Scotia Canadian Tactical Asset Allocation Fund (Formerly Scotia Total Return Fund)

Scotia Canadian Tactical Asset Allocation Fund (formerly Scotia Total Return Fund)

Management Report of Fund Performance (as at December 31, 2007)

This annual management report of fund performance contains money market instruments. The fund can invest up to 49% of financial highlights, but does not contain the complete annual its assets in foreign securities anywhere in the world. financial statements of the fund. You can get a copy of the The portfolio advisor determines the asset mix based on its annual financial statements at your request, and at no cost, by analysis of market conditions and how it expects each asset calling toll-free 1 800 268-9269 (416 750-3863 in Toronto) for class to perform. The portfolio advisor actively manages the English, or 1 800 387-5004 for French or by asking your mutual allocation between equity and fixed income securities to try to fund representative. You can also write to us at 40 King Street maximize returns. It will aggressively pursue opportunities for West, P.O. Box 4085, Stn. A Scotia Plaza, Toronto, Ontario capital gains or investment income, but will take measures to M5Z 2X6 or visit www.scotiabank.com/mutualfunds or SEDAR avoid undue risk or low returns from a particular security. The at www.sedar.com. portfolio advisor uses fundamental analysis to identify long- You may also contact us using one of these methods to request term investments. This involves evaluating the financial condi- a copy of the fund’s proxy voting policies and procedures, proxy tion and management of each company, as well as its industry voting disclosure record, or quarterly portfolio disclosure. and the economy. In this document, we, us and our refers to Scotia Securities Risk Inc. and fund refers to the Scotia Canadian Tactical Asset Allocation Fund. The overall risks of investing in the fund remain as discussed in its simplified prospectus. The fund remains suitable for This report may contain forward-looking statements about the investors who want growth through asset allocation among the fund. Such statements are predictive in nature and depend three major asset classes, who can accept medium risk and upon or refer to future events or conditions and may include who are investing for at least three years. such words as “expects”, “plans”, “anticipates”, “believes”, “esti- mates” or other similar expressions. In addition, any statement Results of operations regarding future performance, strategies, prospects, action or plans is also a forward-looking statement. Forward-looking Over the review period, the fund’s Class A units returned 0.0% statements are subject to known and unknown risks and compared to a 3.9% return for a blended index consisting of uncertainties and other factors that may cause actual results, 40% S&P/TSX Composite Index, 40% DEX Universe Bond Index performance, events, activity and achievements to differ mate- and 20% Morgan Stanley Capital International (MSCI) World rially from those expressed or implied by such statements. Index. In contrast to the blended index, the fund’s return is Such factors include general economic, political and market after the deduction of fees and expenses. Any difference conditions, interest and foreign exchange rates, regulatory or between the performance of Class A units and the performance judicial proceedings, technological change and catastrophic of the other class of the fund is solely the result of the events. You should consider these and other factors carefully different management fees charged to, and operating expenses before making any investment decisions and before relying on recovered from, each class. Please see Past Performance for forward-looking statements. We have no specific intention of the performance returns of the fund’s other class. updating any forward-looking statements whether as a result The global credit crisis that began in the summer of 2007 did of new information, future events or otherwise. not abate during the fourth quarter, with financial and economic conditions worsening as the year came to a close. Management Discussion of Fund Performance Announcements by many large U.S. financial institutions of Investment objectives and strategies massive write downs related to the U.S. sub-prime crisis was followed by these institutions reigning in lending activity, and The fund’s objective is to obtain capital growth over the long dampening economic growth as well as raising concerns over term, while providing modest income. It invests primarily in a the quality of their balance sheets. As a result, volatility across broad range of Canadian equity and fixed income securities. It financial markets remained at a heightened level despite may also invest in equity and fixed income securities from coordinated central bank intervention. around the world. Geopolitical risks also remained elevated with gold closing the The fund’s asset mix will generally vary within the following year at US$836/ounce and oil surpassing US$95/barrel. Cur- ranges: 20-80% in equity securities and 20-80% in fixed income rency markets were also volatile, and although the Canadian securities. The fund may also invest a portion of its assets in

