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January 23, 2015

Income Review

Fourth Quarter Review and Outlook Cumberland Income Fund December 2014

In the fourth quarter, the Cumberland Income Fund was positioned to protect capital from the impact of rising interest rates. However, interest rates instead headed lower during the quarter defying a strengthening U.S. economy and rewarding holders of low yielding, longdated government bonds with capital gains. The Cumberland Income Fund gained +0.7% during the fourth quarter of 2014 compared to the gain of +2.7% posted by the FTSE TMX Canada Universe Bond Index during the same period. For the year ended 2014, the Fund gained +5.3% while the FTSE TMX Index gained +8.8%. The persistent decline in long-dated bond yields, of which the index is much more heavily weighted, was the main contributor to the difference in performance. During the fourth quarter, there was a significant divergence amongst the different bond market sectors for the first time in 2014. For example, government bonds1 returned +3.0% during the quarter as ultra-low government bond yields drifted even lower thereby driving bond prices higher. On the other hand, high yield bonds2, typically identified as bonds issued by “riskier” companies, posted their first quarterly loss since the third quarter of 2011. The difference in returns can be explained by the “global growth scare” experienced during the quarter. The obliteration of global oil prices, weak economic data out of Europe and a deceleration of growth in China all led to a flightto-safety into government bonds. The Cumberland Income Fund continues to structure the portfolio in a way that is somewhat agnostic to this volatility in fund flows by concentrating holdings in shorter-dated investment grade and high yield bonds and to a lesser extent, dividend-paying common stocks with attractive risk-reward characteristics. Consequently, during outsized moves in longer-dated bond yields (and hence prices) such as the move experienced this quarter, the Fund’s performance will deviate from that of a reference bond index.