Chief Financial Officer and Chief Operating Officer

Management s responsibility for financial reporting The accompanying financial statements have been prepared by RBC Global Asset Management Inc. ( RBC GAM ), as manager of the Phillips, Hager & North Investment Funds (the Funds ) and approved by the Board of Directors of RBC GAM. We are responsible for the information contained within these financial statements. We have maintained appropriate procedures and controls to ensure that relevant and reliable financial information is produced. The financial statements have been prepared in accordance with accounting principles generally accepted in Canada (and they include certain amounts that are based on estimates and judgments). The significant accounting policies, which we believe are appropriate for the Funds, are described in Note 3 to the financial statements. Although the Board of Directors of RBC GAM is solely responsible for approving the financial statements and overseeing management s financial reporting responsibilities, the Financial Advisory Committee of the Board of Governors provides advice to RBC GAM concerning financial reporting, the audit process and internal controls. Please see The Role of the Board of Governors at the end of this report. Deloitte LLP, Independent Registered Chartered Accountants, have performed an independent audit of the financial statements in accordance with Canadian generally accepted auditing standards. Their report is set out on the next page. John S. Montalbano, cfa Chief Executive Officer RBC Global Asset Management Inc. frank Lippa, CPA, CA Chief Financial Officer and Chief Operating Officer RBC Global Asset Management Inc. March 1, 2013

independent auditor s report To the Unitholders of: Phillips, Hager & North Canadian Money Market Fund Phillips, Hager & North $U.S. Money Market Fund Phillips, Hager & North Short Term Bond & Mortgage Fund Phillips, Hager & North Bond Fund Phillips, Hager & North Community Values Bond Fund Phillips, Hager & North Total Return Bond Fund Phillips, Hager & North Inflation-Linked Bond Fund Phillips, Hager & North High Yield Bond Fund Phillips, Hager & North Short Inflation-linked Bond Fund Phillips, Hager & North Long Inflation-linked Bond Fund Phillips, Hager & North Monthly Income Fund Phillips, Hager & North Balanced Fund Phillips, Hager & North Community Values Balanced Fund Phillips, Hager & North Dividend Income Fund Phillips, Hager & North Canadian Equity Fund Phillips, Hager & North Community Values Canadian Equity Fund Phillips, Hager & North Canadian Equity Value Fund Phillips, Hager & North Canadian Equity Underlying Fund Phillips, Hager & North Canadian Growth Fund Phillips, Hager & North Canadian Income Fund Phillips, Hager & North Vintage Fund Phillips, Hager & North U.S. Dividend Income Fund Phillips, Hager & North U.S. Multi-Style All-Cap Equity Fund Phillips, Hager & North U.S. Equity Fund Phillips, Hager & North Currency-Hedged U.S. Equity Fund Phillips, Hager & North U.S. Growth Fund Phillips, Hager & North Overseas Equity Fund Phillips, Hager & North Currency-Hedged Overseas Equity Fund Phillips, Hager & North Global Equity Fund Phillips, Hager & North Community Values Global Equity Fund Phillips, Hager & North LifeTime 2015 Fund Phillips, Hager & North LifeTime 2020 Fund Phillips, Hager & North LifeTime 2025 Fund Phillips, Hager & North LifeTime 2030 Fund Phillips, Hager & North LifeTime 2035 Fund Phillips, Hager & North LifeTime 2040 Fund Phillips, Hager & North LifeTime 2045 Fund BonaVista Global Balanced Fund BonaVista Canadian Equity Value Fund (collectively referred to as the Funds ) We have audited the accompanying financial statements of each of the Funds, which comprise the statement of investment portfolio as at, the statements of net assets as at and 2011 and the statements of operations and changes in net assets for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the Funds as at and 2011 and the results of their operations and changes in their net assets for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants March 1, 2013 Toronto, Ontario

2012 ANNUAL FINANCIAL STATEMENTS Statement of Investment Portfolio (in $000s) coupon fair % of Net Par Value Security rate % maturity cost Value assets AUSTRALIA BONDS $ 19 365 Brookfield Infrastructure Finance Pty Ltd. CAD 3.455 10-Oct-17 $ 19 365 $ 19 509 TOTAL AUSTRALIA BONDS 19 365 19 509 0.2 CANADIAN BONDS CORPORATE 15 735 407 International Inc. 4.450 15-Nov-41 16 147 17 270 13 110 407 International Inc. 4.190 25-Apr-42 13 461 13 804 6 848 Access Justice Durham Ltd. 5.015 31-Aug-39 7 547 7 699 2 679 Access Roads Edmonton Ltd. 5.812 30-Sep-37 3 113 3 283 1 140 Aéroports de Montréal 6.950 16-Apr-32 1 509 1 483 1 495 Aéroports de Montréal 5.170 17-Sep-35 1 791 1 788 6 991 AGT Ltd. 8.800 22-Sep-25 9 122 10 499 14 000 Alliance Pipeline LP 7.181 30-Jun-23 17 165 17 040 3 749 Alliance Pipeline LP 5.546 31-Dec-23 4 178 4 154 26 141 Alliance Pipeline LP 6.765 31-Dec-25 31 356 31 541 13 446 Alliance Pipeline LP 7.217 31-Dec-25 16 739 16 591 4 380 AltaGas Ltd. 4.070 01-Jun-20 4 380 4 609 11 695 AltaGas Ltd. 3.720 28-Sep-21 11 691 11 969 13 686 AltaLink Investments LP 5.207 16-Dec-16 14 114 14 857 15 297 AltaLink Investments LP 3.674 05-Jun-19 15 297 15 401 2 160 AltaLink LP 5.249 22-Sep-36 2 645 2 621 720 AltaLink LP 5.381 26-Mar-40 923 902 7 319 AltaLink LP 4.462 08-Nov-41 7 522 8 072 3 250 AltaLink LP 3.990 30-Jun-42 3 373 3 330 13 550 American Express Canada Credit Corp. 5.900 02-Apr-13 13 691 13 697 36 135 American Express Canada Credit Corp. 4.853 03-Oct-14 37 042 38 044 39 246 Bank of Montreal 3.930 27-Apr-15 41 207 41 118 51 300 Bank of Montreal 5.180 10-Jun-15 55 744 55 362 43 770 Bank of Montreal 1.890 05-Oct-15 43 769 43 762 86 975 Bank of Montreal 3.490 10-Jun-16 88 079 90 991 5 Bank of Montreal 4.550 01-Aug-17 5 5 7 005 Bank of Montreal 2.240 11-Dec-17 7 003 6 975 683 Bank of Montreal 6.020 02-May-18 808 805 19 615 Bank of Nova Scotia 1.418 08-Nov-13 19 615 19 618 500 Bank of Nova Scotia 3.340 25-Mar-15 521 517 49 273 Bank of Nova Scotia 2.740 01-Dec-16 49 536 50 321 288 Bank of Nova Scotia 4.100 08-Jun-17 311 310 22 506 Bank of Nova Scotia 4.990 27-Mar-18 23 417 22 679 78 575 Bank of Nova Scotia 6.000 03-Oct-18 80 345 81 033 15 105 Bank of Nova Scotia 6.650 22-Jan-21 16 384 17 003 4 412 bcimc Realty Corp. 5.650 05-Jan-18 5 092 5 065 9 375 BC Tel 11.900 22-Nov-15 12 482 11 860 9 926 BC Tel 9.650 08-Apr-22 13 473 14 537 28 442 Bell Aliant Regional Communications LP 6.290 17-Feb-15 31 555 30 722 15 982 Bell Canada 4.850 30-Jun-14 16 755 16 688 1 050 Bell Canada 4.400 16-Mar-18 1 054 1 141 19 255 Bell Canada 3.350 18-Jun-19 19 224 19 824 2 159 Bell Canada 4.950 19-May-21 2 164 2 437 6 178 Bell Canada 6.550 01-May-29 6 121 7 643 3 190 Bell Canada 7.300 23-Feb-32 3 262 4 251 12 824 BMO Subordinated Notes Trust 5.750 26-Sep-22 14 057 14 677 17 117 Brookfield Asset Management Inc. 3.950 09-Apr-19 17 230 17 544 The accompanying notes are an integral part of these financial statements.

