Canada Playing Catch-Up DKAM’s previous newsletter, Canada Cool , focused on how this country is a world leader according to important metrics like quality of life and was personified by Justin Trudeau landing on the cover of Rolling Stone in August. However, our economic strength hasn’t translated into stock market gains…yet. As the title of the newsletter suggests, we will discuss why Canadian stocks are at the beginning of a catch-up phase. The main driver being that this is the first time since 2007 that all 46 economies (tracked by the OECD) will grow simultaneously. This is being referred to as “global synchronized reflation.” As a result, most stocks worldwide have been on a tear in 2017 (Fig. 1), but not in Canada. Using historical and projected growth and profitability metrics, we show that Canada hasn’t been fairly rewarded. Most importantly, this underperformance should reverse with a higher proportion of the benefits going to the type of stocks we want to own. For the first three quarters of 2017, the Capital Ideas Fund rose 2.96% 1 , versus the TSX Composite Total Return Index, which is up 4.45% 2 . Since inception, the Capital Ideas Fund has delivered an annual return of 19.30% 1 net of fees and expenses versus the TSX Composite Total Return Index, which has delivered an annual return of 6.35% 2 . Fig.1 Country Index Return YTD Hong Kong Hang Seng 25.2% Italy FTSE MIB 18.0% United States S&P 500 12.5% Germany DAX 11.7% France CAC 9.6% China Shanghai Comp 7.9% Japan Nikkei 225 6.5% United Kingdom FTSE 100 3.2% Canada S&P/TSX Comp 2.3% 2017 Stock Market Returns Source: Bloomberg as of Sept, 29, 2017 VOLUME XXXXI OCTOBER 2017 INVESTMENT ISSUES • STRATEGIES • INSIGHTS FROM DONVILLE KENT

2 ROE REPORTER | DKAM Goldilocks Not too hot, not too cold. Major economies across the board are currently experiencing "Goldilocks" moments with both above-trend growth and below- trend inflation. Above-trend growth leads to higher earnings while below-trend inflation leads to depressed interest rates. This type of stable environment gives business owners both the confidence and the ability to invest in their companies. More plainly, businesses are healthy, hiring, investing and utilizing cheap credit…all around the world. What is the result of this synchronized growth? Well, all three of the major U.S stock exchanges are at all-time highs, Japan’s Nikkei is at 20 year highs, Germany’s DAX is at all-time highs, London’s FTSE is at all-time highs, copper is at a 3 year high, aluminum is at a 4 year high, consumer sentiment is at a 13 year high, corporate credit spreads are at their tightest level in over 10 years, etc, etc, etc. The point is that the global economy is reflating and economic growth seems to be snowballing. So what about Canada? Using data produced by the International Monetary Fund (IMF) and focusing on the G7 economies, Canada is projected to have the highest GDP growth in 2017 (3.0%) but has produced the lowest stock market performance year to date. This isn’t a one-off event. Over the last 3 & 5 year periods, Canada has averaged close to the highest GDP growth while again producing the worst stock market returns over that time (Fig. 2). We view this disconnect as being unsustainable. What is more relevant is that Canada is projected to continue to have above average growth going forward. Fig. 2 G7 Economies Index 2017 2018 2013-2017 2015-2017 2018-2020 2017 ROE 2018 ROE 2017 YTD 3 Year Stock 5 Year Stock Japan NKY 1.5% 0.7% 1.2% 1.2% 0.6% 9.8% 9.9% 6.5% 24.8% 131.4% Germany DAX 2.0% 1.8% 1.6% 1.8% 1.6% 12.6% 11.9% 11.7% 35.2% 75.1% United States SPX 2.2% 2.3% 2.2% 2.2% 2.0% 16.4% 16.9% 12.0% 27.4% 74.4% France CAC 1.6% 1.8% 1.1% 1.3% 1.9% 9.3% 9.7% 9.6% 22.3% 55.2% Italy FTSE MIB 1.5% 1.1% 0.3% 1.1% 1.0% 9.1% 8.0% 18.0% 10.6% 46.2% United Kingdom UKX 1.7% 1.9% 2.1% 1.9% 1.6% 8.9% 9.3% 3.2% 10.9% 26.7% Canada SPTSX 3.0% 2.1% 2.1% 1.8% 1.8% 11.2% 11.2% 2.3% 4.0% 26.4% Average 1.9% 1.7% 1.5% 1.6% 1.5% 11.1% 11.0% 9.1% 19.3% 62.2% Gross Stock Market Returns Profitability Real GDP Growth Source: DKAM & IMF Estimates Canada's Lack of Return for Above Trend Growth & Profitability

