Asset Allocation and the building/re-balancing of Turner Tomenson client portfolios.
A significant number of academic studies have focused on Asset Allocation and the performance of
portfolios over time. We have adopted, and continue to utilize, Modern Portfolio Theory to find
strategic advantages to building client portfolios through Asset Allocation for predictable risk adjusted
returns over time.

Why?

Through the economic cycle, from trough (recession) to peak (expansive GDP growth) and back to
trough (recession), different asset classes will perform at different levels.
In times of slowing economic growth, central banks will lower interest rates and provide monetary
stimulus to soften the negative impact. Usually through this period more growth-oriented assets will
underperform (such as small companies or developing economies), while interest rate-sensitive assets
(fixed income, like bonds or preferred shares) will outperform.

As investors perceive an economy is close to bottoming (with interest rates at their lows), they start
looking to growth assets for increased returns, anticipating the next period of growth in the cycle.
Unfortunately timing this change is fraught with danger and volatility tends to rise during this period of
change.

As can be seen in this chart of the S&P500, from the end of the recession in 2009, the market has had a
number of significant surges and corrections, although the direction has continued to be up (with higher
highs and higher lows). Achieving portfolio growth and not giving it back during times when markets are
difficult is always the greatest challenge. Through consistency in our Asset Allocation strategy (staying the course with our target weightings) despite some holdings that may under-perform at times, we are able to capture growth when it occurs.

If we look at the 3 year history of our 60% equity/40% fixed income model through the very slow economic recovery since 2009, it is quite clear that all asset classes have performed at certain times, making
a contribution to the total portfolio

 However, there have been assets that have, during the low interest rate environment, been
considerably better performers (such as preferred shares). However, this does not mean that they will always out-perform. In fact, as interest rates begin to rise, these assets will likely be under-performers (as will government bonds and some high-grade corporate bonds). Some might question why hold these at all? There’s too much uncertainty and potential volatility in the world, and these provide stability and income should the unexpected occur. The same holds true for assets that at times provide a high degree of growth to the portfolio, but lag during other periods. Specifically the small companies indexes (Canada: XCS, US: IWR, IWC, Intl: SCZ) or emerging markets indexes (XEM, FXI, EWZ and INDY) have been in this category lately.

So, a common question has arisen through the under-performance of some of our high growth assets:
Why is my TFSA not performing? Garth and I have adopted a strategy for tax efficiency that prescribes
using different accounts within the total portfolio for sheltering assets from tax. For highly taxable, interest paying investments, we prefer, when we can, to shelter them in the RRSPs. This would help RRSPs perform better, through difficult markets, but under-perform in times of growing equity markets.
For TFSAs we have more aggressive growth investments sheltered from the potential for large capital
gains. However, through difficult markets, these assets have underperformed. As history has proven,
this is likely a short-term phenomenon and in time, these assets will once again outperform, and TFSAs
along with them.

We try to hold the most tax-advantaged assets (which pay tax-efficient dividends) in non-registered
accounts.

Key take-away:

Different assets in the total portfolio will perform (and under-perform) throughout the economic cycle.
The balance and diversification of your total portfolio is crucial to capturing the growth in good markets
and limiting the downside in difficult markets (regardless of the account in which they are held).

Predictions for 2013:

Underperforming assets (small companies and emerging markets) will likely out-pace assets that have
performed well over the last few years (REITs, Preferred Shares). However, a balanced portfolio should
still have those asset classes, because it is never certain what our volatile world will throw at us next.
We are always aware our main obligation to you is to preserve your capital. We pursue growth within
this mandate. We are pleased to report the model portfolio described above has achieved a return of
10.71% in 2012, with the three-year average return being 8.28%. More importantly, $100,000 fully
invested in our model on Jan. 1, 2010 has grown to $126,225.93, a 3 year compound annual return of
8.74%.

Thank you for the privilege of working with you, and we look forward to many years of success

www.turnertomenson.ca