Even as the Dow Jonesindustrial average struck anew all-time high in Marchof this year, a good degree ofskepticism persists amongthe investing public. “Manyinvestors were shell shockedby the 2008 financial crisis.While the market hascertainly moved on, thosesame events continue to casta shadow,” says NeilMacdonald, ManagingDirector, Scotia AssetManagement.

The tendency to place thegreatest importance onevents from the most recentpast is known as RecencyBias. “It’s the sameoccurrencethat pushessports fans tooveremphasize anathlete orteam’s latestperformancerather thantheir long-term trackrecord. Or thepoker playerwho doubles his bet on thefaith of his last winninghand. The probability ofsuccess or failure hasn’t

changed, but perception ofthem has,” adds Macdonald.

The market is not theeconomyAt the same time as theeconomy sputters along thelong road to recovery, equitymarkets at home and abroadcontinue to regain ground.Those investors that stuckwith their plan through therecovery and maintained abalance of growth-orientedequities and less risky bondsand cash were well rewarded.

Live Long and Prosper According to a Scotiabankpoll*, 68% of Canadians areconcerned about not having

enoughmoney tosupport theirretirement.Outlivingyourretirementsavings is avery real risk,but one thatcan bemanaged

with properplanning and the rightbalance of investments foreach stage of your life.

An overly-conservative

approach canhandicap growthpotential. It can alsoincrease the risk of fallingshort of goals or running outof money, especially afterfactoring in inflation.

Too Little Risk is RiskyIf your exposure toconservative investmentsexceeds your long-termrequirements, you may needto rethink your definition ofrisky. “Diversifying yourportfolio to include higher-yielding investments can helpsatisfy a thirst for income,while measured exposure toriskier asset classes such asequities has the potential toboost the value of yourportfolio over the longrun,”adds Macdonald.

Any move to increase thereturn-potential of yourprofile comes with addedrisk. Scotia INNOVAPortfolios are available in arange of asset mixes and risklevels to suit a variety ofinvestor needs. Speak to yourScotiabank advisor about themost prudent approach foryour situation.

*Source: Scotiabank. Canadian Savings andInvesting Attitudes and Behaviours, January2013.

Inside INNOVASolid. Stable. Considered. April 2013 | Issue 17 • Volume 4

www.scotiafunds.com

For many investors the pendulum has swung toofar in favour of low risk investing following thefinancial crisis.While a prescription for conservative investments offers temporary reliefof market volatility, the long-term side effects of this approach couldstunt performance or delay plans.

FINAL - 071812

Rethinking Risk

Portfolio construction

Q There are certain levelsof risk an investor needsto take to realize returns.Could you address some ofthe key risks you considerwhen tailoring eachportfolio?

More conservative portfoliosare suitable for investors whohave lower overall tolerancefor risk.

A strong focus is placed on

capital preservation andabsolute downside protectionfor these portfolios. Emphasisis placed on investmentvehicles that provide currentyield through interest anddividend income and avoidexposing the investor’s capitalto a high level of volatility.While we are mindful ofmaintaining purchasingpower over the long term, weallocate larger weightings to

investments that typicallyexhibit higher levels ofvolatility but provide greaterlong-term return potential.

Manager selection

Q What are the benefits ofhaving multiple portfoliomanagers on the programs?

There’s almost as muchvariety in portfolio managersas there are investors.Portfolio managers differ interms of their philosophies,approach and styles, not tomention their economicsector, security and companysize preferences. Thesedifferences can lead to verydifferent patterns ofperformance. Using multiplemanagers withcomplementary approacheswill provide the portfolio withbetter diversification,lowering the overall level ofvolatility and potentiallyavoiding long periods ofunderperformance.

Ongoing oversight

Q Scotia INNOVAPortfolios are regularlyrebalanced and re-optimized. Can youexplain the differencebetween the two and whythey are important?

A good way to think aboutrebalancing is like the regulartidying you do at home or inyour office – putting thingsback in their usual spot. Werebalance Scotia INNOVAPortfolios using the daily cashflows into and out of eachportfolio (e.g. investorpurchases and withdrawals).This helps ensure that thebalance of mutual fundswithin each doesn’t strayfrom its target allocation andthe overall portfolio remainson track.

Re-optimization is more likeremodelling, where all of theelements in a room areexamined for form andfunction. Like a remodel,where elements that no longer

provide the samefunction or utility to aroom are removed or

replaced, the uniquecombination of funds thatmake up each ScotiaINNOVA Portfolios are alsoregularly scrutinized. We dothis in order to help ensurewe are meeting our risk-adjusted return expectations.

