Rates, Risk & Return The first half of 2019 was eventful. Most notably the US Federal Reserve (the Fed) changed course and is now expected to ease monetary policy. The price of oil rebounded almost 30%, Venezuela entered a constitutional crisis, Theresa May resigned as the British Prime Minister and Trump continued to tariff but also negotiate with China. Throughout all of this, many of our stocks hit all-time highs. The Capital Ideas Fund is up 16.56% 1 year to date and our annualized return since inception now stands at 17.85% 1 versus 6.28% 2 for the S&P/TSX Total Return Index and 11.34% 3 for the S&P 500 Total Return Index. Figure 1. Source: Bloomberg and DKAM At the beginning of the year, in an effort to get in front of our investors more, we travelled across the country to present our story and discuss a variety of investment topics. We would like to use this newsletter to keep all of our investors informed and address the most common and timely topics of conversation we have been having. We always like to stress that at the heart of our business we are stock pickers who like to get into the nitty gritty of financial statements and business operations. That being said, the topics covered in this VOLUME XLVIII July 2019 INVESTMENT ISSUES • STRATEGIES • INSIGHTS FROM DONVILLE KENT

2 ROE REPORTER | DKAM newsletter are very timely and answer or clarify many important issues of which we feel our investors should be aware. Specifically, we want to address the three R’s which have been coming up the most: rates, risk, and return. The topic of interest rates is extremely fitting as the Federal Reserve is set to lower interest rates for the first time in over 10 years. We’ll discuss why this event can have a profound impact on investment decisions. The topic of risk is also appropriate because there seems to be a disconnect between how we view risk, especially in the context of the Capital Ideas Fund, and how some view it from the outside looking in. Finally, the topic of return is always a timely subject of discussion. In this case, we’ll review a few of our US holdings that we have added to the fund in recent months. At the time of this writing, the fund now holds 32% US equities and we expect this weighting to increase over time. Currently, the top 20 stocks in our stock tracker are 40% Canadian-listed and 60% US-listed. We think this is a good gauge of the direction the fund is shifting. It should be noted that, of those 20 companies, less than 5% of aggregate revenue is derived in Canada. In addition, we are far from being closet indexers and don’t resemble major indexes, Exchange Traded Funds (ETFs), or mutual funds. We own 0 of the 30 companies in the Dow Jones Index, 2 of the 60 companies in the S&P/TSX Composite Index, 3 of the 2,014 companies in the Russell 2000 Index, 5 of the 500 companies in the S&P 500, and only 6 of the 2,681 companies in the Nasdaq Composite Index. We own 21 stocks that are not part of any major indexes and we own no utilities, no major banks, no railroads, no insurance companies, and no Real Estate Investment Trusts (REITs). The fund is currently 115% long and 18% short for a net 97% position. As for sector exposure, the fund is roughly 34% technology, 27% consumer cyclical, 22% consumer non-cyclical, 7% financial, and 6% industrial 4 . Rates We spoke in the last ROE Reporter about inflation and our long-term outlook. We don’t want to belabour the topic too much but it is extremely relevant considering the Fed is set to lower interest rates for the first time in over 10 years. The Fed doesn’t see this move as a signal of weak economic growth but rather a strategic move to combat low inflation, or more precisely, to actively fend off deflation. Regardless of whether this is the right decision, interest rates are going lower. The most prominent risk in 2018 was the interest rate hiking cycle as the Fed tried to find equilibrium. Investors were unsure of how far they would go and stocks took it on the chin in Q4 2018. The opposite is currently happening as

3 ROE REPORTER | DKAM rates are heading lower and stock indexes are hitting all-time highs. This has prompted several questions about lower rates and the impact on investments. There are two main issues at play here. The first, more straight forward matter is that lower interest rates make businesses more profitable. The second more nuanced issue is the impact lower interest rates have on the relative value of one investment over another. At any point in time, there is a finite amount of investable capital that looks to find a suitable return and a finite number of possible investments. For instance, a pension fund is always trying to obtain a sufficient return in order to satisfy their pension obligations. For example, the Canadian Pension Plan uses a 3.55% net annual return (after fees and inflation) in their actuarial report. As you can imagine, as interest rates fall, bond yields fall (government debt currently has a negative yield in over 30 countries), and the menu of investments that generate a satisfactory return becomes smaller and smaller. The answer is to stretch on capital risk and/or liquidity risk to achieve return. Investors are stretching on the risk spectrum in fixed income to get a satisfactory yield. The same dynamic is occurring across other asset classes including real-estate and private equity. To get a handle on which way capital will most likely be flowing, we track the equity risk premium. The equity risk premium is a relative measure that aims to compare how expensive the stock market is versus how expensive the bond market is. The ratio does this by using the earnings yield of the stock market (inverse of the Price to Earnings Ratio) and dividing it by the yield on investment grade bonds, so higher numbers represent stocks offering more value than bonds (Figure 2). The chart illustrates, on a 25 year timeline, the relative basis that stocks appear to be more attractive than bonds. With interest rates set to decline even further at the end of July, stocks will only get more attractive. Figure 2. Source: Bloomberg

