Manager’s Quarterly Commentary – David Barr – Q1 2014

Following up on the Funds strong performance in 2013, your Fund was up 4.77%¹ in the first quarter compared to 6.07% for the benchmark². As a result of the strong performance of the Fund and great support from our investors, we have closed the fund to new investors. We believe that it is in the best interests of investors in the Fund to cap it. By limiting the amount of capital in the Fund, it will continue to be able to access opportunities that others cannot.

Last year, the Fund’s performance was assisted by the strong market appreciation of small cap stocks. That trend has reversed this year, and as I write this, the hot air appears to be leaving the “momentum” stocks. This is music to our ears – yesterday’s momentum stocks can become tomorrow’s next great value idea, particularly in the technology world. Since inception3 the Fund has an annualized return of 21.24%¹, compared to 10.07% for the S&P/TSX Capped Composite Total Return Index.

¹ Refers to Class A units in the Fund.
² S&P/TSX Capped Composite Total Return Index.
³ Inception is June 2009.

Let’s protect on the downside – Cash and Special Situations

We recently reread some of Buffett’s partnership letters from the 1960s. One category of investment he talked about was “workouts”, or as we call them, “special situations”. Our definition of “special sits” can be found in the glossary on our website. Buffett talks about how investing in workouts provides strong absolute returns over time, with the added benefit of these types of investments not fluctuating with the general market. This was really proven out in 1962 when the Dow had a very tough year and Buffett dramatically outperformed, which he attributed to his workout situations.

In the midst of a five year old bull market, we are searching for investments to protect our capital in the case of short term negative market moves. Cash is one way we can achieve this, the other is through investing in special situations. One such new investment is Maxim Power. Maxim is a business with several different assets: power generation in France; power generation in the Northeast US; power generation in Alberta and a coal property in Alberta. Given the diversity of businesses and with a market cap of just $150 million, there are not a lot of investors who naturally follow the company. The Book Value (BV) of the company today is $4.98. We built our position below $2.80 per share, a 44% discount to the BV. We think the BV is a conservative measure of intrinsic value. Therefore the margin of safety is likely to be higher than 44%. We classify the investment as a special situation because the company had reached an agreement to sell the US power generating assets which was canceled by the buyer as a result of a regulatory inquiry. The company announced that it will “investigate further sales opportunities as they arise.” It is our experience that once companies decide to divest of assets to focus on other parts of their business, the will stay focused until the divestiture is complete. As the company monetizes its assets, we believe the discount to Book Value will close and shareholders will benefit.
Portfolio Updates

We sold five positions in the quarter, three of which were as a result of transactions announced in 2013. We made four new investments in the quarter including the previously mentioned Maxim Power. Cash on hand has increased from 15.15% at the year end to 22.00% at the end of this quarter. We decreased US exposure from 12.41% at the end of 2013 to 11.55% at the end of March 2014.

David Barr
April 15, 2014

 View full standard performance information (March 31, 2014)

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