The fourth quarter of 2011 finally gave equity investors a break from the double-digit losses of the third quarter. The Fund rose approximately 1.5% during the quarter, compared to a 3.1% return of the S&P/TSX Composite Index (TSX), while the loss for 2011 came to -3.2%, compared to -8.7% for the TSX.

The commentary for the second quarter of 2011 ended with the question "is buying safe yield beginning to look like a risky proposition?" The third quarter showed us the answer: not yet. The S&P/TSX fell over 12 per cent in reaction to the deluge of bad news. The credit rating of the United States was cut to AA from AAA. Europe's game of kick the can down the road, as it relates to its sovereign debt problems, finally began to run out of road, as talk of preventing a Greek default changed to protecting banks in that continent.

The second quarter began where the first quarter ended, as supply disruptions from March's massive earthquake in Japan and rising commodity prices began to slow global economic growth. It was a difficult quarter for equities as the S&P/TSX lost 5.7 per cent. The Fund lost about 90 basis points over the same period. Gains in fixed-income holdings and health care equities, short positions, and option-premiums received, were offset by price declines in most long equity positions.

Despite the brood of Black Swans that descended on global markets in the first quarter of 2011, equity indices generally finished in positive territory. These Swans, or unexpected events, came in the form of both natural disasters (earthquakes in New Zealand and Japan, cyclones in Australia) and man-made events (the collapse of long-embedded political regimes in Northern Africa).

In Canada, the S&P/TSX Composite Index returned 5% in the quarter while Canadian bond indices, conversely, were virtually flat.

Equity markets posted a strong fourth quarter as the U.S. Federal Reserve’s quantitative easing (QE2) program – the purchase of treasury securities by the reserve bank – once again put investors in a risk-taking mood. In Canada, the leading stocks of the fourth quarter were once again resource related, be they precious or base metals miners, and to a lesser extent, energy related.

There’s a parable from Warren Buffett that describes asset markets as a hypothetical business partner named Mr. Market, who is prone to bouts of euphoria and despair, alternately offering to buy your share of the business or sell you his. The third quarter was one in which Mr. Market was an eager buyer, reversing the despair he felt during the second quarter. The bond market was little different, with short-term treasury yields in the U.S. touching some all-time lows, while longer-term yields also came down. Corporate spreads remained tight, and new issues continued at a robust pace.