Canada Cool The TSX started the year well. Since February, however, the market has softened and has been essentially flat for the year. The energy sector has been perhaps the biggest laggard so far in 2017, but most other sectors, including technology and finance, have also been corrected over the past few months. Most of the economic news over the past six months has been positive, which is kind of ironic given the sideways performance of the stock market. Economic growth in Canada was recently revised upward by the IMF, unemployment is low and falling and the real estate market appears to be landing softly. So what’s the problem? The answer is rising interest rates. Rising interest rates are typically a mixed blessing for the market. Interest rates tend to go up when the economy and employment are strong. This is obviously good news. But central banks raise interest rates to stave off inflation. Thus rising interest rates are intended to slow the economy with the related affect being to reduce future earnings of companies that drive the stock market. Thus, in the short-term, good news (a strong economy) is canceled out by bad news (rising interest rates). In the first half of 2017, the Capital Ideas Fund rose 4.5% 1 , versus the market, which is up 0.7% 2 . Since inception, the Capital Ideas Fund has delivered an annual return of 20.1% 1 net of fees versus the TSX Composite Total Return Index, which has delivered an annual return of 6.1% 2 . We remain optimistic about the performance of both the fund and the Canadian stock market for the balance of 2017. VOLUME XXXX JULY 2017 INVESTMENT ISSUES • STRATEGIES • INSIGHTS FROM DONVILLE KENT

2 ROE REPORTER | DKAM Canada just made the cover of Rolling Stone Magazine… Everybody loves Canada! Canada is receiving a lot of good press these days. Of course, much of it is due to the relatively favorable comparisons between our photogenic and likable PM and the US President. Our Prime Minister enjoys broad popular support at home and Canadian values are seen by many people outside of Canada as… shall we say… nice? Canada is being hailed as a well-mannered nation and a great place to live. Indeed, hardly a day goes by in which some media or academic organisation doesn’t praise us. Besides the recent cover of Rolling Stone, US News and World Report ranks Canada as having the highest quality of life in the world and as being the second best country in the world overall (after Switzerland). The Sustainable Development Solutions Network ranks Canada as the sixth best country in the world in which to live. Even on the business front the news is fairly positive. Business Insider magazine ranks Canada as the 10th most attractive country in which to do business in. It seems that those in the know think Canada is a pretty cool place to live! Economically, Canada is also in a very sweet spot relative to other nations. Year to date, Canada is the fastest-growing country among the G7 nations, a number that is all the more staggering given the still depressed price of oil. Canada’s unemployment rate, at 6.5%, is average compared to the G7 but has been falling steadily since 2010. Canada is cool, but where are the risks? While Canada has been getting a lot of favorable press, many pundits and organisations have been critical of the levels of household debt and/or mortgage debt. The IMF most recently warned Canada about the risks to the economy if a housing market correction occurred and also urged the Canadian Government to do more to protect Canadians from the possible negative effects of substantial household and mortgage debt. The Government has actually been doing a lot over the past 3-5 years to cool the market. Canadian regulators have been instituting a variety of measures to restrict mortgage lending, and if and when a real estate correction occurs, it will be one that has been anticipated for years. My sense is that Canada’s major financial institutions are well prepared for such a correction and have positioned their balance sheets correctly.

3 ROE REPORTER | DKAM A few weeks ago the Bank of Canada began raising interest rates for the first time in seven years, which will take some steam out of the mortgage market. At the same time, core inflation in Canada and the rest of the G7 remains quite modest. For this reason, while interest rates are on the rise (and should be), it is unlikely they will soar from current levels. Figure 1. Canadian Policy Interest Rate Source: Bloomberg Besides rising interest rates, a related risk to Canada is the CAD vs USD exchange change rate. The CAD has appreciated quite sharply over the past few months, which should have some dampening effect on the Canadian economy in the coming year. If the Bank of Canada were to rapidly raise interest rates relative to the US, we should expect further strength in the CAD and therefore an offsetting effect on the Canadian economy as our exports become more expensive relative to those of our largest trading partner. Further strengthening of the Canadian dollar is a risk to the Canadian economy but further supports the view that interest rates are unlikely to shoot higher.

4 ROE REPORTER | DKAM Figure 2. CAD:USD Exchange Rate Source: Bloomberg Coming soon – New ideas from Jesse Gamble Jesse Gamble joined DKAM in 2011. Since then his work has been a critical and integral part of the portfolio management process at Donville Kent. Jesse is also an accomplished athlete. He played on the winning Canadian World Championship Lacrosse team in 2014 and has been a member of the Toronto Rock Lacrosse team for many years. Jesse is no slouch in the classroom either, with a business degree from Cornell University and an MBA from Canada’s Ivey School of Business. Gamble co-manages the DKAM Capital Ideas Fund, and, starting with the next edition of the ROE reporter, will be the newsletters co-author. Jesse looks at the world in interesting ways, and I look forward to sharing this forum with Jesse in the years ahead. Final thoughts Canada is cool. I like that. But pride comes before a fall. So let’s enjoy, as a nation, some of our recent acknowledgements while not getting too full of ourselves. I think our modesty as a nation, which sometimes has been referred to as our national insecurity, is actually a strength.

5 ROE REPORTER | DKAM As always, I wish once again to acknowledge the fine people who work at Donville Kent. Thank you Jordan, Ali, Jesse, Dominika, Chris, James, and Kathryn. Finally, to my investors, thank you for your ongoing support. All estimates, projections and calculations have been generated by DKAM. This does not constitute advice for personal investments but rather a breakdown of how Donville Kent approaches stock analysis. 1 Time weighted rates of return for Class A Series 1, net of all fees and expenses as of June 1 st , 2017. 2 S&P TSX Composite Total Return Index is the Net Total Return version of the S&P/TSX Composite Index. DISCLAIMER Readers are advised that the material herein should be used solely for informational purposes. Donville Kent Asset Management Inc. (DKAM) does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. Readers should always conduct their own research and due diligence and obtain professional advice before making any investment decision. DKAM will not be liable for any loss or damage caused by a reader's reliance on information obtained in any of our newsletters, presentations, special reports, email correspondence, or on our website. Our readers are solely responsible for their own investment decisions. The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in our newsletters, presentations or on our website should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions. Past performance does not guarantee future results. Unit value and investment returns will fluctuate and there is no assurance that a fund can maintain a specific net asset value. The fund is available to investors eligible to invest under a prospectus exemption, such as accredited investors. Prospective investors should rely solely on the Fund's offering documentation, which outlines the risk factors in making a decision to invest. The S&P/TSX Composite Total Return Index ("the index") is similar to the DKAM Capital Ideas Fund LP ("the fund") in that both include publicly traded Canadian equities of various market capitalizations across several industries, and reflect both movements in the stock prices as well as reinvestment of dividend income. However, there are several differences between the fund and the index, as the fund can invest both long and short, can utilize leverage, can take concentrated positions in single equities, and may invest in companies that have smaller market capitalizations then those that are included in the index. In addition, the index does not include any fees or expenses whereas the fund data presented is net of all fees and expenses. The source of the index data is Bloomberg. DKAM receives no compensation of any kind from any companies that are mentioned in our newsletters or on our website. Any opinions expressed are subject to change without notice. The DKAM Capital Ideas Fund, employees, writers, and other related parties may hold positions in the securities that are discussed in our newsletters, presentations or on our website.