Statement of Investment Portfolio (in $000s) coupon fair % of Net Par Value Security rate % maturity cost Value assets CORPORATE (cont.) $ 7 095 Brookfield Asset Management Inc. 5.300 01-Mar-21 $ 7 093 $ 7 840 10 929 Brookfield Asset Management Inc. 5.950 14-Jun-35 10 778 10 883 8 785 Brookfield Renewable Power Inc. 6.132 30-Nov-16 8 919 9 768 15 928 BRP Finance ULC 4.790 07-Feb-22 15 927 16 837 13 275 Calloway Real Estate Investment Trust 5.370 12-Oct-16 13 306 14 365 9 065 Canada Safeway Ltd. 3.000 31-Mar-14 9 111 9 112 22 791 Canadian Imperial Bank of Commerce 1.419 28-Nov-13 22 791 22 820 12 120 Canadian Imperial Bank of Commerce 4.750 22-Dec-14 12 582 12 824 39 755 Canadian Imperial Bank of Commerce 3.100 02-Mar-15 40 759 40 847 69 121 Canadian Imperial Bank of Commerce 2.200 22-May-15 69 734 69 734 52 600 Canadian Imperial Bank of Commerce 3.400 14-Jan-16 53 864 54 736 31 677 Canadian Imperial Bank of Commerce 2.650 08-Nov-16 31 775 32 233 2 975 Canadian Pacific Railway Ltd. 6.450 17-Nov-39 3 023 3 657 7 260 Canadian Utilities Ltd. 3.122 09-Nov-22 7 260 7 268 2 670 Canadian Utilities Ltd. 9.400 01-May-23 4 122 4 095 11 038 Capital Desjardins Inc. 5.187 05-May-20 11 319 12 584 12 822 Capital Desjardins Inc. 3.797 23-Nov-20 12 827 13 347 265 Cards II Trust 3.096 15-Sep-15 272 274 5 605 Caterpillar Financial Services Ltd. 2.200 01-Jun-15 5 625 5 652 3 600 Centra Gas Ontario Inc. 8.650 19-Oct-18 4 855 4 680 3 760 Central 1 Credit Union 4.000 09-Oct-19 3 757 3 819 10 100 Centre Street Trust 3.690 14-Jun-21 10 100 10 078 4 671 CI Investments Inc. 3.940 14-Dec-16 4 685 4 848 40 Citigroup Finance Canada Inc. 4.350 08-Mar-13 40 40 37 264 Citigroup Finance Canada Inc. 5.500 21-May-13 37 607 37 799 5 000 CU Inc. 6.145 22-Nov-17 5 954 5 905 8 591 CU Inc. 6.800 13-Aug-19 10 964 10 825 542 CU Inc. 4.801 22-Nov-21 608 628 2 780 CU Inc. 9.920 01-Apr-22 4 319 4 278 5 437 CU Inc. 6.215 06-Mar-24 5 498 6 961 10 000 CU Inc. 5.563 26-May-28 12 353 12 321 9 863 CU Inc. 5.556 30-Oct-37 11 758 12 550 3 980 CU Inc. 5.580 26-May-38 4 351 5 112 6 957 CU Inc. 6.500 07-Mar-39 10 018 9 980 7 402 CU Inc. 4.543 24-Oct-41 8 304 8 379 16 900 CU Inc. 3.805 10-Sep-42 16 944 16 851 9 569 Emera Inc. 4.100 20-Oct-14 9 884 9 912 10 748 Emera Inc. 2.960 13-Dec-16 10 743 10 932 5 100 Emera Inc. 4.830 02-Dec-19 5 649 5 624 3 475 Enbridge Gas Distribution Inc. 5.570 29-Jan-14 3 792 3 619 4 663 Enbridge Gas Distribution Inc. 5.160 04-Dec-17 5 319 5 309 30 428 Enbridge Inc. 4.770 02-Sep-19 31 995 34 125 15 522 Enbridge Inc. 4.530 09-Mar-20 17 166 17 188 10 005 Enbridge Inc. 4.260 01-Feb-21 10 013 10 908 1 100 Enbridge Inc. 3.190 05-Dec-22 1 089 1 092 480 Enbridge Inc. 5.120 28-Sep-40 487 553 6 245 Enbridge Income Fund Holdings Inc. 2.920 14-Dec-17 6 244 6 230 5 645 Enbridge Income Fund Holdings Inc. 3.940 13-Jan-23 5 644 5 618 39 957 Enbridge Pipelines Inc. 6.620 19-Nov-18 48 552 49 296 10 000 Enbridge Pipelines Inc. 4.490 12-Nov-19 11 008 11 240 1 100 Enbridge Pipelines Inc. 5.080 19-Dec-36 1 264 1 312 500 Enbridge Pipelines Inc. 5.350 10-Nov-39 628 628 5 770 Enbridge Pipelines Inc. 5.330 06-Apr-40 6 786 7 207 28 148 Encana Corp. 5.800 18-Jan-18 31 552 31 895 12 655 Enersource Corp. 4.521 29-Apr-21 12 700 14 239 The accompanying notes are an integral part of these financial statements.

