Scotia North American Equity Fund (formerly Scotia Cassels North American Equity Fund)

Management Report of Fund Performance (as at December 31, 2009)

This annual management report of fund performance contains Risk financial highlights, but does not contain the complete annual The overall risks of investing in the fund remain as discussed financial statements of the fund. You can get a copy of the in its simplified prospectus. The fund remains suitable for annual financial statements at your request, and at no cost, by investors who want dividend income as well as the growth calling toll-free 1 800 268-9269 (416 750-3863 in Toronto) for potential of investing in a broad range of Canadian and U.S. English, or 1 800 387-5004 for French or by asking your mutual equity securities, who can accept medium risk and who are fund representative. You can also write to us at 40 King Street investing for the long term. West, P.O. Box 4085, Stn. A, Scotia Plaza, Toronto, M5Z 2X6, or download from www.scotiafunds.com or Results of Operations www.sedar.com. Over the review period, the fund returned 19.0% compared to You may also contact us using one of these methods to request 35.0% for the S&P/TSX Composite Index and 23.7% for the a copy of the fund’s proxy voting policies and procedures, proxy blended index consisting of 50% S&P/TSX Composite Index and voting disclosure record, or quarterly portfolio disclosure. 50% S&P 500 Composite Index (in Canadian dollars). In In this document, we, us, our and the Manager refers to Scotia contrast to the index, the fund’s return is after the deduction Asset Management L.P. and fund refers to the Scotia North of fees and expenses. American Equity Fund. The S&P/TSX Composite Index ended the year up 35.0%. This report may contain forward-looking statements about the Towards the end of 2008, the energy, financials and materials fund. Such statements are predictive in nature and depend sectors were the largest detractors from the fund’s performance upon or refer to future events or conditions and may include as a result of the global credit crisis and falling oil prices. such words as “expects”, “plans”, “anticipates”, “believes”, “esti- However, these same sectors were positive contributors to mates” or other similar expressions. In addition, any statement performance in 2009. The financials sector generated strong regarding future performance, strategies, prospects, action or returns over the year, as a result of increased confidence in plans is also a forward-looking statement. Forward-looking major Canadian financial institutions. Increased demand for statements are subject to known and unknown risks and oil, and other commodities pushed the prices higher, uncertainties and other factors that may cause actual results, allowing the energy and materials sectors to produce strong performance, events, activity and achievements to differ mate- gains. Also adding value to the fund was the information rially from those expressed or implied by such statements. technology sector, which posted positive performance largely Such factors include general economic, political and market due to very strong results from Research in Motion. conditions, interest and foreign exchange rates, regulatory or In U.S. markets, the S&P 500 Composite Index returned 7.4% judicial proceedings, technological change and catastrophic (in Canadian dollars) over the year. Over the review period, events. You should consider these and other factors carefully the perceived risk of a depression abated and global equity before making any investment decisions and before relying on markets began to advance on forecasts of a recovery. One of forward-looking statements. We have no specific intention of the main drivers for the reversal of the economic decline in updating any forward-looking statements whether as a result the U.S. was the implementation of the Trouble Asset Relief of new information, future events or otherwise. Program (TARP), which provided massive government interven- tion. Dramatic interest rate cuts were also made, which helped Management Discussion of Fund Performance a struggling housing sector. Over the year, one of the largest Investment Objectives and Strategies detractors from the performance of the U.S. equity component of the fund was the , which appreciated more The fund’s objective is to earn dividend income while providing than 15% versus the U.S. dollar. long-term capital appreciation. It invests primarily in compa- nies located in and the . The fund underperformed the broad based index because of its allocation to U.S. equities. In general, U.S. equities generated The portfolio advisor uses fundamental analysis to identify lower returns than Canadian equities, which benefited from a investments that have the potential for above-average growth stronger financials sector and rising energy and commodity over the long term. This involves evaluating the financial prices. Relative to the index, the fund’s modest overweight condition and management of each company, as well as its positions in Teck Resources and posi- industry and the economy. The fund’s assets are diversified by tively contributed to the overall return, while its exposure to industry and company to help reduce risk. Johnson & Johnson and Exelon detracted the most. For the period, the fund experienced net sales of $80,900,922.

