The Manager's Commentary - December 31, 2009

Welcome to the “Year of the Coupon”. While 2010 is the Chinese Year of the Tiger, corporate bond investors should generally expect to feast on just the coupon in 2010 as the capital gain feeding frenzy has, for the most part, run its course. Nevertheless, return expectations for corporate bonds of 7 to12 percent this year still look very attractive. In comparison, the S&P 500 is trading at close to 16 times 2010 earnings (the long term average is just below 15 times) which are expected to grow 35% over 2009 earnings. Sure, 2009 was a year that saw earnings retract significantly due to the global economic contraction. However, by the end of 2010, earnings are forecast to be at a level not seen since 2006 - when earnings reached an all-time peak.

The job of predicting future earnings is always difficult but we believe it is more difficult today than it has been over the last several decades. The complicating factor is the expected removal, but uncertain outcome, of the many US government monetary and fiscal stimulus programs. In the context of this back drop, we acknowledge that the chance of either a hyper inflationary or grinding deflationary environment exists… just don’t ask us for a range of probabilities.

As always, you want to ensure that you invest in businesses that can withstand any type of macro environment. Thankfully, the uncertainty that is still percolating in the economy is providing us the opportunity to buy the bonds of those types of companies at very attractive yields and valuations. Below are two such examples.

We recently purchased a bond in Charter Communications, one of the largest cable companies in the United States. The company has almost 6 million subscribers and has grown its revenue and cash flow consistently over the last 2 years despite a poor economy. Furthermore, the company restructured its balance sheet to reduce the amount of debt which, in our opinion, increases the likelihood that the company is acquired by an investment grade competitor. We purchased bonds with over a 10% yield that values the company at a reasonable cash flow multiple.

Another recent purchase was made in Dollar Financial Corp. the owner of the Money Mart chain in Canada. The pay day loan business generates a high return on capital employed and because the loans are short in duration (2 weeks) there is a high degree of visibility into the quality of the customer base. The bond the
fund purchased has over a 10% yield and is secured by the Canadian business which generates the majority of the company’s cash flow.

While we continue our bottom-up effort to seek out fixed income opportunities in the corporate world, we are very cautious of the significant headwinds the economy still faces. With this in mind we are positioning the fund in shorter duration securities and those, from a valuation perspective, that possess a significant margin of safety.

Matthew Shandro
December 31st, 2009