Q: What is your investment philosophy?

A: Our fund focuses almost exclusively on buying Canadian companies, income trusts and equities, having a minimum $500 million market capitalization. Our philosophy is pegged on the belief that stocks disliked by the market are likely to only worsen with time. We therefore just believe in share price and buy only the best performing equities in the country, ones that have shown positive price momentum.

We also believe in owning companies that provide some social benefit to the world. Consequently, we will not buy alcohol, tobacco and gambling stocks. Otherwise, we are open to investing in any company, sector or industry.

Q: What is your investment strategy?

A: Being a price momentum driven fund, our stock selections are strictly based on the chart, and the price momentum of the stock in the last two years, on a time weighted basis over that period. Therefore, even if sometimes they may have got hammered due to volatility, overall they should have performed well and continued to do so over time.

Again, as we do not focus on individual holdings or companies, we often augment our returns by investing in a sector or area that we believe, we know better than everybody else. For example, we believe we know the exchange sector, namely stock and commodities exchanges including option exchanges, probably better than anyone else. Consequently, we own big holdings of private and public stock exchanges including a few foreign exchanges like the Hong Kong and London Stock Exchanges. Otherwise, we have been exclusively, about 97.1%, invested in the Canadian market.

We look at each stock’s price chart individually. In the case of sectors, we cap the weighting at 2x the index weight, or 50% of the total portfolio, whichever is greater. Therefore, if a sector weighting in the index is 30% we will cap the sector at 50 %. We believe in sector diversity in the portfolio. Consequently, if a sector turns, we will not get completely hammered.

Thus, we let the market dictate our stock picks and do not fight the trend. If that trend starts to change, we change with it. More importantly, what we want to avoid in this fund, is the risk of long-term bear-market participation; hoping things will turn around. Our model therefore, will naturally seek out those stocks that are doing well no matter how obscure.

Q: What is your strategy in a situation where a stock turns and falls steeply inducing you to sell, but later regains the momentum and accelerates considerably?

A: If it involves a single stock it is immaterial because it occupies only 1% or 2% of the total portfolio. Again, it is not likely that a whole sector will turn over at once.

In times of change and transition, there will be a greater frictional cost to this fund than there would be with other funds because, as stocks or sectors roll over, we’re going to be selling the ones that are going down. However, in case we feel there is a permanent change for the better in that stock or sector, we will not hesitate to buy it back again even at a higher price.

Q: In your strategy, do you pay attention to valuations like price-to-earnings ratio that sometimes, in a normal cycle, become very expensive?

A: In our model, we do not bet on a sector, company or management. We also do not bet on whether earnings multiples are justified or unjustified, or even whether the earnings that the managements produce are accurate.

We believe and care about only the stock price. Even if we get hammered in the short term, this fund thrives on long-term trends and a consistent bull market. Our model is designed to help us capitalize on a good market, and also protect people’s capital in a bad market. Hence, in a market that goes up 10%, if the fund only goes up 6% or 8% that is fine. But in a market that goes up 20% or 30% we hope to go up 40% or 50% and that is how we augment our returns. However, if the market goes down 10%, and if we’re able to hold the value of people’s investments during that period, that’s what this model is built to do.

Q: Can you give some historical examples of holdings that illustrate your investment model and strategy?

A: Research In Motion. This was one of our original positions when we resurrected the fund in 2004. The company’s Blackberry had been hailed as one of the great Canadian success stories until Research In Motion got involved in a lawsuit that became a serious issue, and at one point it looked like the United States might cut off the service. The stock began losing its price momentum, which was when we sold it. The stock continued to fall steeply, settled at a much lower price and then again rebounded.

Subsequently, we ended up buying back the stock, this time at a higher price than what we sold it, raising questions about the rationale behind our action. However, people forget the fact that when we sold RIM, we would have bought other stocks with positive price momentum with the sale proceeds. Moreover, we were buying back RIM only after ascertaining that the stock was climbing and would continue to do so. This is an example of how we are only interested in buying and owning stocks that are upward bound.

Sometimes we select stocks that are smaller than our $500 million market cap criterion, but they are in a minority. One such company is Photochannel Networks that trades on the Toronto Stock Exchange. It provides electronic plumbing that allows stores like Wal-Mart and Costco to develop their pictures. We originally bought it around $1.25 and it’s currently trading at about $4. The stock has continued its excellent performance so we have continued to own it although it is not a large holding.

Besides market cap, another exception to our basic model that we sometimes make is the length of time the company is listed. We originally bought the Toronto Stock Exchange shortly after it became a public company, because we just felt it was going to keep climbing and it has done so. Initially, it did not meet our model criterion of being publicly listed for two years since we look for a 2-year price history. However, the advantage about exchanges is that, however well a stock market does, the exchange will do even better because of leverage to the market. Therefore, we buy exchanges as a way to leverage ourselves to the performance of the market.

Agriculture is a sector that lately, has shown a great deal of momentum. Agrium, and Sino-Forest have been two of our best performers in this sector. Sino-Forest is a lumber company based in China that trades on the Toronto Stock Exchange.