October Newsletter

ECONOMIC AND CAPITAL MARKETS REVIEW

The global economy continued to improve throughout the third quarter supported by ongoing government stimulus and low interest rates. However, the economic recovery has not been broad -based and future growth is forecast to be moderate at best. The consensus is looking for +2.4% real GDP growth in the U.S.A. for 2010, and 3.1% for global growth, though this could be optimistic. Only Asia at +8.0% is displaying anything close to robust growth. With approximately 70% of developed nations’ GDP represented by consumption, households’ ability to spend is critically important. The strength and duration of the recovery will be largely dependent on consumer spending, and significant risks do remain in the form of persistent high unemployment and a soft U.S. housing market. In addition, while Government deficits continue to spiral higher as consumer debt is replaced by government debt, all this stimulus must eventually be withdrawn, representing an additional challenge for the markets. If policymakers are too slow to take action, inflation is likely to occur resulting in another boom/bust scenario. If they move too fast, growth could stagnate before it achieves sufficient momentum. The rally in equities the past seven months has been the strongest and most impressive since the 1930s. The TSX, up 5.7% in September, finished the quarter up almost 50% since its low in mid-March 2009. With the Dow fast approaching the 10,000 mark for the first time in over a year and the TSX 11,500, the market is now looking for good reasons to push higher. Moves of this magnitude over such a short period are rare and therefore we believe the risk of a near-term correction is significant. With growing concern that the markets have risen too far too fast, earnings and valuations are going to play an increasingly important role going forward. At present equities are still discounting earnings and valuations well below normalized levels, suggesting that prospective long-term returns for equities from current valuations are still attractive.

PORTFOLIO REVIEW

Throughout the quarter we maintained our cautiously optimistic outlook. Our primary investment themes remain investment grade and high yield corporate bonds, energy, precious metals, agriculture, infrastructure, industrials, telecoms, utilities and materials. We deployed a significant amount of cash while maintaining a core position in the Picton Mahoney Market Neutral Fund. New additions to the portfolio include Claymore Silver Bullion Trust, Research In Motion, Shoppers Drug Mart, Crescent Point Energy, and Marrett Investment Grade Bond Fund.

OUTLOOK AND STRATEGY

We continue to believe that the best way to navigate through the equity market during these still uncertain times is with active stock picking and by remaining focused on stocks that pay a sustainable dividend. Dividends make up a sizeable portion of total return in these environments. Our portfolios remain heavily weighted towards these types of investments yet are liquid enough to take advantage of opportunities as they arise.

Going forward our focus will increasingly be on the greater economic revival out of higher savings rate counties in Asia and emerging markets. Note, the emerging markets generate nearly 45% of world GDP, yet they represent only about one-tenth of global stock market capitalization. Clearly this is likely to change and to capitalize on this opportunity we are looking to gain exposure to markets such as China, India and Brazil through the use of Exchange Traded Funds and Canadian companies with exposure to continued global growth.

Lastly, we expect short-term interest rates to remain near their historic lows in both Canada and the U.S. until economic growth achieves self-sustaining momentum.

We remain biased towards C$ denominated assets and expect the US$ to continue its weakness versus the C$ throughout the remainder of 2009 and into the first half 2010. A move through parity before calendar year end would not surprise. We are also looking to increase diversification and lower market risk by taking advantage of the strong C$, now up 18% y-t-d vis-à-vis the US$. This will be achieved by scaling into select US$ denominated securities that gave us reach into industries or sectors that are not well represented in Canada.