1. Fixed Income Update and Outlook
Kris Ullman, Divisional Director, Eastern Canada
Greg Nott, CFA, Chief Investment Officer
JULY 25, 2013
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2. Important information
THIS PUBLICATION IS INTENDED FOR INVESTMENT ADVISORS ONLY AND IS NOT INTENDED FOR, NOR CAN IT BE PROVIDED TO, INVESTORS OR POENTIAL INVESTORS. IT DOES NOT CONSTITUTE A SALES COMMUNICATION AS DEFINED BY NATIONAL INSTRUM , “MUTUAL FUNDS.”
Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This information is made available on an “as is” basis. Russell investments Canada Limited does not make any warranty or representation regarding the information.
Indices and benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, and are not a guarantee of future performance and are not indicative of any specific investment. Index return information is provided by vendors and although deemed reliable, is not guaranteed by Russell investments or its affiliates. Due to timing of information, indices may be adjusted after the publication of this report.
This publication may contain forward-looking statements. Forward-looking statements are statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "expects", "anticipates", "plans", "believes", "estimates" or negative versions thereof and similar expressions. In addition, any statement that may be made concerning future performance, strategies or prospects, and possible future Fund action, is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risk, uncertainties and assumptions about economic factors. Forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward-looking statements made in this publication. Any number of important factors could contribute to these digressions, including, but not limited to, general economic, political and market factors, interest and foreign exchange rates, capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. No model or group of models can offer a precise estimate of future returns available from capital markets.
Unless otherwise stated, all yield measures are yield-to-maturity. Yield-to-Maturity: The rate of return anticipated on a bond if it is held until the maturity date. 
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3. Important information
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Date of publication: July RETAIL (EXP ).
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4. The investment world today
Return assumptions are low, yet return requirements remain high
Investors want more certainty than they can afford
Increasing uncertainty with fixed income investments
The point: the future looks different and your current course is not sustainable/risky/sub-optimal
Our clients’ financial goals are straightforward: invest to achieve lasting financial security for retirement without too bumpy a ride along the way. The challenge is that in an environment where returns are hard to come by and where market volatility is high across the board, navigating that journey takes a lot of expertise, judgment and perspective. Put simply, successful investing is difficult. In over 40 years of living out our mission of improving financial security for people, we at Russell discovered that there is no silver bullet to meeting client goals. There are many things you need to do well to invest successfully where doing just one poorly can undermine the enterprise. Doing all these things well in today’s marketplace is even harder than it has been historically– big shifts are occurring in economies and the investment world. The world is getting faster; companies come and go in the blink of an eye. Google didn’t exist 15 years ago and now has a market cap of over $250 Billion while Lehman brothers went from the 4th largest US investment bank to bankrupt in under 2 years. Everything is becoming more connected. You can have a video conference with colleges on the other side of the world in seconds, or fly there in hours. Countries are more interconnected, businesses rely on global revenue streams. Cross-border capital flows have made financial markets into a single integrated entity, with markets pricing every opportunity against a global opportunity set of alternatives and pricing risk events globally and instantaneously without respect for national boundaries. And new economies are rising. China has overtaken Japan as the second largest economy and is projected to overtake the US by 2016.
These global shifts have implications for how you invest. To add to the complexity, these shifts are related to one another, so the impact on investing is multi-faceted. We couldn’t have had a global financial crisis without globalization. We continue to see the effects of market dislocation from the GFC on a number of fronts:
Capital market return assumptions are low, yet return requirements remain high. Returns are lower across asset classes because interest rates are lowto start with. Underlying structural issuesthat raise questions about the strength and resilience of even the largest and most prosperous economies are yet to be resolved, creating an ongoing shadow/backdrop of volatility as nervous markets switch between greed or fear on any hint of good or bad news.
Investors may have to take on more risk than they are comfortable with to meet their return objectives; reliable sources of extra return and real time risk management are crucial. With low return estimates for capital markets, the only way to realistically meet return targets is by moving up the risk spectrum or by making assets work harder and smarter. Making assets work harder and smarter takes time, effort, fees, research, and real time dynamic portfolio management. But…
Organizations are increasingly resource constrained even as they take on these demanding and complex challenges. . To survive, committees need to drive costs down and achieve scale efficiencies. This means greater market competition, more pressure on fees, transparency, achieving economies of scale, employing the best resources but doing so cost efficiently. Increased regulation demand attention and often result in even less time to focus on the critical challenges of achieving investment goals.