2

Inside INNOVA | ScotiaFunds

Continuous�ne tuning

• Fixed Income • Equities• Alternatives (e.g. real estate, infrastructure)

• Canada• Global developed markets • Emerging markets

• Fund company• Portfolio advisor• Portfolio manager

• Income focused• Core • Company size

Great Input Leadsto Great OutputWhether you are building a house or constructinga portfolio, it is the quality of the resources andworkmanship that stand the test of time.

Multi-level diversification in one solution

Judith Chan is the chiefarchitect of Scotia PortfolioSolutions, responsible forportfolio construction, managerselection and ongoing oversight.

Inside INNOVA recently spoke with Judith Chan, Director,

Portfolio Solutions at Scotia Asset Management about her

approach and portfolio construction methodologies.

April 2013 | Issue 17 • Volume 4

Equity markets kicked off notwith a whimper but a bangthis year – and, in somecountries, surpassed recordhighs – as many took a ‘glasshalf full’ approach to investing.

While many of the sameconcerns continued to exist –such as the U.S. fiscalchallenges, ongoing Eurozonedebt crisis and Japan’sstruggles witheconomic growththe worst ofthe crisesappeared tobe contained.“Investorshave ignoredpolitical risksin Europe

since

mid-summer, being soothedby the promises that theEuropean Central Bank will do‘whatever it takes’ to maintainthe currency,” says PeterBaughan, co-portfolio advisorof INNOVA’s Scotia PrivateGlobal Equity Pool. “As in theU.S. (and now Japan),investors are increasinglyreliant on easy money fromcentral banks,” he adds.

Aside from ongoingsupport from central

banks, investorswere alsoheartened byimproving U.S.economic data,decisive actionfrom Eurozoneleaders to contain

the debt crisis (aswe saw in Cyprus)

and a change of

government in Japan andChina.

Over the quarter, the MSCIWorld Index delivered strong,double-digit returns of 10.3%in Canadian dollar terms. Thisperformance was drivenprimarily by U.S. equities, withthe S&P 500 Index hitting anall-time high and returning13% over the quarter. Othermarkets, including Canada’s,lagged by comparison, but stillrose in the quarter.

Money flowed more stronglyinto equities again, as manyinvestors felt comfortableenough to take on additionalrisk for greater returnpotential. Fixed incomecontinues to be an importantdiversifier to smooth outreturns over time – particularlyin the event of a marketcorrection, which is anticipatedthis year but is not expected tobe extreme.

A surge in equity returns isclearly a positive start for2013.

3

SCOTIA PORTFOLIOS 3 Mths 6 Mths 1 Yr 2 Yrs 3 Yrs SinceInception

Scotia INNOVATM Portfolios Series AScotia INNOVA Income 2.31% 3.22% 5.55% 5.13% 5.30% 6.96%*

Scotia INNOVA Balanced Income 2.91% 4.42% 6.24% 4.72% 5.35% 7.94%*

Scotia INNOVA Balanced Growth 3.96% 6.13% 7.06% 4.03% 5.33% 8.53%*

Scotia INNOVA Growth 4.69% 7.35% 7.60% 3.38% 5.16% 9.33%*

Scotia INNOVA Maximum Growth 5.97% 9.32% 8.53% 2.36% 4.97% 9.65%*

Scotia INNOVATM Portfolios Series TScotia INNOVA Income 2.31% 3.22% 5.56% 5.12% 5.31% 5.23%**

Scotia INNOVA Balanced Income 2.91% 4.42% 6.24% 4.72% 5.37% 5.31%**

Scotia INNOVA Balanced Growth 3.96% 6.13% 7.06% 4.04% 5.37% 5.16%**

Portfolio Performance (as at March 31, 2013)

Equities dash out ofthe gates in 2013 – Pearls of wisdom

from some of our topinvestment minds

“At one point close to40% of the S&P/TSXComposite Index wasresource stocks. It’s been agood 10 years but it’sgoing to be challenging astime goes on. What youwant to do is replacethose resource stocks withmore great NorthAmerican companies thatyou can’t find in Canada.” Jason Gibbs, Portfolio Advisor,Scotia Canadian Dividend Fund

“North America appearsas one of the strongestregions globally in thiseconomic recovery, due toa strengthened financialsystem, potential forenergy self-sufficiency andthe renaissance ofmanufacturing throughoutthe region. Over the nextdecade, Canada is a keypart of the NorthAmerican story.”

Alex Lane, Portfolio Advisor,Scotia Canadian Small Cap Fund

“Global growth isbecoming an issue.Central banks are buildinga bridge from recession toexpansion by easingaggressively, but manystructural reforms are stillneeded to raise potentialGDP growth rates.Otherwise, they’rebuilding a bridge tonowhere.”

