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Q2/2 Perigee Diversifund
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Q1/2 Mawer U.S. Equity







Perigee Diversifund

For four years after it was created the Perigee Diversifund made money in each calendar year and provided 10% annualized returns. However, since then the fund has been on a downward trend, losing 7% in 2001 and another 7.1% in the first six months of 2002. At the end of Q2, it's five year average annual return stood at a modest 3.0% which compares poorly with the average Canadian balanced fund which, according to globefund.com, gained 3.7%.

Described as "Perigee's most aggressive balanced fund", Diversifund is managed by a team of seven analysts, four of whom focus on stocks and three on bonds. The team selects the best industries based on economic conditions and then selects good stocks.

At the end of 2001 stocks made up 61% of the fund's portfolio. This reflected the team's positive outlook for equities in 2002. Despite dropping 6.4% in Q2, the fund's continues to emphasize equities over fixed income in the belief that stocks should perform well over the next year. This was certainly not the case during July, which saw the fund slip 3%.

The fund's stock portfolio is focused on large Canadian companies with a few smaller issues. Stock selection proceeds through a top-down analysis of industry sectors likely to yield above-average returns. With sector allocations thus set, "best-in-class" stocks are selected in each sector based on a variety of indicators, but with an aggressive growth touch. Additionally, exposure to the U.S. and global markets is achieved through positions which mirror those of Perigee's Batterymarch U.S. Equity and International Equity funds.

Looking at the fundamentals the fund's portfolio of Canadian stocks is somewhat expensive. Excluding Nortel, the fund has an earnings yield of 4.3% which, while above that of the S&P/TSX, (around 2.9%), still represents poor value. Including Nortel, the fund's earnings yield is a miserable -2.6%. On the dividend side, the fund yielded 1.9% at quarter end, essentially on par with the S&P/TSX Composite.

Stocks added during Q2 included Molson, Potash Corporation, Enbridge, TransCanada Pipelines, and Sobeys. Dropped were EnCana, Penn West Petroleum, Precision Drilling, Sierra Wireless, and Telus. Financial stocks represented 14.5% of the fund's total portfolio and fully 40% of the fund's Canadian stock component.

The fund's fixed-income strategy is to favour shorter maturities in anticipation of domestic interest rate increases. Nearly 70% of the fund's bond portfolio is invested in federal and provincial issues. The remaining 30% is invested in high-quality corporate issues, only two of which are rated below 'A' by the Dominion Bond Rating Service (DBRS). Also, only two issues had a negative outlook at quarter end according to DBRS. The portfolio currently favours short maturities (less than 5 years), which make up more than 50% of the holdings. The largest corporate positions are in TD Bank (4% of the fixed income portfolio) and Precision Drilling (3.8%), both of which have a mid-term maturity.

True to its aggressive strategy, Diversifund pursued growth in the technology sector during the late 90's. Its position in Nortel, in particular, reached 13% of the portfolio two years ago, having purchased 40% more in the spring of 2000. In hindsight this was obviously a bad move.

From the frugal point of view, Perigee Diversifund offers an aggressive balanced fund with a low turnover and low MER but it is only suitable for more aggressive investors.

FF: Q2 2002

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