The good news is that opportunity continues to spring eternal, with new industries generating new ways of producing/consuming/creating value and new investment categories offering substantial opportunity while diversifying sources of risk. The tremendous growth in several emerging economies and the commercial opportunities this creates for companies everywhere is but one example, not to mention the plentiful investment opportunities in illiquid and alternative investment, many of which feature strong risk premia and rewards to the skillful..
Successful investing is hard indeed. We believe investors need to grasp these new and potent opportunities to reach their demanding goals but they must do so in a disciplined fashion that recognizes and manages risks and allows for real-time adjustments and course corrections. Successful investing means harnessing a world of investment opportunity to serve your goals.
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5. Russell Disciplined Investing Program
Products Category
Average Advisor Holdings
# of Products
438
# of Equity Products
261
# of Fixed Income (FI) Products
105
# of Mutual Funds
170
Key Ratios
Average (CAN$)
AUM per Product
$224,426
AUM per Equity Product
$527,352
AUM per FI Product
$760,566
Russell has a lot of experience in analyzing retail portfolios and has come up with some common issues
Read and expand
Source: Investment Analyzer, as of April, 2013
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6. Russell Disciplined Investing Program
Average advisor asset allocation
Source: Russell Disciplined Investing Program. Calculated as of April 2013.
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7. The “wall of worry” might not be that high in the end
Examples of 2012 financial magazine covers
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8. What does the future hold?
Source: Financial Post, June 3, 2013
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9. Part I Fixed Income Review
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10. “Taper” tantrum: Bond yields spike
An overreaction to Fed comments
Fed “tapering” comments spook markets
Fed “tapering” comments spook markets
Past performance is not indicative of future results.
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11. GoC yield curve changes
Recent GoC Yield Curves
Last 30 days
Significant spike in yields on mid-term Canadas
Less so in short and long end
Last 2 years
Short yields relatively unchanged
Longer term yields still well below 2011 levels
Source: Bloomberg as of July 19, 2013
Data is historical and is not indicative of future results.
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12. Long corporate yield spreads remain attractive
(%)
Source: Beutel Goodman, PC Bond. Yield data as of July 2nd, 2013, illustrating the difference in yield between DEX Long Corporate Index vs. DEX Long Canadas Index. Indexes are unmanaged and cannot be invested in directly. Data is historical and is not indicative of future results.
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13. Credit spreads widened, but started to recover
Option Adjusted Spread (OAS) Analysis
OAS (%)
OAS (%)
Canada & US Baa Indexes
EMD & High Yield Indexes
Easy money made, security selection and skill are key.
In Canada HY space, low coupon levels versus historical norms results in that space no longer offering the same level of income protection.
As more money has been flowing into Canada high yield, underwriting standards have become more loose; debt levels for issuing company keeps rising.
From ETF perspective, highest weights in HY ETF are also those most leveraged.
Canso is extremely bearish on Canada HY, seems more opportunities in US HY but still selective.
Non-domestic corporates still more attractive as Canadian corporates trade at a premium relative to global counterparts.
Credit spreads have widened as bond yields rose
This is not typical and we expect it to reverse
Source: FactSet, Russell Investments. Note: Data from 12/31/12 – 7/17/2013.
Indexes are unmanaged and cannot be invested in directly. Data is historical and is not indicative of future results.