Romas Budd, Portfolio Advisor,Scotia Bond Fund

ords fromthe ise

* January, 2009

**January, 2010

The indicated rates of return are the historical annual compounded total returns as at March 31, 2013 including changes in unit value and reinvestment of alldistributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would havereduced returns. The rate of return shown is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values ofthe funds or returns on investment in the mutual funds. Mutual funds are not guaranteed, their values change frequently and past performance may not berepeated.

U.S. equity marketscontinue to advance ata brisk pace.

The U.S. equitymarket reachedan all-time highon the last day of

the quarter, supported byimproving macroeconomic

data and a global monetarybackdrop that continues tobe accommodative. The U.S.economy continues to showmarked signs of improvement,as evidenced by the continuedhousing revival, decliningjobless numbers and animprovement inmanufacturing levels.

Canadian economicdata continues to beuninspiring.

The Canadianeconomy isclearly stalling asannualized

quarter-over-quarter realgross domestic product(GDP) growth has produced

less than one percent for twoconsecutive quarters. In ouropinion, growth rates shouldrise over the longer term,although results may besubdued over the nextquarter or so.

Macro headwindsobstruct recovery inEurope.

Europeanmarkets wereshocked early inthe quarter

following anti-austerityelections results in Italy andmisspending allegationsbrought against SpanishPrime Minister Mariano Rajoy.Meanwhile, unemploymentfigures continued tohighlight the divergencebetween the stronger andweaker countries in thecurrency bloc. EuropeanCentral Bank President MarioDraghi took steps to ease

investor jitters by declaring,“monetary policy will remainaccommodative as long asneeded.”

Cyprus brings eurozoneback into the spotlight.

AnotherEuropean testchallengedmarkets in

March, and this time itcentered on Cyprus, whichthreatened to send theregion back into crisis. Globalmarkets were on edge untilCyprus reached a €10 billionbailout deal with theinternational lenders torestructure Cyprus banks.

Outlook provided by Scotia AssetManagement L.P., portfolio managerto Scotia INNOVA Portfolios.

© Copyright 2013 Scotia Asset Management L.P. All rights reserved.This document has been prepared by Scotia Asset Management L.P. and is not for redistribution. This document is provided solely for information purposes and is not to be used orrelied on by any other person. To the extent this document contains information from third party sources, it is believed to be accurate and reliable, but Scotia Asset Management L.P.does not guarantee their accuracy or reliability.The information provided is not intended to be investment advice. Investors should consult their own professional advisor for specific investment advice tailored to their needs whenplanning to implement an investment strategy to ensure that individual circumstances are considered properly and action is taken based on the latest available information. Theinformation contained in this document, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change withoutnotice. Nothing in this document is or should be relied upon as a promise or representation as to the future. This report may contain forward-looking statements. Such statements are predictive in nature and depend upon or refer to future events or conditions. Any statement regardingfuture performance, strategies, prospects, action or plans is also a forward-looking statement. Forward-looking statements are subject to known and unknown risks anduncertainties and other factors that may cause actual results, performance, events, activity and achievements to differ materially from those expressed or implied by such statements.Such factors include general economic, political and market conditions, interest and foreignexchange rates, regulatory or judicial proceedings, technological change and catastrophicevents. You should consider these and other factors carefully before making any investmentdecisions and before relying on forward-looking statements. We have no specific intention ofupdating any forward-looking statements whether as a result of new information, futureevents or otherwise.® Registered trademark of The Bank of Nova Scotia, used under licence.ScotiaFunds are managed by Scotia Asset Management L.P. and are available through Scotia

Securities Inc., and from other dealers and advisors including ScotiaMcLeod and ScotiaiTRADE which are divisions of Scotia Capital Inc. (member of Canadian Investor ProtectionFund). Scotia Asset Management L.P., Scotia Securities Inc. and Scotia Capital Inc. arecorporate entities separate from, although wholly owned by, The Bank of Nova Scotia.

Commissions, trailing commissions, management fees andexpenses may be associated with mutual fund investments.Please read the prospectus before investing. Mutual funds arenot guaranteed, their values change frequently and pastperformance may not be repeated.

Inside INNOVA | ScotiaFunds

www.scotiafunds.com

Sunny with clouds

Cloudy

A Look at the Markets

Sunny

Index Performance3-Months (as of March 31, 2013,C$)

0.7% MSCI Emerging Markets Index

10.3% Global equities (MSCI World Index) .

13.0% U.S. market(S&P 500 Index)

3.3% Canadian equities (S&P/TSX Composite. Index)

Source: Bloomberg

Rainy