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Recent Developments Related Party Transactions Over the review period, the portfolio advisor added approxi- We are the trustee, manager, portfolio advisor, registrar and mately 30 different stocks to the fund in order to increase transfer agent of the fund. The fund pays us a management diversification and reduce downside risk. The portfolio advisor fee, which may vary for each class of units of the fund. The expects to maintain this position going forward. The portfolio Bank of Nova Scotia (“”), the parent company of the advisor also increased the fund’s exposure to the industrials Manager, earns fees for of providing custodial services, includ- and information technology sectors and has maintained the ing safekeeping and administrative services and unitholder fund’s modest overweight positions in the energy and materials record-keeping services to the fund. sectors. In addition, the portfolio advisor expects to maintain Certain of the funds hold units of other funds managed by the the fund’s regional bias to Canadian stocks in the short term. Manager. Such underlying funds pay their own fees and The portfolio advisor remains optimistic that equity markets expenses, which are in addition to the fees and expenses will move higher during the course of 2010, potentially benefit- payable by a fund that invests in the underlying fund. No ing the fund’s performance. In general, the portfolio advisor’s management fees are payable by a fund if the payment of those outlook on the overall economy appears to be favourable, but fees could reasonably be perceived as a duplication of fees remains cautious as one of the biggest perceived risks to payable by an underlying fund for the same service. financial markets in 2010 will be the potential withdrawal of Our affiliates may earn fees and spreads in connection with quantitative easing and rising interest rates. various services provided to, or transactions with, the fund, On November 1, 2009 Scotiabank completed a reorganization of such as banking, brokerage, securities lending, foreign its asset management business. As part of that reorganization exchange and derivatives transactions. We, or our affiliates, the fund manager operations of Scotia Securities Inc. and the may earn a foreign exchange spread when unitholders switch investment management operations of Scotia Cassels Invest- between units of funds denominated in different currencies. ment Counsel Limited were transferred to and continue under The fund also maintains bank accounts and over-draft provi- Scotia Asset Management L.P. (SAM). As a result, on Novem- sions with Scotiabank for which Scotiabank may earn a fee. ber 1, 2009, Scotia Asset Management L.P. replaced Scotia For certain classes of units of the fund, Scotia Securities Inc., Securities Inc. as the trustee and manager of the fund and a wholly-owned subsidiary of Scotiabank, is the principal replaced Scotia Cassels Investment Counsel Limited as portfo- distributor for which it is paid a trailer commission by the lio advisor of the fund. Manager. Units of the funds are also distributed through At the time of writing, the Government of Ontario has brokers and dealers, including Scotia Capital Inc. (“SCI”), a announced its intention to harmonize the provincial sales tax wholly-owned subsidiary of Scotiabank. SCI, like other dealers, with the federal goods and services tax (GST). If the proposed is paid a trailer commission by the Manager for distributing harmonization proceeds as announced, effective July 1, 2010, certain classes of units of the fund. Trailer commissions are the Manager may be required to collect a combined 13% paid by the Manager out of the management fees it receives harmonized sales tax on management fees paid to it by the from the fund and are based on the average value of assets Fund. Currently, management fees charged by the Manager to held by each dealer. the Fund and other expenses are subject only to the 5% federal The Manager has established an independent review committee GST. Since the MER of the Fund includes taxes, if a 13% (“IRC”) which acts as an impartial and independent committee harmonized sales tax were to apply to management fees and to review and provide recommendations or, in certain cases, other expenses paid by the Fund, the MER of the Fund would approvals respecting any conflict of interest matters referred to increase to reflect the additional taxes payable on management it by the Manager. The IRC prepares, at least annually, a report fees and other expenses resulting from the harmonized sales of its activities to unitholders of the fund. The report is tax. available on the ScotiaFunds website at www.scotiafunds.com or at the unitholder’s request at no cost by contacting the Future Accounting Changes Manager (see front cover). The Canadian Accounting Standards Board confirmed that effective January 1, 2011, International Financial Reporting The Manager and the fund relied on standing instructions from Standards (“IFRS”) will replace current Canadian standards the IRC in respect of one or more of the following types of and interpretations as Canadian generally accepted account- transactions: ing