Statement of Investment Portfolio (in $000s) coupon fair % of Net Par Value Security rate % maturity cost Value assets CORPORATE (cont.) $ 1 435 Enersource Corp. 5.297 29-Apr-41 $ 1 801 $ 1 774 980 EPCOR Utilities Inc. 6.750 22-Mar-16 1 159 1 114 6 122 EPCOR Utilities Inc. 5.800 31-Jan-18 7 042 7 071 8 020 EPCOR Utilities Inc. 5.650 16-Nov-35 9 609 9 740 2 840 FortisBC Energy Inc. 4.250 09-Dec-41 3 105 3 039 5 995 FortisBC Inc. 5.480 28-Nov-14 6 558 6 409 3 400 Gaz Metropolitain Inc. 4.930 18-Jun-19 3 904 3 880 2 300 Gaz Metropolitain Inc. 5.700 10-Jul-36 2 990 2 936 2 775 George Weston Ltd. 6.690 01-Mar-33 3 132 3 174 14 530 Golden Credit Card Trust 3.824 15-May-15 15 225 15 229 1 087 Greater Toronto Airports Authority 7.050 12-Jun-30 1 533 1 523 135 Greater Toronto Airports Authority 6.980 15-Oct-32 194 192 15 870 Great-West Lifeco Inc. 5.998 16-Nov-39 15 937 19 773 8 362 Horizon Holdings Inc. 3.033 25-Jul-22 8 362 8 343 760 HSBC Bank Canada 3.860 21-May-15 768 795 44 010 HSBC Bank Canada 2.572 23-Nov-15 44 010 44 713 6 405 HSBC Bank Canada 2.901 13-Jan-17 6 405 6 558 17 836 HSBC Bank Canada 3.558 04-Oct-17 17 870 18 779 4 030 Hydro One Inc. 3.130 19-Nov-14 4 178 4 146 8 500 Hydro One Inc. 5.180 18-Oct-17 9 666 9 677 7 000 Hydro One Inc. 7.350 03-Jun-30 9 982 10 144 8 350 Hydro One Inc. 6.930 01-Jun-32 11 816 11 893 8 989 Hydro One Inc. 6.350 31-Jan-34 11 973 12 262 1 200 Hydro One Inc. 5.360 20-May-36 1 496 1 481 6 100 Hydro One Inc. 4.890 13-Mar-37 7 125 7 133 9 205 Hydro One Inc. 6.030 03-Mar-39 11 781 12 558 19 219 Hydro One Inc. 5.490 16-Jul-40 24 777 24 641 3 630 Hydro One Inc. 6.590 22-Apr-43 5 481 5 430 4 700 Inter Pipeline Fund 3.839 30-Jul-18 4 700 4 961 533 Loblaw Companies Ltd. 6.500 22-Jan-29 590 614 704 Loblaw Companies Ltd. 6.850 01-Mar-32 779 843 5 785 Loblaw Companies Ltd. 6.050 09-Jun-34 6 321 6 376 2 123 Loblaw Companies Ltd. 6.450 01-Mar-39 2 460 2 470 10 850 Lower Mattagami Energy LP 2.228 23-Oct-17 10 850 10 869 3 332 Lower Mattagami Energy LP 4.331 18-May-21 3 348 3 702 7 451 Manitoba Telecom Services Inc. 4.590 01-Oct-18 7 450 8 063 7 268 Manitoba Telecom Services Inc. 5.625 16-Dec-19 7 791 8 296 4 353 Maritimes & Northeast Pipeline LP 4.340 30-Nov-19 4 353 4 539 24 892 MI Developments Inc. 6.050 22-Dec-16 24 907 25 805 18 485 Molson Coors Capital Finance ULC 5.000 22-Sep-15 19 813 19 809 30 500 National Bank of Canada 2.231 30-Jan-15 30 513 30 765 3 285 Nova Gas Transmission Ltd. 8.900 27-May-25 4 969 4 862 2 000 Nova Scotia Power Inc. 9.750 02-Aug-19 2 838 2 822 12 858 Nova Scotia Power Inc. 8.850 19-May-25 19 319 19 194 6 790 Nova Scotia Power Inc. 6.950 25-Aug-33 9 772 9 585 430 Nova Scotia Power Inc. 5.670 14-Nov-35 534 537 5 050 Nova Scotia Power Inc. 5.950 27-Jul-39 6 558 6 644 7 450 Nova Scotia Power Inc. 5.610 15-Jun-40 9 645 9 441 9 195 Ontrea Inc. 4.619 09-Apr-18 9 216 10 021 16 190 OPB Finance Trust 3.890 04-Jul-42 16 179 16 443 12 745 Pembina Pipeline Corp. 3.770 24-Oct-22 12 785 12 845 5 700 Plenary Properties LTAP LP 3.801 18-Aug-14 5 779 5 831 1 878 Plenary Properties LTAP LP 6.288 31-Jan-44 2 004 2 455 25 561 Rogers Communications Inc. 5.340 22-Mar-21 26 022 29 263 13 466 Rogers Communications Inc. 6.680 04-Nov-39 14 930 16 954 The accompanying notes are an integral part of these financial statements.

