The Year to December 31, 2006

Equity markets are volatile by nature and returns can vary significantly year to year. This can been seen quite readily by looking at the returns of equity mutual funds over time. Listed below are Canadian equity mutual funds, and on the following page foreign equity mutual funds, that we support. We have shown simple annual returns for the past 5 years and compound annual returns for the past 3, 5 and 10 years as of Dec. 31st, 2006.

Simple annual returns are just that: the return for the fund for that particular year. Compound annual returns show the geometric average annual return over a number of years, assuming that any returns over a specified time period were reinvested in more units of the fund. Bold emphasis indicates that the fund performed above average for its category during that time period, as compared to its peer group. It is a separate matter to compare the fund performance to a relevant index, which is the benchmark active mutual fund managers attempt to outperform.

We have included the similar statistics for Canadian bond funds as a base-line to compare the returns of different risk-profiles. We also have included benchmark iSHARES for the Canadian equity market, as well as the US and EAFE markets.

Notice that a number of the funds shown in both tables achieved superior performance across all three compound periods, but few achieved superior performance in every single simple period. Such is the nature of mutual fund investing and stock-picking…. the experts call this regression towards the mean (average). The tricky lesson is not to “punish” and bail out of your fund that falls off the pack in a particular year or two because the investment climate of the day favours a different investment outlook.

Exchange-Traded Funds (iShares) continue to develop as an alternative to actively-managed mutual funds. ETFs are passively managed funds that track indices and have significantly lower annual management fees compared to mutual funds. Many track broad geographic indices (like the US, Europe, Japan and Emerging Markets) while others track industry sectors (like technology, health or banking,) or small, medium or large companies.

New exchange-traded funds that recently have been introduced include the Canadian Dividend Index iShares (XDV), S&P Global Industrial Index iShares (EXI), SPDR S&P Emerging Europe ETF (GUR) and SPDR S&P China ETF (GXC). Also, we have been adding MSCI Switzerland iShares to portfolios to provide for more global financial and health exposure and it is also a currency play on the ‘swiss franc’. The ETFs for the US S&P 500 and MSCI Int’l have been restructured this past year to hedge the Canadian dollar against the US dollar and other international currencies.

Unlike mutual funds, we are better able to break down the dollar value of money invested in broad-index ETFs into the various industrial sectors and include them in your sector analysis along with your direct stock sector holdings. This provides us with more insight into the risk exposure of portfolios to the various industrial sectors and allows us to manage your sectoral industrial diversification. Also, we include both foreign ETFs and mutual funds in our international geographic analysis of portfolios. This allows us to manage your international diversification.

We are continuing to assess individual mutual fund performance against the relevant ETF. In the past year, some have been dropped from our list and others have been added. Our portfolios continue to evolve to a blend of direct stock holdings, rigidly-tested mutual funds and ETFs.