July 24th, 2014

Income Review

Second Quarter Review and Outlook Cumberland Income Fund July 2014

The Cumberland Income Fund gained +1.7% during the second quarter of 2014 compared to the gain of +2.0% posted by the FTSE TMX Canada Universe Bond Index during the same period. The Fund has gained +3.9% year-to-date and +6.8% year-over-year, while the FTSE TMX Index has gained +4.8% year-to-date and +5.3% year-over-year. Bond yields (interest rates) continue to defy expectations as we progress through 2014 with the divergence between the economic data and the direction of bond yields widening during the quarter. Despite evidence that the first quarter slowdown in the North American economy was a weather-related phenomenon, and therefore temporary, bond yields continued their descent lower during the second quarter. That is, economic data in general improved greater than the market expected, yet contrary to a typical bond market reaction, bond yields declined (and bond prices increased). The Fund’s positioning remained skewed to a rising rate environment throughout the quarter with the expectation that the ending of the first quarter’s “polar vortex” would reveal that the economy is on a much more solid footing than recently reported. The data did come in stronger than expected, yet bond yields failed to react. However, Cumberland’s strategy of holding a diversified set of asset classes in addition to investment grade bonds, including high yield bonds, preferred and dividend-paying common stocks was instrumental in offsetting the reduced exposure to interest rate risk within the portfolio.