AM 71 E dollar finished the fourth quarter little changed from the

1 SCOTIA CANADIAN TACTICAL ASSET ALLOCATION FUND previous quarter, it gained over 15% vis-à-vis the U.S. dollar rate reductions, the likelihood of a recession would increase over the year. significantly. For the year, the S&P/TSX Composite Index was up 9.8%, the Effective May 1, 2007, in accordance with National Instru- DEX Universe Bond Index up 3.7%, and the MSCI World Index ment 81-107, Independent Review Committee for Investment down 4.9%. The fund underperformed the benchmark index Funds, we, as manager of the fund, have established an due to results from all three asset classes detracting from Independent Review Committee (“IRC”). The IRC became performance. In Canadian equities, value added from securities operational on November 1, 2007 and currently has three selection within the growth portion was offset by the fund’s members, each of whom is independent of the manager and value holdings that excluded market leader Research in Motion any party related to the manager. The current members of the (RIM). Seven out of ten sectors produced positive returns, with IRC are Eric F. Kirzner, Robert S. Bell and D. Murray Paton. Technology leading the way largely due to the strength of RIM, Additional information about the IRC is available in the fund’s which finished the year up 127%. The strong returns from the annual information form. Materials and Communications sectors were also noteworthy. On the negative side, Health Care was the worst performing Accounting policy change sector, with Consumer Staples and Financials also producing National Instrument 81-106 requires the fund’s net asset value negative returns. to be calculated in accordance with Canadian generally Within the global component, securities selection in the inter- accepted accounting principles (‘GAAP’). Effective October 1, national markets added value, while U.S. equities detracted 2006, CICA Handbook Section 3855, Financial Instruments – modestly. Both strategies were hurt significantly during the Recognition and Measurement, requires financial instruments first two weeks of August when most quantitative strategies which are actively traded to be valued based on the last bid suffered disproportionately as the credit crisis forced many price for the security. Prior to that date, fair value for GAAP hedge funds to liquidate stock positions and raise capital. The purposes was based on the last traded price for the day, when U.S. and international holdings combined delivered market available. performance for the period. The Canadian Securities Administrators (“CSA”) granted The bond component underperformed for the year. Despite interim relief to investment funds from complying with strong results from the yield curve strategy (positioned for National Instrument 81-106 for the purposes of calculating and steepening), the fund’s overweight to corporate credit and reporting of net asset value (other than for financial reporting specifically its concentration in high-quality Financials were purposes). This relief has been extended and will expire on both large detractors. the earlier of September 30, 2008 and the date upon which changes to National Instrument 81-106 come into effect. During the period, the fund experienced net sales of Accordingly, the value used to determine the daily price of the $5,367,366. fund’s units for purchase and redemption by investors (‘Pricing NAV’) is not affected by this accounting policy change. In Recent developments accordance with the decision of the CSA, a reconciliation In Canada, fundamentals continue to favour equity markets between the Pricing NAV and the net asset value calculated in over fixed income and real estate. Consensus earnings growth accordance with Section 3855 (‘GAAP NAV’) is required in the for 2008 is once again expected to be positive with the notes to the financial statements of the fund. possibility that Energy earnings could provide a significant positive surprise. If oil prices remain at the relatively high Related party transactions US$90 level versus US$61 a year ago, earnings from this sector We are the manager of the fund. The Bank of Nova Scotia, the will move sharply higher in the coming year. Furthermore, with parent company of the manager, earns fees as a result of corporate balance sheets generally in very good shape, the providing custodial services, including safekeeping and admin- portfolio advisor expects to see takeover activity continue to istrative services and unitholder record-keeping services to the play a role in moving markets higher. fund. Monetary policy remains a positive influence on markets. As at December 31, 2007, the fund paid brokerage fees to Although credit conditions have tightened, the global monetary Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia environment remains accommodative with central bankers glo- and an affiliate of the manager, in the amount of $12,813. bally making a coordinated effort to reduce interest rates. For the period from November 1 to December 31, 2007, we The biggest risk to financial markets remains the threat of a relied on standing instructions from the IRC to proceed with recession in the U.S. economy. Tighter lending conditions and trades in securities of The Bank of Nova Scotia or its related the deterioration in the housing market will continue to put parties. downward pressure on consumer spending. At the same time, higher energy prices, food costs and import prices resulting from a weaker dollar also have the potential to push inflation higher. If inflation picks up, putting at risk further interest