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14. Russell’s current fixed income outlook
Significant increase in bond yields post-Fed comments appears to be an ‘over- reaction’ in our opinion
We would expect bond yields to stabilize at levels lower than current
But 10 year GoCs yields not likely to re-test the 2.0% level
We believe rates unlikely to rise significantly from here:
Given only slow global growth
Given inflation staying low
Given central banks will stay accommodative
Bond Yields are expected to stay relatively ‘range bound’ for rest of 2013
2.10% % on the 10-year
Search for yield trade likely continues – credit spreads could narrow again
We still expect modest positive single digit Total Returns for 2013
There is no guarantee that any stated expectations will occur and are subject to change based on economic conditions. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
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15. Sub-adviser positioning comments
Beutel, Goodman & Company, Ltd.:
Remain bearish on interest rates. Believe that the central banks will be successful in creating economic growth
Still positive on long maturity liquid high quality corporates (utilities, pipelines)
Canso Investment Counsel Ltd:
Still positive on credit but warning signs are increasing - Remain selective on new issuance
Underweight to Cdn banks, large overweight to foreign financials (through Maples)
Taking profits on longer maturity corps (Rogers, Bell, P3 issues) and re-investing in FRNs - now at 25% exposure.
Pacific Investment Mgmt. Company LLC:
Expect weak economic growth to continue (below consensus forecast)
Central banks stay ‘low for long’. Therefore neutral duration
Given recent sell-off in credit markets – moving from a ‘risk reduction mode’ to ‘selectively adding risk’ – will add to non-domestic IG credit if spreads widen further
There is no guarantee that any stated expectations will occur and are subject to change based on economic conditions.
Sub-advisers listed are current as of July Russell has the right to engage or terminate a sub-adviser at any time. The investment strategies are the goals of the individual sub-advisers there is no assurance that the exact objective will always be met.
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16. Why be Active in fixed income?
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17. Benchmark risk has increased
As yields have declined, and issuers having issued longer maturity debt, durations of benchmarks have increased significantly
This increases the benchmark’s susceptibility to rate increases
As of January 2002, a 100bps increase in yields would result in an approx. index return of 0% over the following 12 months for the DEX Universe Bond Index.
As of January 2013, a 100bps increase in yields would result in an approx. index return of -4.5% over the following 12 months for the DEX Universe Bond Index.
Yield (%)
Duration (years)
Source: PC Bond Analytics, Debt Market Indices
This is a hypothetical example and is not meant to represent any actual results. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.
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18. Flexibility of “active” management with fixed-income strategies
Duration Management
Long duration vs. short duration (vs. the benchmark)
Yield Curve Management
Bullet vs. Barbell
Sector Selection
Governments vs. Corporates
Skilled Security Selection
Off-benchmark opportunities
Non-domestic sovereign and corporates
Securitized debt
Floating Rate Notes
Real Return Bonds
High Yield/EMD (Hard/Local/Corp)
Access to product
Retail bond desks starved for inventory
Better pricing
Competitive retail pricing
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19. Scenario Analysis of the Russell Fixed Income Pool
Series F as of June 30, 2012
Difference: +2.8%
Can 10 Yr Yield:
6/29/12 = 1.74%
6/28/13 = 2.44%
1Yr = +0.70%
Year 1 Impact based on yield and duration of RFIP* as of June 30, 2012: Yield: 2.85%, Duration: 5.88 years.
Yr 1 yield change: Aggressive: +1.0%, Moderate: +0.70%, Conservative: +0.25%,
*RFIP: Russell Fixed Income Pool Series F
Source: Russell Investments. For illustrative purposes only and is meant to demonstrate the hypothetical effect on returns based on different yield scenarios. This is not a forecast of future results and not reflective of actual expectations.
Indexes are unmanaged and cannot be invested in directly.
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20. Russell Fixed Income Pool positioning
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21. Fixed Income Pool positioning over time
Years
Likely stay around 1 year short.
Source: Wilshire Axiom, Russell Investments, Russell Fixed Income Pool
Data from Mar 31, 2008 to June 30, Data is historical and is not indicative of future results.
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22. Fixed Income Pool sector positioning over time
Ratio: Overweight/Underweight
Move from Provis to Federals
-u/w provis – bad fundamentals, stretched valuations
-Federals increase also reflective of RRB additions.
Source: Wilshire Axiom, Russell Investments, Russell Fixed Income Pool
Data from March 31, 2008 to June 30, Data is historical and is not indicative of future results.
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23. Fixed Income Pool sub-adviser positioning over time
Deviation from Strategic Weighting (%)
Likely not push Canso much higher.
Still prefer credit over gov’ts but spread valuations getting stretched.
