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, Ontario 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, gold 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 Canadian dollar, 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 Canada and the United States. 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 Royal Bank of Canada 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. 1 SCOTIA NORTH AMERICAN EQUITY FUND 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 (“Scotiabank”), 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.