Statement of Investment Portfolio (in $000s) coupon fair % of Net Par Value Security rate % maturity cost Value assets CORPORATE (cont.) $ 8 496 Rogers Communications Inc. 6.110 25-Aug-40 $ 9 654 $ 9 972 3 615 Rogers Communications Inc. 6.560 22-Mar-41 4 130 4 497 4 600 Royal Bank of Canada* 5.950 18-Jun-14 5 006 4 863 7 495 Royal Bank of Canada* 3.360 11-Jan-16 7 779 7 791 3 045 Royal Bank of Canada* 3.030 26-Jul-16 3 127 3 140 120 839 Royal Bank of Canada* 2.680 08-Dec-16 121 725 123 117 21 248 Royal Bank of Canada* 3.660 25-Jan-17 22 385 22 436 94 716 Royal Bank of Canada* 2.580 13-Apr-17 95 240 96 011 16 989 Royal Bank of Canada* 2.990 06-Dec-24 16 998 17 078 14 568 Shaw Communications Inc. 6.750 09-Nov-39 15 808 16 176 2 607 Sobeys Inc. 5.790 06-Oct-36 2 607 2 748 5 485 Sobeys Inc. 6.640 07-Jun-40 5 560 6 450 23 660 Sun Life Capital Trust II 5.863 31-Dec-19 23 910 25 897 15 340 Sun Life Financial Inc. 4.950 01-Jun-36 15 416 16 220 7 515 TELUS Corp. 4.950 15-May-14 7 854 7 833 2 010 TELUS Corp. 5.950 15-Apr-15 2 241 2 188 12 760 Teranet Holdings LP 3.531 16-Dec-15 12 919 13 199 19 325 Teranet Holdings LP 4.807 16-Dec-20 19 618 21 491 12 013 Teranet Holdings LP 5.754 17-Dec-40 12 248 13 574 7 795 Teranet Holdings LP 6.100 17-Jun-41 8 754 9 249 3 600 Terasen Gas Inc. 11.800 30-Sep-15 5 046 4 515 7 510 Terasen Gas Inc. 10.300 30-Sep-16 10 325 9 619 4 982 Terasen Gas Inc. 6.500 01-May-34 6 996 6 925 10 092 Terasen Gas Inc. 6.000 02-Oct-37 13 522 13 616 230 Terasen Gas Inc. 6.550 24-Feb-39 333 334 3 510 Terasen Gas Vancouver Island Inc. 5.200 06-Dec-40 3 500 4 206 4 340 The Standard Life Assurance Co of Canada 3.938 21-Sep-22 4 340 4 498 5 750 Thomson Reuters Corp. 6.000 31-Mar-16 6 474 6 425 20 859 Thomson Reuters Corp. 4.350 30-Sep-20 22 727 22 808 9 530 Toronto-Dominion Bank 5.690 03-Jun-18 10 112 9 689 2 455 Toronto Hydro Corp. 6.110 06-May-13 2 682 2 494 13 782 Toronto Hydro Corp. 5.150 14-Nov-17 15 582 15 677 3 039 Toronto Hydro Corp. 4.490 12-Nov-19 3 341 3 400 3 348 Toronto Hydro Corp. 3.540 18-Nov-21 3 353 3 516 9 390 TransAlta Corp. 6.450 29-May-14 10 215 9 821 2 740 TransCanada PipeLines Ltd. 9.450 20-Mar-18 3 676 3 632 380 Union Gas Ltd. 4.640 30-Jun-16 409 413 36 125 Union Gas Ltd. 5.350 27-Apr-18 41 742 41 431 10 683 Union Gas Ltd. 8.750 03-Aug-18 14 233 14 013 9 590 Union Gas Ltd. 8.650 10-Nov-25 13 511 14 610 18 354 Veresen Inc. 3.950 14-Mar-17 18 439 18 920 4 795 Veresen Inc. 4.000 22-Nov-18 4 782 4 927 610 Viking Rideau 6.750 10-Mar-14 616 624 7 380 Wells Fargo Financial Canada Corp. 4.330 06-Dec-13 7 707 7 568 18 930 Wells Fargo Financial Canada Corp. 3.970 03-Nov-14 19 728 19 662 12 301 Wells Fargo Financial Canada Corp. 4.380 30-Jun-15 13 090 13 015 3 795 Wells Fargo Financial Canada Corp. 2.774 09-Feb-17 3 795 3 860 20 975 Wells Fargo Financial Canada Corp. 2.944 25-Jul-19 20 994 21 162 2 616 Westcoast Energy Inc. 3.280 15-Jan-16 2 657 2 707 23 894 Westcoast Energy Inc. 8.500 04-Sep-18 31 312 30 802 6 825 Westcoast Energy Inc. 7.150 20-Mar-31 8 935 9 566 2 700 Westcoast Energy Inc. 4.791 28-Oct-41 2 700 3 038 6 468 Winnipeg Airport Authority Inc. 6.102 20-Nov-40 6 559 7 861 2 774 452 2 834 099 33.3 The accompanying notes are an integral part of these financial statements.

Statement of Investment Portfolio (in $000s) coupon fair % of Net Par Value Security rate % maturity cost Value assets FEDERAL $ 136 820 Canada Housing Trust No. 1 3.750 15-Mar-20 $ 152 068 $ 152 721 28 943 Canada Housing Trust No. 1 3.800 15-Jun-21 32 464 32 564 4 677 CBC Monetization Trust 4.688 15-May-27 4 683 5 246 565 Government of Canada 2.500 01-Jun-15 583 583 32 000 Government of Canada 2.750 01-Sep-16 33 608 33 618 346 946 Government of Canada 1.500 01-Sep-17 349 000 348 780 30 220 Government of Canada 3.750 01-Jun-19 34 278 34 259 975 Government of Canada 3.500 01-Jun-20 1 101 1 101 544 Government of Canada 2.750 01-Jun-22 588 588 25 671 Government of Canada 5.750 01-Jun-29 38 309 38 141 18 049 Government of Canada 4.000 01-Jun-41 24 331 24 127 671 013 671 728 7.9 PROVINCIAL/MUNICIPAL 9 390 Hospital for Sick Children 5.217 16-Dec-49 9 261 11 596 391 Hydro-Quebec 11.000 15-Aug-20 627 619 5 030 Municipal Finance Authority of British Columbia 3.350 01-Jun-22 5 024 5 202 28 325 Ontario Electricity Financial Corp. 8.500 26-May-25 38 247 43 916 7 988 Ontario Electricity Financial Corp. 9.000 26-May-25 12 246 12 802 60 138 Ontario Electricity Financial Corp. 8.250 22-Jun-26 82 458 93 418 14 330 Province of New Brunswick 4.800 03-Jun-41 17 605 17 621 116 095 Province of Ontario 3.150 02-Jun-22 119 569 120 123 28 666 Province of Ontario 9.500 13-Jul-22 42 305 44 558 46 788 Province of Ontario 8.100 08-Sep-23 65 973 68 922 70 142 Province of Ontario 8.500 02-Dec-25 103 370 110 290 14 725 Province of Ontario 8.000 02-Jun-26 18 908 22 531 449 314 Province of Ontario 7.600 02-Jun-27 625 300 678 502 125 181 Province of Ontario 6.500 08-Mar-29 164 371 176 467 65 792 Province of Ontario 6.200 02-Jun-31 89 644 91 475 56 318 Province of Ontario 5.850 08-Mar-33 75 783 76 494 226 498 Province of Ontario 5.600 02-Jun-35 304 424 302 678 47 936 Province of Ontario 4.700 02-Jun-37 50 452 57 781 70 766 Province of Ontario 4.600 02-Jun-39 76 686 84 857 89 284 Province of Ontario 4.650 02-Jun-41 109 396 109 399 23 927 Province of Ontario 3.500 02-Jun-43 24 558 24 476 200 633 Province of Quebec 3.500 01-Dec-22 210 141 211 323 44 449 Province of Quebec 9.375 16-Jan-23 67 974 69 041 49 434 Province of Quebec 8.500 01-Apr-26 77 854 77 133 3 983 Province of Quebec 6.000 01-Oct-29 4 897 5 313 64 772 Province of Quebec 6.250 01-Jun-32 83 216 89 770 38 886 Province of Quebec 5.750 01-Dec-36 52 180 52 356 3 700 Province of Quebec 5.000 01-Dec-38 4 571 4 579 42 408 Province of Quebec 5.000 01-Dec-41 52 620 53 541 4 692 Province of Quebec 4.250 01-Dec-43 5 362 5 339 25 833 TransLink 3.800 02-Nov-20 26 277 27 617 2 621 299 2 749 739 32.3 TOTAL CANADIAN BONDS 6 066 764 6 255 566 73.5 UNITED KINGDOM BONDS 9 945 BAA Funding Ltd. CAD 4.000 03-Jul-19 9 882 10 351 44 606 National Grid Electricity Transmission Plc. CAD 2.730 20-Sep-17 44 752 44 955 20 785 National Grid Electricity Transmission Plc. CAD 2.900 26-Nov-19 20 785 20 656 TOTAL UNITED KINGDOM BONDS 75 419 75 962 0.9 The accompanying notes are an integral part of these financial statements.

