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October 2008 Newsletter

October 1st, 2008

On September 22nd, Van Arbor Asset Management proudly announced that ZLC Private Investment Management, a division of ZLC Financial Group (www.zlc.net), acquired a 70% interest in Van Arbor.

Building on our strong alliance established last year, Van Arbor and ZLC’s interests are now aligned with a commitment to provide quality investment fund solutions to shareholders, clients, advisors and institutions. Combining our strengths will allow Van Arbor to expand its potential across Canada as a premier fund management firm.

With the markets around the world in turmoil, September was a challenging month for equity money managers. Although losses were suffered, which we are never pleased with, the Van Arbor Funds relative to the performance of their respective markets can be seen in the following table:

MARKETS AT A GLANCE: QUARTERLY UPDATE

The winds of change are blowing and uncertainty reigns supreme. Elections, economic uncertainty and the acceleration of the credit crisis all weighed heavily on markets as equities & commodities fell sharply throughout the World. Canada, one of the last bastions of prosperity, was not immune as fear once again temporarily trumped fundamentals. It is true that most global economies are slowing and markets have been pricing the economic weakness that lies ahead; however, it is also true that there is opportunity created as forward looking markets usually recover 6-9 months ahead of any recessionary/slowdown bottom. Given that the strongest returns, from our investing style, usually come early in the recovery phase, we will be focusing during the next few months in taking advantage of new opportunities created. Overall, we are encouraged with our relative performance as our disciplined focus of holding quality value stocks coupled with the importance we put on capital preservation has helped us avoid many of the pitfalls of chasing growth stocks. Our defensive stance has positioned us to capitalize on adding great value companies as they become more reasonably priced. We remain diligent in focusing on quality companies that offer good earnings visibility, are less cyclical and offer stable returns relative to the TSX Index. At the same time we believe that there will be great opportunity for upside potential once fundamentals trump fear.

Contrary to popular belief, the US remains one of the better places to invest in the current market environment. The selection and diversity of large, safe and stable earning companies has offered superior opportunity for growth in a weak economic environment. One of the reasons that the US Fund and our new World Fund have fared better than the markets as of late has been the ability to diversify holdings appropriately as well as gain from the rebound in the US dollar. It may be surprising to think that the US dollar has continued to perform so well; however, given that the US led the global slowdown, it is likely to recover before Europe, Canada and Asia. Interest rate cuts have already been priced into the US dollar, while Canada and Europe are still cutting or haven’t even started to cut interest rates yet, which will help the US dollar perform relatively well. Economically, we are seeing growth slowing down around the world, which may not bode well for commodities and growth style investing, but should favour value style of investing.

CANADIAN ADVANTAGE FUND

With the Canadian Fund falling 6.1% last month, relative to the S&P; TSX Index’s 14.5% drop, we can only highlight our 8.4% outperformance for the month and 11.5% for the quarter versus the market. The positive relative performance can be attributed to our disciplined defensive positioning, a bias towards value over high price multiple growth stocks and our patience in taking profits and building into new positions. September in general was one to forget with the previous market leaders from the energy, material and technology sectors falling around 20% for the month, due mostly to expectations of slowing global demand growth. The Canadian market took a big step forward in pricing in some of the risks that we have been anticipating and is beginning to move a lot of company’s stock prices closer to reasonable levels and higher expected returns once the markets stabilize. Not all was down last month as a few of our gems, like Alimentation Couche Tard, rose 7.6% as their earnings benefit from declining oil prices and a stronger US dollar. Going forward we are somewhat defensively positioned, expecting more short term volatility, but we are also moving new opportunities into the portfolio as they present themselves in the current fearful market.

WORLD ADVANTAGE FUND

We would like to take this opportunity to introduce our newest fund, the Van Arbor World Advantage Fund. Initially incubated in October 2007, the World Fund gained Fund status as of June 1st, 2008. The primary motivation in starting the Fund was to combine our success in the Canadian, US and Euro Fund into one fund that can seek the best opportunities throughout the World. The Fund is focused on large cap global companies that trade throughout the developed world including the US, Canada, Europe and Asia (Japan, Hong Kong, Australia, New Zealand and Singapore). Having the flexibility to hold companies and currencies where we think the best opportunities are has proven very successful at maximizing returns while at the same time being able to create a much more diversified portfolio of stocks and currencies. The Fund, priced in Canadian Dollars, has been one of our best performers as of late being down 2.6% since June 1st compared to the 17% fall in the MSCI World Index (in Canadian Dollars). We believe that the World Fund enables investors to tap into the best companies in the World, while also having exposure to foreign currencies as the Canadian Dollar seems to be coming off its multi decade high.

US ADVANTAGE FUND

Once again the US Fund performed well in a tough market, down 3.2% as the S&P; 500 Index dropped 9.1% in September. When you factor in the 12.5% gain in the US dollar for the year, the US Fund is actually up in Canadian dollar terms by 6.2% in 2008 versus the negative 10.6% return of the S&P; 500 Index (in Canadian Dollars). The Fund has found much solace in companies like Wal-Mart, Altria and Proctor & Gamble as their stable earnings stream and consistent returns are being rewarded in the current economic environment. As for the US economy, it remains in a state of flux as the credit crisis puts pressure on the economy and cyclical companies, but it should be noted that some company’s earnings are benefiting from falling input costs as commodity prices ease.

EURO ADVANTAGE FUND

Taken into context, the 8.2% fall in the Euro Fund for the month fared much better than the 14.6% drop in the S&P; Euro Index. Year to date the fund now sits 13.2% higher than the market, in one of the toughest years in the Euro Zone market. Faced with somewhat high inflation and a Central Bank reluctant to cut interest rates, the Euro Zone has underperformed other World Markets. Financial and industrial companies have been weighing heavily on the Euro market, but we have found decent performance from our overweight positions in the health care and consumer staple sectors.

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Van Arbor Asset Management is an Asset Management company dedicated to creating wealth using a disciplined, proprietary investment strategy with an emphasis on preserving capital while generating superior long-term returns.

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