The Year to December 31, 2007

Equity markets are volatile by nature and returns can vary significantly year to year. This can been seen quite readily by looking at the returns of equity mutual funds over time.

Listed below are Canadian equity mutual funds, and on the following page foreign equity mutual funds, that we support. We have shown simple annual returns for the past 5 years and compound annual returns for the past 3, 5 and 10 years as of Dec. 31st, 2007. Simple annual returns are just that: the return for the fund for that particular year. Compound annual returns show the geometric average annual return over a number of years, assuming that any returns over a specified time period were reinvested in more units of the fund.

Bold emphasis indicates that the fund performed above average for its category during that time period, as compared to its peer group. It is a separate matter to compare the fund performance to a relevant index, which is the benchmark active mutual fund managers attempt to outperform. We have included the similar statistics for Canadian bond funds as a base-line to compare the returns of different risk-profiles. We also have included benchmark iSHARES for the Canadian equity market, as well as the US and EAFE markets.

Mutual Funds North Canada 2007

Notice that of the Canadian funds listed, only the TSX 60 iShares, an exchange-traded fund achieved superior performance in every single simple period. Such is the nature of mutual fund investing and stock-picking…. the experts call this regression towards the mean (average). The tricky lesson is not to “punish” and bail out of your fund that falls off the pack in a particular year or two because the investment climate of the day favours a different investment outlook.

Exchange-Traded Funds (iShares) continue to develop as an alternative to actively-managed mutual funds. ETFs are passively managed funds that track various indices and have significantly lower annual management fees compared to mutual funds. Many track broad geographic indices (like the US, Europe, Japan and Emerging Markets) while others track industry sectors (like technology, health or banking,) or small, medium or large companies.

Unlike mutual funds, we are better able to break down the dollar value of money invested in broad-index ETFs into the various industrial sectors and include them in your sector analysis along with your direct stock sector holdings. This provides us with more insight into the risk exposure of portfolios to the various industrial sectors and allows us to manage your sectoral industrial diversification. Also, we include both foreign ETFs and mutual funds in our international geographic analysis of portfolios. This allows us to manage your international diversification.

Recently, we have been adding new iShares to portfolios, including S&P Global Industrial iShares (EXI) to provide for exposure to global infrastructure companies, MSCI Eastern European Fund (RNE) for exposure in emerging Eastern Europe, S&P Global 100 iShares (IOO) for broad exposure to the top 100 global multinationals and MSCI Taiwan (EWT) for Asian technology exposure.

A review of these foreign funds shows that none achieved superior “simple” performance in each of the last five years, and only Cundill Value, Fidelity European and Mawer World achieved superior “compound” performance throughout the last ten years.

We continue to assess individual mutual fund performance against the relevant ETF. We produce monthly reports off the internet which filter the superior-performing funds across various categories. These results are tracked across time to identify opportunities.

In the past year, some have been dropped from our list and others have been added. Our portfolios continue to evolve to a blend of direct stock holdings, rigidly-tested mutual funds and ETFs.