Statement of Investment Portfolio (in $000s) coupon fair % of Net Par Value Security rate % maturity cost Value assets UNITED STATES BONDS $ 16 170 Anheuser-Busch InBev Worldwide Inc. CAD 3.650 15-Jan-16 $ 16 296 $ 16 935 44 398 Bank of America Corp. CAD 1.818 01-Jun-16 44 191 42 400 8 125 Goldman Sachs Group Inc. CAD 5.200 19-Apr-22 8 063 8 193 33 496 JPMorgan Chase & Co. CAD 2.920 19-Sep-17 33 603 33 691 32 750 Merrill Lynch & Co. Inc. CAD 5.290 30-May-22 31 368 33 309 44 797 Molson Coors International LP CAD 3.950 06-Oct-17 45 067 47 140 TOTAL UNITED STATES BONDS 178 588 181 668 2.1 TOTAL BONDS 6 340 136 6 532 705 76.7 MORTGAGE-BACKED SECURITIES 2 761 Data Centres Trust 7.233 10-Sep-14 2 939 2 869 12 551 Equitable Trust 4.350 01-Jan-18 12 993 13 726 7 185 Merrill Lynch Mortgage Loans Inc. 7.767 05-Sep-21 7 256 7 763 3 894 Peoples Trust 4.200 01-Oct-19 3 896 4 282 TOTAL MORTGAGE-BACKED SECURITIES 27 084 28 640 0.3 MORTGAGES CMHC Insured 1 658 4.670% Jun 15, 2013 1 658 1 658 650 5.770% Jul 01, 2014 654 683 23 432 4.980% Jan 01, 2018 23 432 26 227 25 446 5.040% Jan 01, 2019 25 609 28 805 1 063 4.860% Jun 05, 2020 1 077 1 192 1 087 4.860% Jun 05, 2020 1 103 1 220 1 140 4.860% Jun 05, 2020 1 156 1 278 4 191 4.260% Nov 01, 2022 4 241 4 505 TOTAL MORTGAGES 58 930 65 568 0.8 SHORT-TERM INVESTMENTS 92 825 Bay Street Funding Trust - Class A 92 710 92 710 20 000 Bell Canada International Inc. 19 981 19 981 34 400 Caisse Centrale Desjardins 34 360 34 360 53 745 Canadian Master Trust - Series A 53 589 53 589 14 875 Caterpillar Financial Services Ltd. 14 861 14 861 40 700 Central 1 Credit Union 40 595 40 595 46 300 Clarity Trust 46 171 46 171 99 903 Darwin Receivables Trust - Senior Notes 99 495 99 495 81 610 Enbridge Inc. 81 532 81 532 152 500 Fusion Trust 152 041 152 041 82 700 HSBC Bank Canada 82 522 82 522 191 250 Inter Pipeline Fund 190 659 190 659 121 950 King Street Funding Trust 121 816 121 816 7 350 McCain Financial Canada 7 345 7 345 140 850 Merit Trust - Senior Notes 140 245 140 245 52 250 National Bank of Canada 52 207 52 207 25 625 Nova Scotia Power Inc. 25 600 25 600 11 150 OMERS Realty Corp. 11 119 11 119 247 275 Prime Trust - Senior Notes 246 336 246 336 118 886 Reliant Trust 118 513 118 513 14 000 TransCanada PipeLines Ltd. 13 960 13 960 210 630 Zeus Receivables Trust - Senior Notes 209 687 209 687 TOTAL SHORT-TERM INVESTMENTS 1 855 344 1 855 344 21.9 TOTAL INVESTMENTS $ 8 281 494 8 482 257 99.7 OTHER NET ASSETS 21 822 0.3 NET ASSETS $ 8 504 079 100.0 * Investment in related party (see note 7 in the generic notes). Short-term investments, which may be made up of treasury bills, commercial paper, term deposits and discount notes, and are grouped by issuer, earn interest at rates ranging from 1.00% to 1.31% and mature between January 2, 2013 and June 17, 2013. The accompanying notes are an integral part of these financial statements.

Financial Statements Statements of Net Assets (in $000s except per unit amounts) December 31 (see note 2 in the generic notes) 2012 2011 ASSETS Investments at fair value $ 8 482 257 $ 7 198 411 Cash 373 1 270 Due from investment dealers 39 015 11 597 Subscriptions receivable 6 820 20 765 Dividends receivable, interest accrued and other assets 48 626 47 750 TOTAL ASSETS 8 577 091 7 279 793 LIABILITIES Due to investment dealers 67 616 20 543 Redemptions payable 4 499 6 998 Accounts payable and accrued expenses 897 822 TOTAL LIABILITIES 73 012 28 363 NET ASSETS $ 8 504 079 $ 7 251 430 Investments at cost $ 8 281 494 $ 6 897 725 NET ASSETS, END OF PERIOD SERIES C $ 229 080 $ 192 755 ADVISOR SERIES $ 43 201 $ 22 738 SERIES B* $ $ 4 507 SERIES D $ 831 784 $ 860 486 SERIES F $ 115 591 $ 97 573 SERIES O $ 7 284 423 $ 6 073 371 NET ASSETS PER UNIT, END OF PERIOD SERIES C $ 10.65 $ 10.75 ADVISOR SERIES $ 10.65 $ 10.75 SERIES B* $ $ 10.79 SERIES D $ 10.57 $ 10.67 SERIES F $ 10.62 $ 10.72 SERIES O $ 10.60 $ 10.70 NET ASSET VALUE (TRANSACTIONAL NAV) PER UNIT, END OF PERIOD (see note 3 in the generic notes) SERIES C $ 10.66 $ 10.76 ADVISOR SERIES $ 10.66 $ 10.76 SERIES B* $ $ 10.80 SERIES D $ 10.58 $ 10.68 SERIES F $ 10.63 $ 10.73 SERIES O $ 10.61 $ 10.71 Statements of Operations (in $000s except per unit amounts) For the periods ended December 31 (see note 2 in the generic notes) 2012 2011 INCOME (see note 3 in the generic notes) Interest $ 293 452 $ 254 111 TOTAL INCOME (LOSS) 293 452 254 111 EXPENSES (see notes Fund Specific Information) Management fees 7 502 6 178 Administration fees 1 981 1 602 Board of Governors costs 4 4 GST/HST 1 048 896 TOTAL EXPENSES 10 535 8 680 NET INVESTMENT INCOME (LOSS) 282 917 245 431 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments 129 596 97 123 Net gain (loss) on foreign currencies and other net assets 893 Change in unrealized gain (loss) on investments (99 923) 219 475 NET GAIN (LOSS) ON INVESTMENTS 29 673 317 491 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 312 590 $ 562 922 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS SERIES C $ 6 322 $ 11 781 ADVISOR SERIES $ 1 220 $ 873 SERIES B* $ $ 352 SERIES D $ 29 555 $ 65 587 SERIES F $ 3 813 $ 6 740 SERIES O $ 271 680 $ 477 589 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS PER UNIT SERIES C $ 0.30 $ 0.82 ADVISOR SERIES $ 0.30 $ 0.82 SERIES B* $ $ 0.85 SERIES D $ 0.36 $ 0.88 SERIES F $ 0.36 $ 0.88 SERIES O $ 0.43 $ 0.93 * All outstanding Series B units were redesignated as Series D units effective July 2012. Approved by the Board of Directors of RBC Global Asset Management Inc. John S. Montalbano Director Doug Coulter Director The accompanying notes are an integral part of these financial statements.

