2007 Annual Report - Sun Life Financial

Reaching Greater Heights
Management Review and Outlook
Sun Life Of Canada
Prosperity Balanced Fund , Inc.
2007 PERFORMANCE REVIEW. The Fund continued to beat the benchmark return
performance for the year, despite the large cash levels and low volatility. The
Fund ended the year with a 17.2% return compared to the composite benchmark
of 12.04%. Total fund collections for 2007 amounted to Php 6.88billion, as
against redemptions of Php 1.99billion.
FINANCIAL MARKEt REVIEW
It was supposed to be another-record breaking year
for the Philippines, wherein the convergence of
sound macro-economic fundamentals, a benign U.S.
Federal Reserve policy and the fulfillment of earnings
targets should have resulted in lower market
volatility and a more consistent growth trend.
However, two completely unexpected events
shocked the financial markets just as it was headed
for a new all time high. The first event occurred in
the first quarter, wherein the Chinese government’s
efforts to tame runaway inflation and market speculation
resulted in an unprecedented one-day drop of
8% in the PSEi. While the drop had no local fundamental
basis, the emergence of China as a new global
market factor meant that there was a new source of
external shocks, which has to be considered when
making investments. When the risks from China became
clearer and quantifiable, investors were able to
regain their lost footing. The PSEi slowly recovered
and went on to post a new all-time-high, closing at
3,786, translating to a YTD return of 27%.
Just as the market reached another milestone, the
second unexpected external event occurred in the
form of the U.S. sub-prime mortgage crisis. This
event, together with the U.S. Federal Reserve’s
reluctance to proactively manage the looming crisis,
caused the PSEi to drop by 24% in one month and set
the stage for a massive global liquidity crisis. The crisis
finally forced the U.S. Federal Reserve to hastily
loosen monetary policy, resulting in a 9.8% singleday
recovery in the PSEi, which went on to another
8 Prosperity Funds
milestone closing level of 3,873, early in the fourth
quarter, for a YTD return of 30%. However, unlike
the earlier crisis precipitated by China, this would
have no quick resolution.
In the fixed income market, system liquidity remained
high as ever and interest rates traded along
a steeper yield curve. The average 91-day Treasury
bill slid to 4.19% from 5.24% in 2007, while yields
in the 7-year belly went flat. In contrast, the longer
dated 20-year tenor rose to 8.33% compared to 7.77%
in end-2006. The spate of U.S. Fed rate cuts in the
2nd half encouraged similar cuts by local monetary
authorities albeit in a lesser magnitude.
The massive increase in volatility brought about by
external factors which could not be quantified, resulted
in a negative return for nearly every local IPO
and follow-on offering. Similarly, efforts by the US
Federal Reserve to stabilize financial markets forced
interest rates to drop, which made the risk-return
profile of the yield curve terribly unattractive.
While the external backdrop continued to deteriorate,
local fundamentals allowed the PSEi to close the
year with a respectable 21.4% return with the following
sector performances:
Property: + 16.56%
Holding Firms: + 17.60%
Financials: + 5.05%
Industrials: + 12.23%
Mining: + 84.98%
ALL SHARES: + 19.16%
Average 91-day T-bill Return: 3.36%