3 ROE REPORTER | DKAM So why has the stock market underperformed? Firstly, Canada’s economy relies on metals, minerals and energy products. This dependence is well represented by their respective weights in the TSX Index (20% energy & 12% materials). As an asset class, these sectors historically trade in line with commodity prices (oil, gas, gold & silver) which have traded down to sideways since 2011. Meaning, on a relative basis, these industries drag our entire index lower over time. Secondly, and more timely, is the discount being applied to the Canadian market due to our elevated housing market and leveraged populace. Investors aren’t willing to invest in a country when they foresee a real-estate correction. Financials, which are inextricably tied to the housing market, are the largest constituent in the TSX Index at 35% of the total. Put more bluntly, we’re seeing the dominant industries in our economy casting a shadow over our stock market as a whole. This has led the TSX to historic relative lows versus the S&P 500 (Illustrated well by the graph below copied from RBC’s Quantitative Research). We believe in mean reversion and in turn we believe the large valuation gap between Canada and the US will narrow, especially for sectors being unfairly punished due to the dark clouds emanating from commodities and housing. Where to capitalize From time to time, these economic stereotypes associated with Canada are blindly and broadly applied across sectors in the index. In our opinion, if you’re willing and able to sift through the thousands of companies publicly

4 ROE REPORTER | DKAM listed in Canada, there continue to be pockets of opportunity. More specifically, technology companies represent roughly 3% of the index, but punch above their weight in both quality and growth. However, Canadian Tech has underperformed the U.S Tech sector by a wide margin which has expanded even further since June of this year (Fig. 3). Is this justified or fair? Not even close. *TSX & S&P 500 Information Technology Sector GICS Level 1 Indexes One might assume the discount is fair and warranted because a business’s health is tied to the health of its customers (remember Canadians are levered, and reliant on underperforming commodities). Now here’s where the magic happens…Canadian tech companies aren’t Canadian. Well their headquarters are in Canada and they’re publically listed in Canada, but they’re not tethered to the Canadian economy. In actuality, they more resemble American technology firms (Fig. 4) 3 , reinforcing why the underperformance is unwarranted. 95 100 105 110 115 120 125 130 Normalized Relative Performance Fig.3 Canadian Tech vs. U.S Tech US Tech Stocks Canadian Tech Stocks Fig. 4 Revenue by Geography US Canada Rest of World Avg. Sales Growth Canadian Technology Stocks 47.4% 9.0% 43.6% 14.6% U.S Technology Stocks 40.3% 5.0% 55.0% 14.2% Source: DKAM & Bloomberg Estimates

5 ROE REPORTER | DKAM Canadian tech companies don’t get the credit they deserve. When it comes to creating shareholder value, which in our minds is synonymous with a consistently high return on equity, we would put the top Canadian tech names up against the global leaders. *We chose to use technology as an example here but the same argument applies to a large proportion of Canadian consumer stocks and even some industrial stocks. We view this dislocation as a pendulum that will eventually swing back and value stocks on their fundamentals. Despite a stock’s daily, monthly or quarterly performance, we take comfort in the fact that the management of the companies we invest in will continue to create value for us, their shareholders. For illustrative purposes, suppose a stock we own is flat on the year but it has a 24% ROE. The way we see it is that the business is increasing (actually compounding) its intrinsic value by ~2% each month. As long as management continues this compounding process, Mr. Market will eventually realize the value being created – just like how gravity will inevitably sway the pendulum back to equilibrium. We feel well positioned entering the seasonally strongest part of the year to be able to benefit from this opportunity. Final Thoughts In order to make our investor communication more interactive, please feel free to reach out if you would like to discuss a financial topic or want us to cover something specific in a future newsletter. On this topic, we would highly recommend Ray Dalio’s new book Principles . As always, we wish once again to acknowledge the fine people who work at Donville Kent. Thank you to our team. Finally, to our investors, thank you for your ongoing support. J.P. Donville & Jesse Gamble info@donvillekent.com

6 ROE REPORTER | DKAM 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 September 29 th , 2017. 2 S&P TSX Composite Total Return Index is the Net Total Return version of the S&P/TSX Composite Index. 3 Technology calculations based on top 10 positions in the iShares US Technology ETF and iShares S&P/TSX Capped Information Technology Index ETF 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.