Source: Wilshire Axiom, Russell Investments, Russell Fixed Income Pool. Data from March 31, 2008 to June 30, Data is historical and is not indicative of future results. Sub-advisers are current as of June Russell has the right to engage or terminate a sub-adviser at any time.
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24. Other Fixed Income Pool Exposures
Floating Rate Notes (FRNs)
We are increasing our exposure to FRNs
Short Term Income Pool
Fixed Income Pool
Current FRN Exposure
20.4%
13.6%
Real Return Bonds (RRBs)
We are very gradually increasing our exposure to RRBs
Fixed Income Pool
Current RRB Exposure
2.2%
Data as of June 30th, Source: Wilshire Axiom.
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25. Part II Reviewing your Multi-Asset strategy: Russell in Action
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26. Canada Institutional Plans
Source: Canada Pension Plan (CPP) as of September 30, 2012, Ontario Teachers’ Pension Plan (OTPP) 2011 annual report. For OTPP, fixed income allocation is inclusive of negative money market position, Harvard based on policy allocation, Yale based on 2012 report. Numbers may not sum to 100% due to rounding.
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27. Russell Income Essentials Portfolio
68% Fixed Income / 32% Equities Target Allocation
Source: Russell Investments as of July 2013
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28. Russell Income Essentials Portfolio evolution
Strategic allocation
enhancements
Other enhancements
2009
JUN
hedged USD exposure
added strategic Canadian Dividend exposure
AUG
2010
MAR
began incorporating asset class tilts into the portfolios
2011
FEB
removed USD hedge
MAR
US Equity: restructured from 11 sub-advisers to 6
Added strategic Global High Income Bond exposure
DEC
Global Equity: +Sanders Capital, LLC
2012
US Equity: +Mar Vista, Investment Partners, LLC -Montag & Caldwell
APR
MAY
Global Equity: +Sustainable, -Marsico Capital Management
Dynamic Portfolio Mgt is more than just our EAA signals though…
It goes back to our strategic allocation changes, and even our sub-advisor changes within the underlying funds.
This is a time line of the changes we’ve done in the LifePoints Balanced Fund.
added strategic Short Term Income exposure
AUG
Added strategic Focused Canadian Equity and Focused US Equity exposures
DEC
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29. Russell Income Essentials Portfolio evolution
Strategic allocation
enhancements
Other enhancements
2013
added strategic Infrastructure and Real Estate exposures
JAN
Global High Income Bond Pool: +Lazard Asset Management (Canada), Inc.
MAR
Global Equity Pool: +Numeric Investors LLC, +Wellington Management Company, LLP
-Arrowstreet Capital L.P.
- McKinley Capital Management
MAY
JUL
Canadian Dividend Pool: +Invesco Canada Ltd.
Sub-advisers are current as of the specified date. Russell has the right to engage or terminate a sub-adviser at any time.
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p.29

30. Russell Income Essentials Portfolio evolution
RIEP Actual vs. Russell 36/65 Composite*
Russell 35/65 Composite
Cumulative Return (%)
Source: Russell Investments, Confluence
Past performance is not indicative of future results.
*The Russell 35/65 Composite, Series F represents the actual allocation of RIEP in Allocation is 33% Fixed Income Pool, 32% Core Plus Pool, 12% Canadian Equity Pool, 7% US Equity Pool, 8% Overseas Equity Pool, and 8% Global Equity Pool. Portfolio weights rebalanced back to target quarterly.
The cumulative returns were calculated by taking a percentage of each of the pool’s return, net of Series F management fees and expenses.
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31. Russell Diversified Monthly Income
43% Fixed Income / 57% Equities Target Allocation
Source: Russell Investments as of July 2013
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32. Russell Diversified Monthly Income Portfolio evolution
Strategic allocation
enhancements
Other enhancements
2009
JUN
hedged USD exposure
2010
MAR
began incorporating asset class tilts into the portfolios
added strategic Smaller Companies exposure
NOV
2011
FEB
removed USD hedge
MAR
US Equity: restructured from 11 sub-advisers to 6
EM Equity: restructured, added strategic EM Equity and Frontiers exposure
APR
Global Equity: +Sanders Capital, LLC
Added strategic Global High Income Bond exposure
DEC
Cdn Equity: +Clarivest Asset Management LLC, - Greystone Management Investments Inc.
