The Manager's Commentary - December 2011

A Year in Review

Fellow Unitholders,

^{* Annualised return since fund inception on June 1, 2009
** S&P/TSX Capped Composite Total Return Index}

2011 serves as a very useful illustration of the investment strategy for the fund. Focused on undiscovered companies that already trade below their intrinsic value, market fluctuations did not have that large an impact on the market value of the fund. The benchmark for this fund (the S&P/TSX Capped Composite Total Return Index) was down 8.71% for the year. It was an even tougher year in the small cap market in Canada as demonstrated by the BMO Nesbitt Burns Canadian Small Cap Index being down 18.1% for the year. The strategy of staying away from resource companies during a cyclical high paid off this year.

A Year of Volatility
The year saw incredible volatility. The Dow Jones Industrial Average moved more than a hundred points on forty per cent of trading days, and there were more than sixty days on which the S&P index moved 2% or more. Compare this to 2005, when the S&P didn’t move more than 2% in a day once. The volatility is difficult for investors to navigate, with many fleeing from equity market as evidenced by the outflow from equity based mutual funds last year. However, when the market dips to provide extreme pricing, it produces opportunities for value investors to buy low in anticipation of selling when prices get high. The best example last year was the Fund’s investment in Zarlink where we were able to take advantage of the July/August sell off to buy the stock and realize a gain of 17.1% with relatively low risk as a buyer for the company had already been announced.

Lucky or Smart?
Since inception on June 1, 2009, the Fund has developed a strong track record of identifying companies that have been acquired or have another similar catalyst occur. When portfolio companies do get taken out, the question is whether or not the manager is smart or lucky. In reality you need both. As a value investor you need to do your due diligence to ensure you purchase the company at a substantial discount to what you think someone else will pay for the whole company. Even after all the work you do, you are often reliant on a third party. As part of our investment process we spend a significant amount of time and energy looking for potential catalysts.

The table below shows the portfolio companies that have been acquired by a third party in the last two years.

Portfolio Update
We did make some changes in the portfolio in Q4 of 2011, as we initiated one new position, added to five existing positions and disposed of one. At year end, the Fund had a cash position of approximately 15.1%. Technology continues to be the largest industry sector represented at 55.8% of the Fund.

Forward Thinking
Given the geopolitical backdrop to start the year, we think we could have another year of volatility as investors react to headlines. We will continue to take a conservative approach to allocating capital, but will capitalize on these opportunities to start new positions or add to existing positions when stocks are cheap. The ideal exit from companies in our portfolio is when an acquirer emerges, but we think it will be a slow M&A year as both equity and debt investors continue to hold back.

Dave Barr
December 31, 2011