Financial Statements Statements of Changes in Net Assets (in $000s) For the periods ended December 31 series c advisor Series series B* series D (see note 2 in the generic notes) 2012 2011 2012 2011 2012 2011 2012 2011 Net Assets Beginning of period $ 192 755 $ 138 068 $ 22 738 $ 1 980 $ $ 5 476 $ 864 993 $ 819 257 Increase (decrease) from operations 6 322 11 781 1 220 873 352 29 555 65 587 Early redemption fees Proceeds from units issued 81 073 97 388 38 813 21 193 115 155 145 837 Proceeds from reinvestment of distributions 7 873 5 033 1 340 373 162 34 848 29 878 Payments on redemption of units (50 375) (54 125) (19 335) (1 244) (1 319) (175 639) (168 145) TOTAL UNIT TRANSACTIONS 38 571 48 296 20 818 20 322 (1 157) (25 636) 7 570 Distributions from net income (5 502) (4 314) (1 000) (313) (139) (25 927) (27 067) Distributions from net gains (3 066) (1 076) (575) (124) (25) (11 201) (4 861) Distributions from capital TOTAL DISTRIBUTIONS (8 568) (5 390) (1 575) (437) (164) (37 128) (31 928) TOTAL INCREASE (DECREASE) IN NET ASSETS 36 325 54 687 20 463 20 758 969 (33 209) 41 229 Net Assets End of period $ 229 080 $ 192 755 $ 43 201 $ 22 738 $ $ 4 507 $ 831 784 $ 860 486 For the periods ended December 31 Series f series o total (see note 2 in the generic notes) 2012 2011 2012 2011 2012 2011 Net Assets Beginning of period $ 97 573 $ 69 567 $ 6 073 371 $ 4 623 263 $ 7 251 430 $ 5 657 611 Increase (decrease) from operations 3 813 6 740 271 680 477 589 312 590 562 922 Early redemption fees Proceeds from units issued 43 155 52 688 1 851 855 1 869 636 2 130 051 2 186 742 Proceeds from reinvestment of distributions 4 316 2 890 334 508 239 003 382 885 277 339 Payments on redemption of units (28 341) (31 064) (904 239) (891 740) (1 177 929) (1 147 637) TOTAL UNIT TRANSACTIONS 19 130 24 514 1 282 124 1 216 899 1 335 007 1 316 444 Distributions from net income (3 376) (2 706) (246 009) (210 320) (281 814) (244 859) Distributions from net gains (1 549) (542) (96 743) (34 060) (113 134) (40 688) Distributions from capital TOTAL DISTRIBUTIONS (4 925) (3 248) (342 752) (244 380) (394 948) (285 547) TOTAL INCREASE (DECREASE) IN NET ASSETS 18 018 28 006 1 211 052 1 450 108 1 252 649 1 593 819 Net Assets End of period $ 115 591 $ 97 573 $ 7 284 423 $ 6 073 371 $ 8 504 079 $ 7 251 430 * All outstanding Series B units were redesignated as Series D units effective July 2012. The accompanying notes are an integral part of these financial statements.

Notes to financial statements fund specific information Financial instrument risk and capital management (see note 4 in the generic notes) Credit risk (%) The table below summarizes the Fund s credit risk exposure grouped by credit ratings as at: December 31 December 31 Rating 2012 2011 AAA 10.7 11.4 AA 48.4 54.4 A 26.7 20.7 BBB 13.2 12.3 D 0.1 Unrated* 1.0 1.1 Total 100.0 100.0 * Mortgages, which represent 100% (December 31, 2011 100%) of the unrated above, are all Canada Mortgage and Housing Corporation ( CMHC ) guaranteed mortgages, and therefore have the backing of an AAA rated issuer. Interest rate risk (%) The table below summarizes the Fund s exposure to interest rate risk by remaining term to maturity as at: December 31 December 31 Term to maturity 2012 2011 Less than 1 year 3.5 11.1 1 5 years 30.2 25.1 5 10 years 21.2 22.0 > 10 years 45.1 41.8 Total 100.0 100.0 As at, had prevailing interest rates risen or lowered by 1%, with all other factors kept constant, the Fund s net assets may have decreased or increased, respectively, by approximately 6.1% (December 31, 2011 5.9%). In practice, actual results could differ from this sensitivity analysis and the difference could be material. Fair value hierarchy ($000s except % amounts) (see note 3 in the generic notes) The following is a summary of the inputs used as of and 2011 in the valuation of the Fund s financial instruments carried at fair value. level 1 Level 2 Level 3 Total Equities Mutual fund units Fixed-income and debt securities 6 626 913 6 626 913 Short-term investments 1 855 344 1 855 344 Derivatives assets Derivatives liabilities Total financial instruments 8 482 257 8 482 257 % of total portfolio 100.0 100.0 December 31, 2011 Level 1 Level 2 Level 3 Total Equities Mutual fund units Fixed-income and debt securities 5 870 056 5 870 056 Short-term investments 1 328 355 1 328 355 Derivatives assets Derivatives liabilities Total financial instruments 7 198 411 7 198 411 % of total portfolio 100.0 100.0 For the periods ended and 2011, there were no transfers of financial instruments between Level 1 and Level 2. Management fees (see note 7 in the generic notes) No management fees are payable by the Fund with respect to Series O units. Series O unitholders pay a negotiated fee directly to RBC GAM for investment-counselling services. Management fees of the other series of the Fund are calculated at the following annual percentages, before GST/HST, of the daily net asset value of each series of the Fund. Series C 1.00% Advisor Series 1.00% Series B 0.75% Series D 0.50% (note 1) Series F 0.50% Note 1: Management fees are calculated at the annual rate of 0.50% of the Series D net asset value, provided that the aggregate of all fees and other expenses (excluding the taxes included therein and commissions incurred in connection with portfolio transactions) paid or payable by Series D does not exceed an amount computed with reference to the following percentages of the net asset value of Series D. Net Asset Value of Series d percentage Up to $1 000 000 2.00 From $1 000 001 up to $3 000 000 1.75 From $3 000 001 up to $5 000 000 1.50 From $5 000 001 up to $10 000 000 1.25 From $10 000 001 up to $100 000 000 1.00 Over $100 000 000 0.75 Please see the generic notes at the back of the financial statements.