principles for publicly accountable enterprises, which • Investing in or holding securities of related issuer, includ- includes investment funds. We have commenced development ing Scotiabank; of a changeover plan to meet the implementation date. The key elements of the plan will include identifying differences • Trades in securities with SCI or parties related to the man- between the fund’s current accounting policies and those it ager or the portfolio advisor, where SCI or such related par- expects to apply under IFRS, as well as any accounting policy ties act as principal; and implementation decisions and their resulting impact, if • Investing in securities of an issuer during, or for 60 days any, on the net assets or net asset value of the fund. after, the period in which SCI, or a related entity to the

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portfolio advisor, acted as an underwriter in the offering of requirements of generally accepted accounting principles (“GAAP”), including CICA Handbook Section 3855, and may result in a different valuation of securi- those securities; and ties held by the fund in accordance with GAAP than the market value used to determine net asset value of the fund for the purchase, switch and redemption • Purchases or sales of securities from or to another invest- of the fund’s units (“Pricing NAV”). The provisions of Section 3855 have been ment fund managed by us (referred to as “Inter applied retroactively without restatement of periods prior to December 31, Fund Trading”). 2007. The Pricing NAV per unit at the end of the period is disclosed in Ratios and Supplemental Data. The applicable standing instructions require that investment (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the decisions relating to the above types of transactions (i) are weighted average number of units outstanding over the financial period. made free from any influence by us or any entity related to us (3) Distributions were paid in cash or reinvested in additional units of the fund, or and without taking in account any considerations relevant to both. us or any entity related to us; (ii) represent the business judgment of the portfolio advisor uninfluenced by any consider- Ratios and Supplemental Data ation other than the best interests of the funds; (iii) are in Manager Class Units compliance with our policies; and (iv) achieve a fair and 2009 2008 2007 2006 2005 reasonable result for the fund. Total net asset value (000’s)(1) $ 396,758 260,709 424,555 327,315 342,708 From time to time, the fund may enter into portfolio securities Number of units transactions with SCI or other dealers in whom Scotiabank has outstanding (000’s)(1) 42,876 32,890 37,132 28,697 33,016 a significant interest (the “Related Dealers”). These Related Management expense (2) Dealers may earn commissions or spreads provided that such ratio % 0.13 0.13 0.14 0.14 0.13 Management expense trades are made on terms and conditions that are comparable ratio before waivers to non-related brokers or dealers. During the period, the fund or absorptions(2) % 0.13 0.13 0.14 0.14 0.14 paid commissions to SCI amounting to approximately $34,235, Trading expense to CI Capital Markets amounting to approximately $16,759 and ratio(3) % 0.18 0.23 0.19 0.11 0.09 to Dundee Securities Inc. amounting to approximately $372. Portfolio turnover rate(4) % 55.87 57.01 57.59 48.87 46.03 Net asset value per Financial Highlights unit $ 9.25 7.93 11.43 11.41 10.38 The following tables show selected key financial information (1) This information is provided as at December 31st of year shown. (2) about the fund and are intended to help you understand the The Management expense ratio is based on total expenses (excluding commis- sions and other portfolio transaction costs) for the stated period and is expressed fund’s financial performance over each of the past five years as an annualized percentage of the daily average net asset value during the ended December 31, as applicable. period. (3) The trading expense ratio represents total commissions and other portfolio trans- (1) action costs expressed as an annualized percentage of the daily average net The Fund’s Net Assets per Unit asset value during the period. (4) The fund’s portfolio turnover rate indicates how actively the fund’s portfolio advisor Manager Class Units (formerly Scotia Private Client Units) manages its portfolio investments. A portfolio turnover rate of 100% is equivalent 2009 2008 2007 2006 2005* to the fund buying and selling all of the securities in its portfolio once in the Net Assets, beginning of year $ 7.91 11.42 11.39 10.38 10.00 course of the year. The higher a fund’s portfolio turnover rate in a year, the greater the trading costs payable by the fund in the year, and the greater the chance of Increase (decrease) from an investor receiving taxable capital gains in the year. There is not necessarily a operations: relationship between a high turnover rate and the performance of a fund. Total revenue $ 0.21 0.28 0.23 0.22 0.08 Total expenses $ (0.03) (0.04) (0.04) (0.01) – Management Fees Realized gains (losses) for the period $ (0.64) (1.06) 0.31 0.20 (0.18) The management fees charged to the fund in 2009 for