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The applicable standing instructions require that investment Class F Units decisions relating to the above transactions: December 31 2007 2006 2005 2004 2003 • are made free from any influence by us or any entity Net assets per unit – beginning related to us and without taking into account any consider- of period $ 18.45 16.85 15.35 14.26 12.86 ation relevant to us or any entity related to us; Increase (decrease) from operations: • represent the business judgment of the portfolio advisor Total revenue $ 0.58 0.56 0.55 0.43 0.28 uninfluenced by any consideration other than the best Total expenses $ (0.23) (0.20) (0.19) (0.20) (0.41) interests of the fund; Realized gains (losses) for the • are in compliance with our policies; and period $ 0.85 1.17 0.92 2.27 (0.19) Unrealized gains (losses) for • achieve a fair and reasonable result for the fund. the period $ (0.99) 0.50 0.57 (1.03) 1.72 Total increase (decrease) from (2) Financial Highlights operations $ 0.21 2.03 1.85 1.47 1.40 Distributions: The following tables show selected key financial information From income (excluding about the fund and are intended to help you understand the dividends) $ – (0.03) – – – fund’s financial performance over the past five years ended From dividends $ (0.35) (0.33) (0.35) – (0.05) December 31, 2007, as applicable. This information is derived From capital gains $ (0.23) – – – – from the fund’s audited annual financial statements. Return of capital $ – – – – – Total distributions for period(3) $ (0.58) (0.36) (0.35) – (0.05) The fund’s net assets per unit(1) Net assets per unit – end of period(4) $ 18.08 18.51 16.85 15.35 14.26 Class A Units (1) The adoption of the new accounting policy may result in a different valuation of December 31 securities held by the fund for financial reporting purposes than the market 2007 2006 2005 2004 2003 value used to determine the net asset value of the fund for the purchase and Net assets per unit – beginning redemption of the fund’s units. An explanation of these differences can be of period $ 18.20 16.62 15.13 14.22 12.73 found in the notes to the fund’s financial statements. (2) Net assets and distributions are based on the actual number of units outstanding Increase (decrease) from operations: at the relevant time. The increase/decrease from operations is based on the Total revenue $ 0.57 0.55 0.54 0.42 0.29 weighted average number of units outstanding over the financial period. (3) Total expenses $ (0.40) (0.36) (0.34) (0.37) (0.33) Distributions were paid in cash/reinvested in additional units of the fund, or both. (4) The net assets per unit at period end is not a cumulative amount but, rather, Realized gains (losses) for the period $ 0.83 1.13 0.91 1.85 (0.28) the value of the fund’s units, in accordance with GAAP, as at the fund’s period Unrealized gains (losses) for the end. period $ (0.97) 0.50 0.56 (1.01) 1.75 Total increase (decrease) from Ratios and supplemental data operations(2) $ 0.03 1.82 1.67 0.89 1.43 Distributions: Class A Units From income (excluding dividends) $ – (0.01) – – – December 31 From dividends $ (0.18) (0.19) (0.19) – – 2007 2006 2005 2004 2003 Total net asset value From capital gains $ (0.22) –––– (000’s)(1) $ 456,284 461,239 441,822 444,476 469,176 Return of capital $ ––––– Number of units (3) Total distributions for period $ (0.40) (0.20) (0.19) – – outstanding (000’s)(1) 25,568 25,269 26,588 29,376 32,996 Net assets per units – end of Management expense (4) period $ 17.82 18.25 16.62 15.13 14.22 ratio(2) % 2.05 2.07 2.14 2.56 2.56 Management expense ratio before waivers or absorptions(2) % 2.05 2.07 2.16 2.60 2.56 Trading expense ratio(3) % 0.10 0.11 0.12 – – Portfolio turnover rate(4) % 199.72 174.06 146.41 220.47 31.19

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Class F Units Past Performance December 31 The performance shown assumes that all distributions made by 2007 2006 2005 2004 2003 the fund in the periods shown were reinvested in additional Total net asset value (000’s)(1) $212119176 units of the fund. If you hold the fund outside of a registered Number of units outstanding (000’s)(1) 1 1 1 1 0.50 plan, you will be taxed on these distributions. Management expense The performance information does not take into account sales, ratio(2) % 1.13 1.14 1.20 1.36 1.34 redemption, distribution or other optional charges that would Management expense ratio before waivers or have reduced returns. absorptions(2) % 15.84 16.46 30.21 22.87 8.01 How the fund has performed in the past does not necessarily Trading expense ratio(3) % 0.10 0.11 0.12 – – indicate how it will perform in the future. Portfolio turnover rate(4) % 199.72 174.06 146.41 220.47 31.19 (1) This information is provided as at the period end of the year shown. On January 26, 2004, Connor, Clark & Lunn Investment Man- (2) Management expense ratio is based on total expenses excluding commissions agement Ltd. was appointed portfolio advisor to the fund. Prior and other portfolio transaction costs for the stated period and is expressed as an annualized percentage of the daily average net asset value during the period. to that, the portfolio advisor to the fund was Montrusco Bolton (3) The trading expense ratio represents total commissions and other transaction Investments Inc. This change in portfolio advisor could have costs expressed as an annualized percentage of the daily average net asset value materially affected the performance of the fund during the during the period. (4) The fund’s portfolio turnover rate indicates how actively the fund’s portfolio performance measurement periods. advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the fund buying and selling all of the securities in its portfolio once All rates of return are calculated based on Pricing NAV and are in the course of the year. The higher a fund’s portfolio turnover rate in a year, in Canadian dollars. the greater the trading costs payable by the fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of Year-by-year returns a fund. These charts show the fund’s performance, which changes from year to year. They show in percentage terms how much an Management fees investment held on January 1 each year would have increased The management fees charged to the fund in 2007 totalled or decreased by December 31 of that year. $8,256,233. The management fee for each class is calculated as % Class A Units a percentage of its daily net asset value and is accrued daily. 16 11.73% The management fees cover the costs of managing the fund, 12 10.73% 11.14% 11.12% allow us to arrange to provide investment analysis, recommen- 8 6.08% 6.43% 4.21% dations and investment decision making for the fund, allow us 4 to make brokerage arrangements for the purchase and sale of 0 the fund’s portfolio securities and to provide or arrange to -0.04% -4 provide other services. Approximately 97.88% of the total management fees we received from Class A units of the fund -8 -6.99% -9.59% -12 and 100% of the total management fees we received from 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Class F units of the funds for the year ended December 31, % Class F Units 2007 are attributable to the costs of investment management, 16 administration and profit. The management fees are also used 12.16% 12.18% 12 11.37% to fund commission payments and other compensation paid to registered dealers and brokers (collectively “distribution 8 7.67% related costs”) for units of the fund purchased and held by 4 investors. The distribution related costs were approximately 0.93% 0 2.12% of the total management fees we received from Class A -0.18% units of the fund for the year ended December 31, 2007. -4 -5.86% -8 2001* 2002 2003 2004 2005 2006 2007 * Mar. 22 – Dec. 31

