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Q1/2 PH&N Cdn Equity
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Leith Wheeler U.S. Equity

During 2003 the Leith Wheeler U.S. Equity fund gained 25.5%, comfortably outperforming the S&P500 Total Return index (expressed in Canadian dollars) which gained 20.5%. The fund outperformed during the market turmoil of the last three years, suffering an average annual loss of 1.4% while the index lost 5.4%, and the average U.S. equity fund lost an average of 6.4% annually.

Vancouver-based Leith Wheeler Investment Counsel has retained the services of Sprucegrove Investment Management of Toronto as sub-advisor and manager for the fund since September of 2001. Sprucegrove shares Leith Wheeler's value bias and uses a bottom-up approach to select high-quality American stocks that have fallen out of favour with other investors. To the extent that the firm looks for stocks that have been overlooked by others or that have been unjustly beaten down in price there is a contrarian flavour to the fund's style.

Having added a stock to its portfolio, the fund aims to hold it for the long term. However, the fund's turnover has been high at an average of 99% over the past five years. This figure is at odds with the fund's historically lower turnover levels. Excluding the years 2000 and 2001, which saw turnovers of over 100%, the fund's turnover has averaged about 70%. While on the high side for a fund with a long term view, such a turnover suggests that the fund typically keeps its stocks for a little less than two years.

We can get a sense of the fund's quantitative properties by assuming that it remained unchanged from December 31st, 2003 to March 31st, 2004. Under this assumption the fund would have had a comparatively low earnings yield of 1.3% at the end of the first quarter. The main contributor to this low figure is Visteon Corporation, which had an earnings yield of -100%. Excluding Visteon, the portfolio would have had an earnings yield of 3%. The good news is that Visteon, which the fund purchased in the second half of 2001, posted surprise positive earnings for the first time in seven quarters on April 22nd and at press time was trading around $11.40 with an earnings yield of -81%.

On other fronts, the fund's portfolio sported a 1.6% dividend yield at the end of March, which is essentially on par with the S&P 500 index. Its price-to-book ratio was a bit on the high side at 2.2, but this was still less than the index's 3.3. A positive note from a value perspective was the portfolio's priceto- sales ratio, which stood at a low 1.1. Overall the portfolio seems a little expensive, but isn't inconsistent with the fund's stated approach.

At the end of the first quarter, the fund held 50 stocks, up from 46 at the end of 2003. It also held a 2% cash position. The top three sectors represented in the portfolio were consumer discretionary, financials, and industrials, while the top three stocks were Markel Corporation, Merck & Company Inc, and the Class B shares of Warren Buffet's Berkshire Hathaway. These three stocks together made up 13% of the fund's assets. During the second half of 2003, the fund was moderately active, doubling its holdings of Teradyne and Merck, and selling Nautica Enterprises and National Semiconductor.

The Leith Wheeler U.S. Equity fund is available for a $50,000 minimum investment to investors in Ontario, Manitoba, Saskatchewan, Alberta, and British Columbia. Residents of British Columbia can purchase units directly from Leith Wheeler. Those in other provinces must make their purchases through dealers or brokers. It is noteworthy that Leith Wheeler pays no trailer fees or commissions to outside dealers for the distribution of its funds, which helps to keep costs down.

During the almost ten years since its inception, the Leith Wheeler U.S. Equity fund yielded average gains of 5.3% annually. Although these are far from being the most spectacular U.S. equity returns, the fund's near rock-bottom MER of 1.25%, and its more recent performance, makes it an interesting choice for frugal investors. However, given its higher than average volatility, it is best suited to more aggressive long-term investors who want exposure to the U.S. Market.

FF: Q1 2004

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