The Manager's Commentary - February 28, 2010

After eight months in operation the fund has surpassed $20 million in assets under management. We would like to thank our current investment advisors and investors for their early support. Having investors who share our long term orientation is critical to the future success of the fund.

We continue to feel that the economic stimulus programs (i.e. cash for clunkers, $8,000 home purchase tax credit, early tax refunds etc…) that were put in place in the U.S. may still be contributing to the recent sense of relief that the future will be friendly. While the investment opportunity of a lifetime that occurred just one short year ago may not be encountered again, it doesn’t mean the coast is clear.

The source of the credit crisis was many US mortgage lenders having the attitude that “if you can fog a mirror you can have a mortgage”. Many of these mortgagees made little or no down payment and, in many cases, provided no record of employment. Some of these mortgages are delinquent, but a growing number may become delinquent over the course of the next year. The peak in mortgage resets is expected to occur later this year and, with unemployment still very high, we think this is a significant head wind that the market still has to confront.

With the prospect of that tough pill still to swallow, we are looking for opportunities with a significant margin of safety. The characteristics of a recent bond investment, in our opinion, fit that requirement nicely. The bond has a 12.25% coupon, three year duration, less than three times leverage, interest coverage in excess of two times and a covenant that requires the company to purchase bonds back each year with 75% of the company’s free cash flow… and, if it matters, it is rated "B" by S&P. However, we are skeptical of ratings agencies and the inherent conflicts that can arise with an issuer pay model. Generally we are reluctant to rely on them.

Matthew Shandro
February 28th, 2010