Quarterly Newsletter

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2004 Q2 Newsletter
June 30, 2004

Markets delivered a somewhat negative and mixed performance in the second quarter of 2004. For the first half of 2004, the Toronto Stock Exchange Index rose 3.9%, retreating slightly from its 4.4% gain in Q1. The S&P 500 in the U.S. rose 2.6% for the year to date. The Dow Jones Industrial Index regained most of the 3.9% it lost in Q1 to close Q2 in positive territory.

For equity markets, Q2 has been volatile and difficult. Equity markets have reacted positively to job creation in the U.S. but negatively to very high oil and gas prices. The early signs of renewed inflation and the likely consequence of higher interest rates also caused weakness in markets.

Data Table

The prospects for Q3 remain largely positive. So long as the pace of job creation remains strong, there is a good prospect for better equity returns.

We have continued to actively manage portfolios to manage both economic circumstances and specific company developments. Six of our top 10 holdings gained in Q2.

Top 10 Holdings

Forestry

We continued to add to our forestry investments in companies such as Nexfor, Canfor, Cascades, and others. Nexfor, our largest forestry holding, is splitting into two companies. We believe this will benefit shareholders over the next several quarters. The split may also lead to a takeover of one or both of the new companies at a premium. Lumber, pulp and wood product prices remained strong in Q2.

New Additions

After meeting with the management of Algoma Steel, we have added holdings of this turnaround situation. The management team at Algoma has leaded the companies through a major efficiency drive and restructuring. We believe excellent returns will result for patient shareholders.
We also participated in new issues of Acclaim Energy and PBB Logistics, two trusts with growth potential. Through Q2 we added to positions in several other business trusts including Hardwood Distribution, Osprey Media, Wellco, and Badger Daylighting.

Trains and Planes

One difficult decision taken in Q2 was to exit our large position in Bombardier. Although the company has made some progress, the Q1 results were very negative. It is likely to be several years before Bombardier regains its investor following. We decided to take our losses and reinvest in companies with better medium term prospects.

Income Trusts

The restrictions imposed by the 2004 Federal Budget drew criticism from pension funds and the trust sector. Shortly before the 2004 election call, Finance Minister, Ralph Goodale, announced the abandonment of the restrictions. As well legislation in both Ontario and Alberta will eliminate the unlimited liability aspect of trusts. These developments are positive for our portfolios.

Conclusions

As noted in our April newsletter, Canada’s economic prospects are excellent so long as we can slow the rise of the Canadian dollar against the currencies of our competitors. The recent rise of the Canadian dollar above 75 cents U.S., while a benefit to Canadians’ visiting the United States, will slow our economy. Selecting companies with an ability to outperform in the current and prospective economic circumstance remains our goal.

Sincerely,

Michael Decter
President and CEO