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Annual compound returns Asset mix(1) % of net asset value(2) This table shows the fund’s annual compound returns com- Canadian Equities 46.7 pared to a blended index consisting of 40% S&P/TSX Composite Bonds and Debentures 28.9 Index (Total Return), 40% DEX Universe Bond Index (formerly Foreign Equities 22.3 the Scotia Capital Universe Bond Index) and 20% MSCI World (1) 2.1% of the fund’s assets are held in cash, other assets and liabilities. Index for the periods shown ending December 31, 2007. (2) Based on Pricing NAV. Since 1 year 3 years 5 years 10 years inception(1) Top holdings Class A Units % -0.04 7.27 7.98 4.21 – Issuer % of net asset value(1) Class F Units % 0.93 8.29 8.77 – 5.43 Toronto-Dominion Bank 3.5 Blended Index % 3.99 9.95 11.15 7.45 7.64(2) Royal Bank of Canada 3.4 (1) Inception Date: Class F Units Mar. 22, 2001. Canada Housing Trust 4.55% due Dec. 15, 2012 3.1 (2) Return: Class F Units. Manulife Financial Corporation 2.9 The S&P/TSX Composite Index (Total Return) is a total return Government of Canada 4.00% due Jun. 1, 2017 2.5 index that tracks the performance of some of the largest and EnCana Corporation 2.5 most widely held stocks listed on the Toronto Stock Exchange Suncor Energy Inc. 2.4 (TSX). Prior to May 1, 2002, this index was called the TSE 300 Canadian Imperial Bank of Commerce 2.2 Composite Index and it tracked the 300 largest companies Petro-Canada 2.0 listed on the Toronto Stock Exchange. Cash and cash equivalents 2.0 The DEX Universe Bond Index is a broad measure of the total Rogers Communications Inc. Class B 1.8 return of Canadian bonds that mature in more than one year. Nexen Inc. 1.7 It includes approximately 900 Canadian federal, provincial, Canadian Natural Resources Ltd. 1.7 municipal and corporate bonds rated BBB or higher. Talisman Energy Inc. 1.5 Toronto-Dominion Bank (callable) 4.78% due Dec. 14, 2105-(2016) 1.4 The MSCI World Index is an index of approximately 1,600 Canadian National Railway Company 1.3 companies listed on stock exchanges in the 23 countries that Agrium Inc. 1.2 make up the MSCI national indexes. Potash Corporation of Saskatchewan Inc. 1.1 A discussion of the fund’s performance relative to the blended Research in Motion Ltd. 0.9 index is found under Results of Operations. Thomson Corporation 0.9 Canadian Pacific Railway Ltd. 0.8 Summary of Investment Portfolio Barrick Gold Corporation 0.8 (as at December 31, 2007) CHC Helicopter Corporation Class A 0.8 Goldcorp Inc. 0.8 This is a breakdown of the fund’s investments and a list of up Bank of Montreal 0.7 to 25 of its largest holdings. The holdings will change as the Top holdings total 43.9 portfolio advisor buys and sells securities. You can obtain an up (1) Based on Pricing NAV. to date list of portfolio holdings on a quarterly basis by calling 1 800 268-9269 (416 750-3863 in Toronto) for English, 1 800 387-5004 for French, or from the internet at www.scotiabank.com/mutualfunds.

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TM Trademark of The Bank of Nova Scotia, used under licence by Scotia Securities Inc., a corporate entity separate from, although wholly-owned by, The Bank Cert no. SW-COC-1161 of Nova Scotia.