Thank you to those who have supported the initial launch of our fund. We are off the mark in the “slow and steady” race to preserve capital and generate solid returns in an uncertain economic environment. As of month end, we have invested approximately 50% of the cash in the fund in bonds of 12 companies spread across 11 different sectors. The current yield of these investments in aggregate is over 9 percent. In addition, several of the bonds have good capital appreciation potential.

Although yield spreads on corporate bonds have dropped since the middle of March, they are still hovering around 300 basis points for investment grade and 1,000 basis points for high yield. These continue to be near historic highs. This pricing environment coupled with the modest size of the fund means that we can search for bond issues not widely followed ($50 million to $150 million in size). In many instances these smaller issues have yet to see the price appreciation of the larger “index” names.

Our strategy is to invest in shorter duration bonds issued by corporations with significant asset coverage. Why do we want to stay short? While inflation will rear its head at some point in the future, we also acknowledge the slight probability of deflation in the near term. With U.S. capacity utilization for total industry at 68% (which is below the 1972-2008 average of 80.9%), we believe there is significant production capacity to meet any “pent-up” demand that may arise over the shorter term. And there is much evidence to suggest that any expected demand may not be so near. Recent data suggests that US consumers are saving more of their disposable income (5.2% in the 2nd quarter of 2009 compared to as low as 1.2% in the 1st quarter of 2008) while their personal income is dropping (falling 1.3% in June 2009). These numbers suggest, along with rising unemployment, that tough times are still ahead for the world’s largest economy.

For as long as we are uncertain of the expected earnings recovery to come over the next several quarters, our objective is to position the fund in shorter duration bonds of corporations with significant asset coverage. While the equity markets have rallied aggressively and are pricing in a robust recovery, we believe the future is difficult to predict. So we will continue to control/minimize the risks we take, knowing that if we focus on this objective, returns will follow in due course.

Matthew Shandro
August 6th, 2009

The Manager's Commentary - August 31, 2009

The fund has three months under its belt and we have built the fund up to 17 positions, with approximately 50% cash in the fund. The current yield of the fund to date has been as expected and we believe the yield will increase as we become more fully invested.

The risk premium on corporate bonds continued to fall during the month of August but much less so than July. However, investment grade tightened more than high yield during a month that saw the S&P500 finish up 3.4%. This is contradictory information from the market. One would think that equity performance of 3%+ in a month would indicate continued high yield tightening, certainly when spreads are still in the 900 bps “zip code”. However, these are not normal times and the credit markets are taking a bit of a breather to assess whether future economic data will support the rally we’ve seen.

In the context of continuing high unemployment, capacity utilization below 70% and deleveraging US consumers, we believe the future earnings of corporations may be muted for several quarters. With this in mind we are on the hunt for “cash-plus” proxies that preserve capital, provide an adequate return and a shorter maturity. We are, however, also looking for opportunities that can provide substantial long term value for unitholders. One such bond that we hold in the fund has a 9% current yield, a yield to maturity of 19%, is 100% covered by the cash on the balance sheet while generating free cash flow. Our efforts are intensely focused on finding more corporate bonds that fit this type of profile.

Matthew Shandro
August 31st, 2009