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Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
Q4/5 Saxon High Income
Q3/5 Saxon Small Cap
Q3/5 BG Income
Q2/5 Trimark Canadian
Q2/5 MB Fixed Income
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Q1/5 Mawer N.C. Closure
Q4/4 Mawer Cdn Equity
Q4/4 Mawer Balanced RSP
Q3/4 Sceptre Equity Growth
Q3/4 Saxon World Growth
Q2/4 BG Small Cap
Q2/4 Mawer U.S. Equity
Q1/4 PH&N Cdn Growth
Q1/4 Leith Wheeler US Eq
Q4/3 iShares S&P500
Q4/3 BG Canadian Equity
Q3/3 North Growth US Eq
Q3/3 HSBC Mortgage
Q2/3 MB Cdn Eq Growth
Q2/3 Batterymarch US Eq
Q1/3 Saxon Stock
Q1/3 BG Balanced
Q4/2 Mawer New Canada
Q4/2 Perigee T-Plus
Q3/2 PH&N Dividend Inc
Q3/2 PH&N Bond
Q2/2 Leith Wheeler Cdn Eq
Q2/2 Perigee Diversifund
Q1/2 PH&N Cdn Equity
Q1/2 Mawer U.S. Equity

PH&N Canadian Growth

With equity markets surging in the second half of 2003, the Phillips, Hager & North (PH&N) Canadian Growth fund gained 19.7% for the year. For the first three months of 2004 the fund was up 3.6%, underperforming the S&P/TSX Composite Total Return index which returned 4.9%. Over the longer term the fund has yielded an average of 9.2% annually over ten years, outperforming the average Canadian equity fund by 1% annually and edging out the index, which posted an average annual return of 9% over the same period.

The fund is managed by Andrew MacDonald using what PH&N describes as a quality growth style. In practice, this amounts to a bottom-up growth-at-a-reasonable-price (GARP) approach, which means that the manager selects growth stocks that are not too expensive. For the Canadian Growth fund Mr. MacDonald places a particular focus on companies deemed to be of high quality. Measures of quality include a company's competitive position, its ability to maintain it, and a variety of quantitative measures such as free cash flow and earnings growth.

The fund invests primarily in the common stock of Canadian companies but also takes advantage of opportunities that can be found outside of the Canadian stock universe. It will invest in foreign stocks, but only up to the maximum allowed for RRSPeligible funds (currently 30%). No particular country allocations are targeted and the focus remains on quality growth companies. Although the fund reserves the right to use derivative instruments to hedge against currency fluctuations, it has been and continues to be the fund's general practice not to do so. Instead, the manager selects companies that would benefit from a depreciation of the local currency and thus offset exchange rate losses.

Once a stock is purchased for the fund, it remains in the portfolio for as long as it continues to be attractive relative to other buying opportunities. However, cyclical stocks are singled out for a more structured approach. Purchased early in their cycle, cyclical stocks are sold gradually when it becomes apparent that a cyclical peak has been reached. The fund's average annual turnover, which stands at 86%, is consistent with its more active strategy.

Considered in aggregate, the fund's portfolio is consistent with its growth-at-areasonable- price style. As of March 31st it sported a dividend yield of 1.6% and an earnings yield of 4.3%, which converts to a price-to-earnings ratio of 23. This compares favourably with the S&P/TSX Composite, which had a median earnings yield of 4%. On a price-to-book basis the portfolio was expensive with a ratio of 2.3, but its price-tosales ratio stood at a modest 1.1. On the whole, from a deep-value perspective, this is a moderately expensive portfolio.

During the first quarter, the fund reduced the number of stocks in its portfolio from 112 at the end of 2003 down to seventy. Of these seventy stocks, twenty-nine were foreignbased representing 25.4% of the fund's assets. In contrast, the fund had held seventy foreign companies at the end of 2003. The paring back during the first quarter was part of an effort to refocus the fund's foreign holdings, which now consist of companies and sectors in which the manager has the highest confidence.

Also during the first quarter, the fund moved to lock in profits in the materials sector trimming its positions in Teck Cominco and Alcan, and selling Shin-Etsu Chemical and Bemis Company. On the other hand the fund's health care portfolio was enhanced with the addition of Wyeth and Merck & Co, and a significant expansion of positions in Caremark Rx and Johnson & Johnson. At the end of the first quarter the fund's top three sectors were financials, energy, and information technology. It's top three stocks were Manulife Financial, Royal Bank, and TD Bank, which together accounted for 16.8% of the fund's assets. The fund also held 0.8% of its assets in cash.

Asked to comment on his best and worst picks, the manager cited the fund's purchase of Biovail in the $40 range as a poor move given the uncertainty that has since plagued that company. However, Mr. MacDonald now feels that the company is attractively valued in the low $20's and has been adding to the fund's existing position during the past quarter. In contrast, Mr. MacDonald points to the purchase of TSX Group in 2002, at the initial public offering, as an example of a stock that has exceeded expectations. The fund paid an average of $20 for TSX group, which currently trades at about $54.

Looking ahead, the manager believes that the bulk of the "easy" returns from stocks in the current bull market have now been realized. However, he remains optimistic that improving corporate earnings will continue to drive stock prices upward, albeit at a reduced pace. Though it will remain largely unchanged, Mr. MacDonald expects that the fund's stock selection will now put more emphasis on avoiding stocks that might disappoint, focusing on higher growth and higher profitability opportunities.

With a 1.21% management expense ratio, the PH&N Canadian Growth fund offers exposure to the capital gains potential of reasonably-valued growth stocks for a modest price. However, a relatively high minimum investment of $25,000 makes it accessible only to larger investors. The fund is appropriate for more aggressive investors seeking long-term capital gains at a belowaverage cost.

FF: Q1 2004



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