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McLean Budden American Equity

Over the past fifteen years the Mclean Budden American Equity fund has gained an average of 11.7% each year, beating the S&P 500 Total Return index (in Canadian dollars) by 0.5% annually. The fund was fortunate to have sold many of its technology stocks in early 2000, as well as Enron in early 2001. It thus avoided much of the initial market downturn but was unable to avoid the general decline that followed in 2002. Since then the fund has performed well compared to the index dropping an average of 4.9% annually in the last three years to the index's 6.3% average decline. The loss is largely the result of the decline in the value of the American dollar, which dropped an average of 8.6% annually against the Canadian dollar over the past three years.

The fund is managed by a team of five portfolio managers, including Mr. Bruce Murray, and focuses on shares of large and medium-sized U.S. companies with a market capitalization of at least $5 billion. Stocks are selected using an inhouse bottom-up approach that emphasizes a solid financial position, good business prospects, and strong return-on-equity. The management team also spends a great deal of time trying to understand a company's business before buying its stock. According to Mr. Murray the fund's overall style is largely driven by the stock selection process (not the other way around) and can vary between value and growth. In recent years it has been in the value camp but the fund has recently been drifting back towards conservative growth.

To ensure adequate diversification the fund will generally not be overweight in any single stock (with respect to the S&P 500 index) by more than 5%. Stocks that are not members of the index are restricted to a 5% maximum weight.

At the end of the first quarter, the fund was marginally more expensive than the S&P 500 index. Taken in aggregate the fund's portfolio had an earnings yield of 4.7% (or a P/E ratio of 21.2) and a dividend yield of 1.7%. In comparison the index had an earnings yield of 5.0% and a 2.0% dividend yield according to Barra.com. On a price-to-book-value basis the fund's 2.7 was marginally more attractive than the index's 2.8. Overall the fund's characteristics are consistent with a blended growth style.

At the end of the first quarter the fund held fifty stocks and a 1.3% cash position. The top three sectors represented in the fund were consumer products, industrial products, and financial services. The fund's top three stocks were Citigroup, Pfizer, and Fannie Mae. Illustrating its more active management style, the fund sold eleven stocks and purchased fifteen new companies during 2004. During the first three months of 2005 the fund had already sold four stocks, including Allstate and Bank of America, and added three new names including AIG. However, despite a high level of recent activity, the fund's five-year average turnover remains reasonable at 52%.

Mr. Murray points to the fund's oil company holdings, such as Apache and Valero, as examples of the fund's good picks. These stocks have performed handsomely as the price of petroleum has increased. Tyco Industries also gets a favourable nod. The fund purchased Tyco two years ago after it determined that the company's problems did not extend beyond the boardroom. On the other hand, Superior Industries International is mentioned as a disappointment where a deterioration in management has undermined a once solid company. The fund exited its position in Superior during the first quarter. In contrast, another disappointment, Viacom, remains in the portfolio. The fund's management team still likes the company and anticipates an improvement in Viacom's business in the near future.

Going forward the fund team believes that U.S. dollar weakness has all but come to an end - at least with respect to the Canadian dollar. Mr. Murray anticipates that the American markets will yield at least single-digit returns over the short to medium term.

With a MER of 1.25%, the McLean Budden American Equity fund offers exposure to U.S. stocks at a very modest price. Its minimum investment of $10,000 is a relatively low threshold and it is available in all provinces except Alberta. A low MER and a very attractive long-term record of index-beating performance makes the McLean Budden American Equity fund worthy of notice by those seeking U.S. exposure. The fund is best suited, as a U.S. equity component, in the portfolio of slightly more aggressive frugal investors.

FF: Q1 2005

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