2012
Dynamic Portfolio Mgt is more than just our EAA signals though…
It goes back to our strategic allocation changes, and even our sub-advisor changes within the underlying funds.
This is a time line of the changes we’ve done in the LifePoints Balanced Fund.
JAN
US Equity: +Mar Vista Investment Partners, L.P., -Montag & Caldwell
APR
MAY
Global Equity: +Sustainable, -Marsico Capital Management
DEC
Cdn Equity: +QV Investors Inc., - GCIC Ltd.
Sub-advisers are current as of the specified date. Russell has the right to engage or terminate a sub-adviser at any time.
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33. Russell Diversified Monthly Income Portfolio evolution
Strategic allocation
enhancements
Other enhancements
2013
added strategic Infrastructure and Real Estate exposures
JAN
Global High Income Bond: +Lazard Asset Management (Canada), Inc.
MAR
Global Equity Pool: +Numeric Investors, +Wellington Management,
-Arrowstreet Capital,
- McKinley Capital
MAY
US Equity Pool: +Fiduciary Management, -First Eagle,
-PENN Capital
JUN
Sub-advisers are current as of the specified date. Russell has the right to engage or terminate a sub-adviser at any time.
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34. Russell Diversified Monthly Income Portfolio evolution
RDMIP Actual vs. Russell 60/40 Composite*
Russell 60/40 Composite
Cumulative Return (%)
Source: Russell Investments, BNYMellon Workbench
Past performance is not indicative of future results.
*The Russell 60/40 Composite, Series F represents the actual allocation of RDMIP in Allocation is 20% Fixed Income Pool, 20% Core Plus Pool, 20% Canadian Equity Pool, 13.33% US Equity Pool, 13.33% Overseas Equity Pool, and 13.33% Global Equity Pool. Portfolio weights rebalanced back to target quarterly.
The cumulative returns were calculated by taking a percentage of each of the pool’s return, net of Series F management fees and expenses.
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35. Takeaways
We believe bond yields will stabilize around current levels for remainder of 2013
But Fixed Income total returns will remain low
Therefore, at the Total Portfolio level, moderate to conservative investors will need to embrace more “growth” than times past, realizing that this will also increase risk
Growth, however, does not necessarily equate to equity
Diversify sources of risk
Growth exposure via fixed income = High Yield & EMD
Growth exposure via non-traditional = GRE, GI, Commodities, Frontiers Mkt
GOAL: Enhance total portfolio experience via improved risk-adjusted returns
Consider actively-managed, globally diversified multi-asset strategies
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p.35

36. Q & A

37. Russell’s Fixed Income Line Up
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38. Russell Fixed Income Line-up
RUSSELL GLOBAL HIGH INCOME BOND POOL
HIGHER
RUSSELL LIFEPOINTS CONSERVATIVE INCOME PORTFOLIO
POTENTIAL RETURN
RUSSELL LIFEPOINTS FIXED INCOME PORTFOLIO
RUSSELL CORE PLUS FIXED INCOME POOL
RUSSELL FIXED INCOME POOL
RUSSELL SHORT TERM INCOME POOL
This slide is an overview of our Multi Asset LifePoints portfolios.
- Again, we added a 5% allocation to all of these portfolios in December last year (except LP FI which was an 8% weight).
Importantly though, it was funded 2% from Core FI and 3% from global equities. This was because we believe it shares equity-like properties and should be treated partially as a “growth asset”.
Also note that since May, we have an active tilt to overweight this product and have been running it at a 6% % allocation.
LOWER
RISK
HIGHER
*® Registered trademarks of Royal Bank of Canada. Used under license. As you move from left to right on the graph - increasing risk - there are different portfolios that can offer higher return potential, which is also matched by higher loss potential. As with any type of portfolio structuring, attempting to increase return or reduce risk can result in unintentional reduction of returns. See the prospectus section "Who should invest in this fund?" for more information.“ Sub-advisers are current as of April Russell has the right to engage or terminate a sub-adviser at any time.
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39. Thank you