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Mawer New Canada Fund

The past year was very good for the Mawer New Canada fund, which gained a healthy 23.5% despite falling markets. The fund performed much better than the Nesbitt-Burns Canadian Small-Cap (NBSC) index which fell 0.9% during the same period. Over three years the Mawer New Canada fund has gained an average of 19.9% annually, while the NBSC index only added 3.2%.

Managed by Martin Ferguson since 1998, the fund's $75 Million in assets are invested mainly in shares of smaller Canadian companies with less than $500 Million in market capitalization. The fund follows a growth at a reasonable price (GARP) style and has a value bias. The focus is on selecting money-making companies that are undervalued, and are in the right part of their business cycle. For these small companies, additional emphasis is placed on management's ability and wealth creation track-record. Unless a company's fundamentals change for the worse, the fund aims to hold its stocks for several years.

Reflecting the added risk associated with small-caps, the fund aims to hold between fifty and sixty stocks, which is about twice the number in Mawer's Canadian Equity fund. No single stock may make up more than 5% of the portfolio, and the representation of any given sector is limited to 20%. The fund's low volatility is a testament to the effectiveness of Mawer's risk-management approach.

The fund's portfolio is inexpensive relative to the S&P/TSX Canadian Small Cap index with a dividend yield of 1.6% (twice that of the index) and a 6.5% earnings yield (over seven times that of the index). Although, it's price-to-book ratio of 1.8 is lower than the index's median of 1.9, the fund's price-to-book ratio is on the high side from a strict value perspective. Nonetheless, the fund's portfolio is well positioned.

At the end of the year the fund held fifty-one stocks, of which all but three were small-cap stocks. The fund also held 5% of its assets in cash. The top three sectors were industrials (33%), energy (20%), and consumer discretionary (13%). These sector allocations have not drifted significantly over the recent months. Nearly 10% of the fund's assets were held in income trusts, most of which were purchased during the first half of 2002. The fund's top three holdings were BW Technologies, Winpak, and CHC Helicopter. Recent big moves included the sale of Slater Steel and Wittke, as well as significant increases in the fund's positions in Exco Technologies and the Contrans Corporation Trust.

Small cap stocks have outperformed the broader equity markets over the past two years and Mr. Ferguson expects them to continue to outperform in 2003. Mind you, the gains are expected to be smaller, because small-cap stocks are no longer as cheap as they were two years ago.

As with all Mawer funds, the New Canada fund can be purchased through dealers or brokers with a $5,000 minimum initial investment. However, buying directly from Mawer requires a minimum of $25,000 for residents of Alberta and Saskatchewan, and $100,000 for those in British Columbia, Manitoba, and Ontario. Residents of other provinces have no option but to go through a dealer.

Over the long term, the Mawer New Canada fund has demonstrated a consistent ability to significantly outperform and is a bargain with a low MER of 1.6%. Because of the greater risk involved with small-cap stocks, this fund should only make up a portion of a well-balanced portfolio. Mawer New Canada should be considered by more aggressive frugal investors.

FF: Q4 2002

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