Investment Process

Security and Market Analysis
We generate investment ideas through fundamental research on a universe of primarily U.S. and Canadian listed securities. Our portfolio managers and research analysts scrutinize securities utilizing information gleaned from myriad sources, including quantitative screening, outside research analysts, corporate regulatory filings, newspapers and periodicals, other like-minded investors and our diverse client and business contacts. To assist our security selection, we draw on specialized independent research, such as a service that identifies sell-side analysts with the best track records and determines the “quality” of corporate earnings. We also subscribe to assorted research services to gain disparate market and macroeconomic perspectives.

Value Investing
Securities purchased at a meaningful discount to their intrinsic values have lower downside risk. Buying a security at a large discount to its FMV also mitigates the risk in our business appraisal. To minimize inherent business risk, we want to purchase securities of strong companies meeting our fundamental criteria and to avoid those that have poor balance sheets or no earnings without the prospect for near-term earnings. We want companies with competitive advantages, barriers to entry or unrecognized valuable assets, and avoid those where predictability is difficult.

Understanding What We Own
If a company appears undervalued, we analyze its business model, management, financial position and operating environment to understand it as best we can and we continually monitor our portfolio holdings in order to react to changes in business prospects.

Portfolio Construction
For a holding to meet our investment criteria, it must be undervalued relative to our appraised FMV and its FMV should be growing. Portfolios are generally focused, high conviction selections of securities influenced by our macro perspectives and may be concentrated in certain securities, sectors and jurisdictions depending on their attractiveness. Our portfolios have, for example, often been heavily weighted in oil and gas and gold stocks, and we have held large individual positions in those sectors. We may from time to time emphasize small to mid-cap companies (and we have often done so in the past) when we believe they offer a significantly better risk-reward opportunity than larger companies, often trading off liquidity for opportunity.

Perception of Risk
We strive to avoid permanent loss of capital—our definition of true risk—but may, from time to time, experience temporary loss of capital from unwarranted share price fluctuations. Avoiding overpriced companies and recognizing when a company’s business model changes adversely can guard against permanent impairment. Often, illiquidity from an emphasis on small cap companies can contribute unduly to an outsized fluctuation in price, in our view, a temporary impairment of capital.

Model Portfolios
We manage each client account based on model portfolios, which are hypothetical allocations of securities. The client’s investment mandate will determine the particular model or models selected to guide investment of the client’s portfolio. Each client’s investment mandate is determined, in order to select a suitable type of account for the client’s specific objectives and circumstances and we then construct a portfolio of securities based on the applicable model(s). Generally, client portfolios will effectively mirror the holdings of the model but may account for client-specific factors such as income requirements, tax-related considerations and reasonable investment requests or restrictions specified by the client. A particular client account’s holdings and weightings may also deviate from the model as a result of the composition of the client account and cash available to purchase new positions, and market forces which impact whether specific securities will be purchased, sold, or held for client accounts from time to time.

Investment Horizon and Minimization of Taxes
We compare all portfolio holdings and prospective purchases to the anticipated target return over a three-year period—our notional anticipated minimum hold period for most investments. Although our core focus is on strategies to achieve long-term capital appreciation, where feasible we also endeavor to manage portfolios with a view to tax efficiency for Canadian and U.S. clients.

Asset Allocation and Short Selling Strategies
To cope with market risk, we can rebalance our portfolios where our market analysis indicates it is warranted. For Long/Short accounts, when our outlook for the market or a particular sector is negative, we can modify the portfolios by reducing our longs and/or increasing short positions and/or raising cash.

Options Strategies
We may use options strategies for hedging or investment purposes to the extent such strategies are appropriate and permitted for a client’s account. We can use options to invest indirectly in securities or financial markets, gain exposure to foreign currencies and provide downside protection to the portfolio where we anticipate a bear market or changes to exchange rates. For example, we can sell put options to earn premiums to lower effective purchase prices (at a strike price where we would want to purchase a security in any event) or sell call options to earn premiums to increase effective selling prices (at a strike price where we would want to sell or short sell a security in any event). We may also use options to initiate synthetic long or short positions with a view to maximizing risk-adjusted portfolio returns. We may apply the SVA™ methodology (described below) to these strategies by using put or call options with strike prices that are at or near floors or ceilings identified by SVA™.

Use of Leverage
Our managed accounts may use margin judiciously from time to time for clients who agree, where we are fully invested but wish to invest in additional attractive opportunities and/or further diversify. Margin involves borrowing funds against the assets of the account, a strategy which is often compelling from a tax point of view, since margin interest is tax deductible against earned or ordinary income and the potential capital gains are taxed at more favourable rates than dividend and interest income. Leverage increases both the possibilities for profit and the risk of loss for the account.