Notes to financial statements fund specific information Operating expenses (see note 7 in the generic notes) Administration fees payable by each series of the Fund are calculated at the following annual percentages, before GST/HST, of the daily net asset value of each series of the Fund. Series C 0.05% Advisor Series 0.05% Series B 0.05% Series D 0.05% Series F 0.05% Series O 0.02% Initial investments ($000s except unit amounts) Royal Bank of Canada, or one of its subsidiaries, held the following investments in the Fund as at: December 31 December 31 2012 2011 Units held Series C 52 50 Advisor Series 103 99 Series B 50 Series D 52 Series F 52 50 Value of all units $ 3 $ 3 Taxes ($000s) (see note 5 in the generic notes) The Fund had no capital or non-capital losses as at. Unitholders equity (000s) The unitholders equity of the Fund includes amounts representing units, undistributed net income (loss), realized gain (loss) on investments and unrealized gain (loss) on investments. There is no limitation on the number of units available for issue. Units are purchased and redeemed at the transactional NAV per unit. For the periods ended December 31 (see note 2 in the generic notes) 2012 2011 Series C Opening units 17 926 13 386 Issued number of units 7 513 9 263 Reinvested number of units 735 479 Redeemed number of units (4 667) (5 202) Ending number of units 21 507 17 926 For the periods ended December 31 (see note 2 in the generic notes) 2012 2011 Advisor Series Opening units 2 115 192 Issued number of units 3 601 2 005 Reinvested number of units 125 35 Redeemed number of units (1 785) (117) Ending number of units 4 056 2 115 Series B Opening units 529 Issued number of units 1 Reinvested number of units 15 Redeemed number of units (127) Ending number of units 418 Series D Opening units 81 066 80 022 Issued number of units 10 760 13 953 Reinvested number of units 3 276 2 871 Redeemed number of units (16 378) (16 198) Ending number of units 78 724 80 648 Series F Opening units 9 104 6 766 Issued number of units 4 013 5 027 Reinvested number of units 404 276 Redeemed number of units (2 632) (2 965) Ending number of units 10 889 9 104 Series O Opening units 567 456 450 231 Issued number of units 172 363 179 606 Reinvested number of units 31 341 22 866 Redeemed number of units (84 064) (85 247) Ending number of units 687 096 567 456 Investments by other related Investment Funds (000s) (see note 7 in the generic notes) The following outstanding units of the Fund were held by the following related Investment Funds as at: December 31 December 31 2012 2011 Series O RBC Select Conservative Class 122 Phillips, Hager & North LifeTime 2015 Fund 65 12 Phillips, Hager & North LifeTime 2020 Fund 47 8 Phillips, Hager & North LifeTime 2025 Fund 12 3 Phillips, Hager & North Balanced Pension Trust 38 240 44 871 RBC Select Very Conservative Portfolio 102 316 67 501 RBC Select Conservative Portfolio 129 327 102 332 Total 270 129 214 727 Please see the generic notes at the back of the financial statements.

Generic Notes to financial statements (also see Fund Specific Information) 1. The Funds The mutual funds ( Fund or Funds ) are open-ended mutual fund trusts governed by the laws of the Province of British Columbia and governed by a Master Declaration of Trust. RBC GAM is the manager and portfolio advisor of the Funds. The Funds may issue an unlimited number of units in some or all of Series C, Advisor Series, Series H, Series B, Series D, Series F, Series I and Series O. Series C units are available to investors who purchase units from authorized third-party dealers. Advisor Series units are available to all investors with an initial sales charge or low-load sales charge option. Under the initial sales charge option, investors pay a sales commission ranging from 0% to 5% of the amount invested. Under the low-load sales charge option, investors do not pay a commission. Series H units have lower fees than Series C units and are only available to investors who invest and maintain the required minimum balance. Series B units were previously available to investors who purchased units from authorized third-party dealers. All outstanding Series B units were redesignated as Series D units effective July 2012. Series D units are available to all investors and may be purchased, switched or redeemed through Phillips, Hager & North Investment Funds Ltd. ( PH&N IF ) or certain other authorized dealers (primarily discount brokers). Series F units are available to investors who have fee-based accounts with their dealer. Series I units have lower fees than Series F units and are only available to investors who invest and maintain the required minimum balance and who have accounts with dealers who have signed a fee-based agreement with RBC GAM. Series O units are only available to large private or institutional investors as may be determined from time to time on a case-by-case basis. Series O units may only be purchased, switched or redeemed through RBC GAM or, in certain circumstances, PH&N IF. 2. Financial year/period The information provided in these financial statements and notes thereto is for the 12-month periods ended or as at and 2011. In the year a Fund or series is established, period represents the period from inception to December 31 of that fiscal year. 3. Summary of significant accounting policies These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ), which include estimates and assumptions made by management that may affect the reported amounts of assets (primarily valuation of investments), liabilities, income and expenses during the reported periods. Actual results may differ from estimates. The significant accounting policies of the Funds are as follows: Valuation of Investments The valuation methods used to calculate the daily net asset value to transact units of the Funds ( transactional NAV ), as described in the Funds Annual Information Form, are not identical to the GAAP valuation methods used to determine the financial statement net assets ( net assets ) described below. The primary difference between net assets and transactional NAV relates to valuation of actively traded securities at bid prices for net assets and at last sale prices for transactional NAV. In accordance with the Canadian Institute of Chartered Accountants ( CICA ) Handbook Section 3862, Financial Instruments Disclosures, the Funds financial instruments are measured at fair value using a three-tier hierarchy based on inputs used to value the Funds investments and derivatives. The hierarchy of inputs is summarized below: Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and Level 3 inputs for the asset or liability that are not based on observable market data (unobservable inputs). Changes in valuation methods may result in transfers into or out of an investment s assigned level. The three-tier hierarchy of investments and derivatives is included in Notes to Financial Statements Fund Specific Information. Investments are recorded at fair value, which is determined as follows: Equities Common shares, preferred shares and exchangetraded funds are valued at the closing bid price recorded by the security exchange on which the security is principally traded.

