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Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
Q4/5 Saxon High Income
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Q3/4 Sceptre Equity Growth
Q3/4 Saxon World Growth
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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







Saxon World Growth

For the past fifteen years the Saxon World Growth fund has yielded average annual returns of 9.9%, ranking in the top-ten global equity funds for that period. It thus outperformed both its peer group and the MSCI World index (expressed in Canadian dollars) which yielded, respectively, 6.6% and 7.0% over the same time period. Only during the past year has the fund been lagging the index. For the twelve months ended September 30th the fund gained 8.8%, trailing the index's 10.1% return. The fund's recent underperformance is likely the combined result of the lacklustre performance of American markets relative to Europe, the rising Canadian dollar, and the fund's continued large cash position.

The fund has been managed since its inception by Bob Tattersall, who also manages the Saxon Small-Cap fund. Well known for his successful value approach to small-cap investing, Mr. Tattersall brings the same approach to the World Growth fund. Small- and mid-cap stocks are selected using a bottom-up approach which looks for good companies with strong balance sheets and solid management that are undervalued by the market. Preferred indicators of value include price-to-book, price-to-sales and price-to- R&D ratios; Mr. Tattersall finds the latter particularly useful for emerging companies. He also places great emphasis on company visits, which serve to further confirm a company's outlook.

In keeping with his bottom-up approach, Mr. Tattersall doesn't set specific geographic or currency exposures. The fund's geographic representation is an outcome of the stock selection process, not an input. The only restriction is that chosen stocks should trade on the exchanges of developed countries. With foreign stocks comes currency risk, which Mr. Tattersall considers to be an integral part of global investing. He does not engage in any sort of currency hedging, preferring instead to devote his time to the search for undervalued stocks.

Generally, once selected, a stock stays in the portfolio for three to five years as attested to by the fund's 22% five year average turnover. A stock is sold when it reaches a previously established target price or if there is an unforeseen significant deterioration of the company's fundamentals that makes the stock no longer suitable for the fund.

Taken in aggregate the portfolio represents good value based on four of five indicators. It sports an attractive 1.8% dividend yield and currently sells for just about book value and well below sales. However, the fund's low earnings yield of 1.4% bears further examination. It turns out that the fund currently gets clobbered on earnings by a handful of stocks with large proportional losses. Excluding the five stocks with losses greater than 50% of the share price the earnings yield climbs to a more pleasing 6.1%, which translates into a priceto- earnings ratio of about 16.

At the end of the third quarter the fund held 73 stocks. The top three countries represented in the portfolio were the United States, Europe, and the United Kingdom. The top three stocks were Marathon Oil, RPM International, and First American, which are all US-based. The fund also held a large 14% cash position, down from 20% at the end of June. The drop in cash is the result of reduced inflows to the fund as well as increased buying activity. The fund sold five stocks during the quarter, including Veritas DGC and Volt Information Sciences which both reached their targets. Six new positions were added including DSM NV, Argonaut Group, and Florida East Coast Industries. The fund also took advantage of sagging markets to add to existing positions, notably increasing its stake in Psion PLC by a factor of 180.

Asked to name his best pick of the last few years, Mr. Tattersall points to Ditech Communications which he purchased at below collateral value and near book value following the tech bubble collapse. The company went "back to basics" and the stock appreciated by a factor of three before being sold for a tidy profit in late 2003. On the other hand, a position in Royal Doulton gets tagged as the worst pick. The stock was purchased at a discount to book value on the assumption that management would either turn the company around or sell it to one of its competitors for the value of the brand name. Neither scenario came to pass and the stock was finally sold at a 90% loss.

The Saxon World Growth fund offers the benefits of geographical diversification for a reasonable 1.87% MER. It is available either directly from Saxon or through dealers and brokers everywhere in Canada for a $5,000 minimum investment.

In the short term, with a large U.S. exposure, increasing oil prices, and a rising Canadian dollar, the Saxon World Growth fund may be in for a period of underperformance. Nevertheless, with its impressive track record and low fees the fund is worthy of consideration for the foreign equity component of frugal investors' portfolios.

FF: Q3 2004

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