are retaining a high payout and attractive yields.

• Qualifying REITs are exempt from the SIFT Rules. In addition, there is broadening and deepening of the REIT and real estate market in Canada occurring. Existing REITs have begun to make significant acquisitions funded in part by equity, greatly increasing the market capitalization of the REIT sector. In addition, a pipeline of REIT initial public offerings is beginning to develop which should offer investors further investment opportunities.

• The high yield market in Canada is finally beginning to emerge. Demand for high yield bonds from Canadian investors is substantial and high yield issuance is expected to increase to meet this demand.

This strategy seeks to capitalize on the strengths of the Investment Manager’s Canadian Equity and Fixed Income teams. The Canadian Equity team has deep history in income-oriented investments and a strong track record of security selection, particularly in less efficient, small and mid-cap securities while the Fixed Income team’s demonstrated strength is credit research.

The Canadian Equity team follows a rigorous bottom-up approach to security selection for equities, income trusts and REITs. The cornerstone of the process is management interviews, during which analysts seek to identify milestones for value creation. The Canadian Equity team has further discussions with customers, competitors and sell-side analysts and develops forecasts for each company based on the outlook. From there, targets prices are set for each security based on the valuation methodology appropriate for the sector. While the Canadian Equity team seeks to invest in the securities with the highest total returns, they are constrained by the foremost objective of delivering a high and sustainable yield. At the low end of the yield spectrum (approximately 2 - 4%), they want to see a track record of dividend growth, as well as prospects for further dividend growth. At the high end of the yield spectrum (approximately 5 – 12%), the Canadian Equity team is much more focussed on sustainability, including a careful analysis of payout ratios. Over time, they expect to have a fairly equal split in the equity portion of the portfolio between lower yields with growth potential and high sustainable yields. In this manner, the Canadian Equity team hopes to capture both high income and growth in income.

The Fixed Income team will have the ability to invest across the fixed income spectrum but, similar to Connor, Clark & Lunn Conservative Income Fund II, their current emphasis will be in corporate bonds including high yield debt. The Fixed Income team’s process is a bottom-up process. During the research process, the Fixed Income team focuses on liquidity and cash flow, analyzes covenants in the debt documents and looks at management performance as well as asset value and quality. While some capital appreciation is expected, the focus is on finding companies where the yield on the investment is expected to be realized.