the Unrealized gains (losses) for the period ending December 31, 2009 totalled $345,549. The man- period $ 2.02 (2.55) (0.30) 0.80 0.53 agement fee for the fund is calculated as a percentage of its Total increase (decrease) daily net asset value and is accrued daily. The management (2) from operations $ 1.56 (3.37) 0.20 1.21 0.43 fees cover the costs of managing the fund, allow us to arrange Distributions: to provide investment analysis, recommendations and invest- From net investment income (excluding dividends) $ – (0.04) (0.01) (0.04) – ment decision making for the fund, allow us to make brokerage From dividends $ (0.18) (0.22) (0.16) (0.20) (0.05) arrangements for the purchase and sale of the fund’s portfolio From capital gains $ – – (0.03) – – securities and to provide or arrange to provide other services. Return of capital $ –––– – 100% of the total management fees we received from the fund Total Annual Distributions(3) $ (0.18) (0.26) (0.20) (0.24) (0.05) for the period ending December 31, 2009 is attributable to the Net assets at December 31st of costs of investment management, administration and profit. year shown $ 9.24 7.91 11.42 11.41 10.38 * The start date for the Manager Class units was June 10. Past Performance (1) This information is derived from the fund’s audited financial statements. The net assets per security presented in the financial statements differs from the net The performance shown assumes that all distributions made by asset value calculated for fund pricing purposes. This difference is due to the the fund in the periods shown were reinvested in additional

3 SCOTIA NORTH AMERICAN EQUITY FUND units of the fund. If you hold the fund outside of a registered to date list of portfolio holdings on a quarterly basis by calling plan, you will be taxed on these distributions. 1 800 268-9269 (416 750-3863 in Toronto) for English, 1 800 387-5004 for French, or by visiting www.scotiafunds.com. The performance information does not take into account sales, redemption, distribution or other optional charges that would Geographical Mix(1) have reduced returns. % of net asset value(2) How the fund has performed in the past does not necessarily Canadian Equities 64.8 indicate how it will perform in the future. U.S. Equities 32.9 (1) All rates of return are based on Pricing NAV and are in 2.3% of the fund’s assets are held in cash, other assets and liabilities. (2) Based on Pricing NAV. Canadian dollars unless stated otherwise. Sector Mix(1) Year-by-Year Returns % of net asset value(2) This chart shows the fund’s performance, which changes from ENERGY 22.1 year to year. It shows in percentage terms how much an FINANCIALS 21.3 investment held on January 1 each year would have increased MATERIALS 13.5 or decreased by December 31 of that year. INFORMATION TECHNOLOGY 10.0 INDUSTRIALS 8.8 % Manager Class Units 25 CONSUMER STAPLES 6.9 20 19.04% CONSUMER DISCRETIONARY 6.3 15 12.22% 10 HEALTH CARE 4.6 4.26% 5 2.00% 0 TELECOMMUNICATION SERVICES 4.2 -5 (1) 2.3% of the fund’s assets are held in cash, other assets and liabilities. Includes -10 U.S. and Canadian equities. -15 (2) Based on Pricing NAV. -20 -25 -30 -28.36% Top Holdings -35 2005* 2006 2007 2008 2009 Issuer % of net asset value(1) * Aug. 22 – Dec. 31 Royal Bank of Canada 7.8 Annual Compound Returns Toronto-Dominion Bank, The 7.0 , Inc. 4.4 This table shows the fund’s annual compound return compared EnCana Corporation 3.5 to the broad based S&P/TSX Composite Index (Total Return) Corporation 3.4 and a blended index of 50% S&P/TSX Composite Index (Total Research In Motion Limited 3.3 Return) and 50% S&P 500 Index (Total Return) for the periods Johnson & Johnson 3.2 ending December 31, 2009. Canadian Natural Resources Limited 3.1 since TransCanada Corporation 3.1 1 year 3 year 5 year 10 year inception1 Teck Resources Limited, Class B 2.8 Manager Class Units % 19.04 -4.54 0.40 Potash Corporation of Saskatchewan Inc. 2.7 Blended Index % 23.70 -3.38 2.14 S&P/TSX Composite Index % 35.05 -0.21 4.25 Occidental Petroleum Corporation 2.6 1 Inception Dates: Scotia Manager Class Units Aug. 22, 2005. Canadian National Railway Company 2.6 JPMorgan Chase & Co. 2.6 The S&P/TSX Composite Index (Total Return) is a total return , Inc., Class B 2.6 index that tracks the performance of some of the largest and SNC-Lavalin Group Inc. 2.4 most widely held stocks listed on the . Praxair, Inc. 2.4 The S&P 500 Index (Total Return) is an index of 500 stocks Canadian Trust 2.4 weighted by capitalization and representing all major U.S. Agnico-Eagle Mines Limited 2.3 industries. It’s a broad measure of the U.S. economy. Microsoft Corporation 2.1 PepsiCo, Inc. 2.1 A discussion of the fund’s performance relative to the broad General Electric Company 1.9 based index is found under Results of Operations. Corporation 1.9 Cisco Systems, Inc. 1.9 Summary of Investment Portfolio 3M Company 1.8 (as at December 31, 2009) Total Net Asset Value (000’s) $396,758 This is a breakdown of the fund’s investments and a list of up (1) Based on Pricing NAV. to 25 of its largest holdings. The holdings will change as the portfolio advisor buys and sells securities. You can obtain an up

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