Generic Notes to financial statements (also see Fund Specific Information) Fixed-Income and Debt Securities Bonds, mortgage-backed securities and debentures are valued at the closing bid price quoted by major dealers in such securities. Mortgages are valued at a principal amount, which produces a yield equivalent to the prevailing rate of return on mortgages of similar type and term. Short-Term Investments Short-term investments are valued at their cost including applicable foreign exchange translations. This value, together with accrued interest, approximates fair value using closing bid prices. Options Listed options are valued at the closing bid price on the recognized exchange on which the option is traded for the long positions and the ask price for the short positions. The premium received for written options is recorded as a credit in the Statement of Investment Portfolio and adjusted daily to the fair value of the written option. Forward Contracts Forward contracts are valued at the gain or loss that would arise as a result of closing the position at the valuation date. Any gain or loss at the close of business on each valuation date is recorded in the Statements of Operations. The net receivable/payable on forward contracts is recorded separately in the Statements of Net Assets. Realized gain (loss) on foreign exchange contracts is included in Net gain (loss) on foreign currencies and other net assets in the Statements of Operations. Futures Contracts Futures contracts entered into by the Funds are financial agreements to purchase or sell a financial instrument at a contracted price on a specified future date. However, the Funds do not intend to purchase or sell the financial instrument on the settlement date; rather, they intend to close out each futures contract before settlement by entering into equal, but offsetting, futures contracts. Futures contracts are valued at the gain or loss that would arise as a result of closing the position at the valuation date. Any gain or loss at the close of business on each valuation date is recorded as Net gain (loss) from futures contracts in the Statements of Operations. The net receivable/payable on futures contracts is recorded separately in the Statements of Net Assets. Mutual Fund Unit Valuation Units of Funds are valued at their respective transactional NAV per unit received from fund companies on the relevant valuation dates. Fair Valuation of Investments (including unlisted securities) If the valuation methods described above are not appropriate, RBC GAM will estimate the fair value of an investment using established fair valuation procedures, such as consideration of public information, broker quotes, valuation models, fundamental analysis, matrix pricing, discounts from market prices of similar securities or discounts applied due to restrictions on the disposition of securities, and external fair value service providers. Procedures are in place to determine the fair value of foreign securities traded in countries outside North America daily, to avoid stale prices and to take into account, among other things, any significant events occurring after the close of a foreign market. This fair valuation process takes into account the last quoted price of the security and adjusts the price based on inputs such as related indices, changes in foreign markets and American Depository Receipts ( ADR ) prices. These securities are classified as Level 2. Foreign Exchange The value of investments and other assets and liabilities in foreign currencies is translated into Canadian dollars (U.S. dollars in the case of the Phillips, Hager & North $U.S. Money Market Fund) at the rate of exchange on each valuation date. Purchases and sales of investments, income and expenses are translated at the rate of exchange prevailing on the respective dates of such transactions. Realized foreign exchange gains/losses are included in Net gain (loss) on foreign currencies and other net assets in the Statements of Operations. Valuation of Series A different net asset value is calculated for each series of units of a Fund. The net asset value of a particular series of units is computed by calculating the value of the series proportionate share of the assets and liabilities of the Fund common to all series less the liabilities of the Fund attributable only to that series. Expenses directly attributable to a series are charged to that series. Other expenses are allocated proportionately to each series based upon the relative net asset value of each series. Expenses are accrued daily. Investment Transactions Investment transactions are accounted for as of the trade date. Transaction costs, such as brokerage commissions, incurred by the Funds are recorded in the Statements of Operations for the period. The period change in the difference between fair value and average cost of securities represents unrealized gains and losses. The basis of determining the cost of portfolio assets, and realized and unrealized gains and losses on investments, is average cost.

Generic Notes to financial statements (also see Fund Specific Information) Income Recognition Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Other income (loss) includes income from income trusts. Distributions received from income trusts are recognized based on the nature of the underlying components, such as income, capital gains and return of capital. Other revenue includes income earned by a Fund from investments in underlying funds. Increase (Decrease) in Net Assets from Operations Per Unit Increase (decrease) in net assets from operations per unit in the Statements of Operations represents the increase (decrease) in net assets from operations by series, divided by the average units outstanding per series during the period. Early Redemption Fees Early redemption fees (short-term trading fees) are paid directly to the Fund and are designed to deter excessive trading and its associated costs. With the exception of money market funds, a Fund may apply a fee of 2% of the current value of units if the unitholder redeems or switches out units within seven days of purchasing or previously switching into a Fund. Foreign Currencies The following is a list of abbreviations used in the Statement of Investment Portfolio: AUD Australian Dollar CAD Canadian Dollar CHF Swiss Franc EUR Euro GBP Pound Sterling JPY Japanese Yen NOK Norwegian Krone SGD Singapore Dollar USD United States Dollar 4. Financial instrument risk and capital management RBC GAM is responsible for managing each Fund s capital, which is its net assets and consists primarily of its financial instruments. A Fund s investment activities expose it to a variety of financial risks. RBC GAM seeks to minimize potential adverse effects of these risks on a Fund s performance by employing professional, experienced portfolio advisors, daily monitoring of the Fund s holdings and market events, diversifying its investment portfolio within the constraints of its investment objectives, and, in some cases, periodically hedging certain risk exposures through the use of derivatives. To assist in managing risks, RBC GAM also uses internal guidelines, maintains a governance structure that oversees each Fund s investment activities and monitors compliance with the Fund s investment strategies, internal guidelines and securities regulations. Liquidity risk Liquidity risk is the possibility that investments in a Fund cannot be readily converted into cash when required. A Fund is exposed to daily cash redemptions of redeemable units. Liquidity risk is managed by investing the majority of a Fund s assets in investments that are traded in an active market and that can be readily disposed. In accordance with securities regulations, a Fund must maintain at least 90% of its assets in liquid investments. In addition, a Fund aims to retain sufficient cash and cash equivalent positions to maintain liquidity, and has the ability to borrow up to 5% of its net assets for the purpose of funding redemptions. Credit risk Credit risk is the risk that a loss could arise from a security issuer or counterparty not being able to meet its financial obligations. The carrying amount of investments and other assets represents the maximum credit risk exposure as disclosed in a Fund s Statements of Net Assets. The fair value of fixed-income and debt securities includes a consideration of the credit worthiness of the debt issuer. Credit risk exposure to over-the-counter derivative instruments is based on a Fund s unrealized gain on the contractual obligations with the counterparty. Credit risk exposure is mitigated for those Funds participating in a securities lending program (see note 6). RBC GAM monitors each Fund s credit exposure and counterparty ratings daily. Interest rate risk Interest rate risk is the risk that the fair value of a Fund s interest-bearing investments will fluctuate due to changes in market interest rates. The value of fixed-income and debt securities, such as bonds, debentures, mortgages or other income-producing securities, is affected by interest rates. Generally, the value of these securities increases if interest rates fall and decreases if interest rates rise. Currency risk Currency risk is the risk that the value of investments denominated in currencies, other than the functional currency of a Fund, will fluctuate due to changes in foreign exchange rates. The value of investments denominated in a currency other than Canadian dollars is affected by changes in the value of the Canadian dollar or a Fund s functional currency, in relation to the value of the currency in which the investment is denominated. When the value of the Canadian dollar falls in relation to foreign currencies, then the value of foreign investments rises. When the value of the Canadian dollar rises, the value of foreign investments falls.