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Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
Q4/5 Saxon High Income
Q3/5 Saxon Small Cap
Q3/5 BG Income
Q2/5 Trimark Canadian
Q2/5 MB Fixed Income
Q1/5 BG Canadian Intrinsic
Q1/5 MB American Equity
Q1/5 Mawer N.C. Closure
Q4/4 Mawer Cdn Equity
Q4/4 Mawer Balanced RSP
Q3/4 Sceptre Equity Growth
Q3/4 Saxon World Growth
Q2/4 BG Small Cap
Q2/4 Mawer U.S. Equity
Q1/4 PH&N Cdn Growth
Q1/4 Leith Wheeler US Eq
Q4/3 iShares S&P500
Q4/3 BG Canadian Equity
Q3/3 North Growth US Eq
Q3/3 HSBC Mortgage
Q2/3 MB Cdn Eq Growth
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







The Mawer Family of Funds

Mawer Investment Management is an independent privately-owned asset management company with about $2.4 billion under management. Its principal business is the management of pension funds and private client accounts. But the firm also offers a family of eight mutual funds available to retail investors.

At Mawer equities are generally managed following a growth-at-a-reasonable-price (GARP) style with a bit of a value bias. For very large taxable accounts Mawer offers a tax-effective overlay strategy (TEAM) that seeks to lock in capital losses, when available, to offset gains. While this overlay isn't applied directly in the management of the Mawer mutual funds, their managers do have access to the TEAM group's research and counsel. Of course Mawer's longterm outlook also helps to minimize taxable gains by keeping portfolio turnover low. As a result many of Mawer's funds have seen strong after-tax returns.

Mawer funds can be purchased through dealers or brokers with a $5000 minimum initial investment. However, when purchasing directly from Mawer the minimum rises to $25,000 for residents of Alberta and Saskatchewan, and to $100,000 for those in British Columbia, Manitoba, and Ontario. Residents of other provinces have no option but to go through a dealer or broker.

It should be noted that at press time Mawer announced that, due to strong recent inflows of cash, the Mawer New Canada Fund was closed to new investors.

Mawer Canadian Equity

The Mawer Canadian Equity fund has an impressive five year record, gaining an average of 11.6% annually since 1999. Such performance places it among the top twenty-five Canadian Equity funds over the past five years and puts it far ahead of the average Canadian Equity fund and the S&P/TSX Composite Total Return index which returned 5.3% and 3.6% respectively. Also the fund achieved this level of return with much less risk, as measured by volatility, than the index.

The fund has been managed by Jim Hall since 1999. Mr. Hall uses bottom-up analysis to select stocks for the fund using a GARP style with a value bias. He looks for well-managed wealthcreating companies, as measured by return-oncapital compared to cost-of-capital, that are not overpriced. He also has a preference for businesses that are able to maintain a clear competitive advantage in their industry. A stock's intrinsic value is estimated following an in-depth analysis of the company focussing on discounted cash flow and is also influenced by economic and market scenario analysis.

Having added a stock to the fund, Mr. Hall aims to keep it in the portfolio for as long as it continues to create wealth and its fundamentals remain sound. In practice this means a holding period of about four years as suggested by the fund's 25% average annual turnover. This is a testament to the effectiveness of Mr. Hall's selection process. When a stock ends up trading above its intrinsic value, the fund tends to slowly reduce its holdings rather than immediately exit.

A low turnover also helps to minimize any taxable capital gains realized by the fund. The fund will occasionally sell to lock in losses and offset gains but tax considerations are secondary. Nevertheless the fund has been 97% tax efficient during the last five years due in great measure to its low turnover. In December 2004 the fund declared a $0.17 capital gain per unit, the first time capital gains have been declared since 2000. According to Mr. Hall these gains are a reflection of strong portfolio performance coupled with inadequate opportunities to realize capital losses.

Based on traditional measures of value the fund's portfolio was not overly expensive and comparable to the market at year end. Its aggregate price-to-earnings ratio was about 18.2 and it had a price-to-sales ratio of 1.4. It's priceto- book of 2.3 was a bit on the high side. These figures are consistent with the fund's GARP style and Mr. Hall's claim that he doesn't pay much attention to traditional value yardsticks.

At the end of 2004 the fund held 30 stocks and a 4.0% cash position. Its top three sectors were Financial Services, Oil & Gas, and Materials which together accounted for about 68% of the fund's assets. The top three names in the portfolio were ScotiaBank, Encana, and CN Rail. The fourth quarter was an uncharacteristically active one for the fund, which sold its holdings of Agrium and Molson and added Loblaw and George Weston to the portfolio. During the second half of 2004 the fund saw its assets swell from $70 million to over $135 million and yet, overall, sector weights remained largely unchanged. For the entire year, the fund saw its exposure to the energy sector rise from 16% to 19% with a corresponding reduction in materials.

Asked to point to a successful pick Mr. Hall mentions Four Seasons which was identified as a candidate stock some time ago on the strength of the underlying business. However, the fund had to wait patiently for three years before the stock dropped into its fair value range during the post- September 11th tourism slump. The stock was purchased at about $40 and has since appreciated to around $95. On the other hand Quebecor World is cited as an example of a stock that has disappointed. The fund purchased the stock on the strength of its business position and its management but shortly thereafter much of the company's management team left, taking with them, in Mr. Hall's words, "the company's competitive advantage". The fund ultimately exited Quebecor World with only modest gains. AGF also gets mention as a disappointment due in part to the mutual fund industry's difficult past few years. Despite the stock being down from its purchase price Mr. Hall sees promise in recent management decisions and continues to hold the stock.

Mr. Hall's outlook for the coming year is muted. He expects stock markets to return high single digits at best, and feels that stock prices are currently in the high end of the fair valuation range. He goes on to suggest that this could spell trouble in the event of an unexpected interest rate shock, which he identifies as an important risk factor at this time.

With a very low 1.35% MER, a demonstrated commitment to the long-term, and a solid record of outpacing the market, the Mawer Canadian Equity fund deserves to be noticed by frugal investors. A low volatility makes this GARP fund suitable as a core holding even for more conservative equity investors.

FF: Q4 2004

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