4 ROE REPORTER | DKAM Risk The term “volatility” gets thrown around a lot. There seems to be a common perception that equity hedge funds that aim to beat the market are inherently risky. There have been a few high-flying funds of the past, many of which relied on leverage, which may be the cause of this reputation. We would like to address this topic, where we think we lie on the risk spectrum, and our general approach to the matter. When most people refer to a fund’s volatility, they are referencing standard deviations of returns or Beta (i.e. how much a fund’s or stock’s returns vary from day to day or vary compared to an index). We appreciate that there are other metrics that aim to capture this balance between risk and return, or adjust for not treating upside volatility the same as downside volatility, but we still often encounter improper use of the calculation in general. Most standard risk metrics penalize upside performance the same as downside performance even though good investments are supposed to disperse higher from their starting points and higher from their relative indexes. Yes, our fund has a higher standard deviation since inception compared to the index 2 , but on average the Capital Ideas Fund has been positive on a monthly basis 71% of the time with a 1.45% average return per month. The S&P/TSX Total Return Index 2 on the other hand has been positive on a monthly basis 63% of the time with a 0.57% average return per month. The point being that knowing the underlying quality of the assets driving the returns is more important than day to day changes in price. The real volatility of the fund is a function of the risk metrics of the underlying investments in the fund, especially for us since we typically don’t use leverage. We are stock pickers who aim to own the highest quality businesses in the market. For the most part, we own companies with solid balance sheets, high rates of recurring revenue, and a sustainable competitive advantage that are trading on fair valuations. We call these companies compounders and they continually grow the value of the underlying businesses independent of what the stock market does from day to day. A final point on risk is the issue of investment time horizon. As an investor, your time horizon is critically important to the topic of risk. Any investment has a high risk of potential loss if you’re looking to buy and sell it in a day, a week, or even a month. Many random events can come into play with any type of asset. For our fund, we approach this problem the same way knowing that tomorrow, next week, or next month, the stocks we own could be up or down. We aren’t in control of what the market will quote us each day for the businesses we own. But over the long term, owning companies that are compounding the value of

5 ROE REPORTER | DKAM their business at high rates will mean that their value will eventually be reflected in their stock prices. Return The way we follow and analyze companies allows us to rank all stocks independent of geography, industry, or size. Since reopening the fund in April of this year, and including US stocks in our investable universe, we have been more than satisfied with this much broader opportunity set and we now own some US stocks that rank as high as our top Canadian picks. With this in mind, we would like to highlight the fund’s top three US holdings. Adobe Inc (ADBE) – Originally founded out of a garage, Adobe became so attractive that Steve Jobs tried to buy the company for $5M in 1982. Jobs’ offer was refused and he would instead end up investing in Adobe and signing a license agreement. From that point on, Adobe has produced profits every single year with net income increasing from $34M in 1989 to $2.6B in 2018. As an investment going forward, Adobe offers a full suite of products that have immersed themselves in the online creative process. Although they are best known for Photoshop, Portable Document Format (PDF), and Adobe Flash, there is much more to their business. For instance, they offer Adobe Spark for free. This is an intro product that is used in schools to teach young generations how to make web pages, short videos, and graphics. This strategy appears to be an effective way to develop brand loyalty with the next generation of coders and developers. Since the 80’s, Adobe has been on the leading edge of technology. Just last year, Adobe and NVIDIA announced an association to upgrade their industry- driving artificial intelligence (autonomous vehicles) and profound learning innovations based on Adobe Sensei. Source: Bloomberg

6 ROE REPORTER | DKAM Verisk Analytics (VRSK) – In 1971, various state, regional, and national insurance rating bureaus consolidated into a single entity. In 2008, Verisk became the parent company of this entity and later went public in 2009. Several of the large insurance companies that were primary shareholders sold their shares during this process, except for Berkshire Hathaway who added to their position over the next couple years. Verisk has considerably expanded its product offerings both organically and through acquisitions. For instance, in 2006 they acquired Xactware, which helps estimate the cost of repairs and reconstruction. They are currently using drones, aerial imaging, and artificial intelligence to remotely and automatically provide predictive analytics and decision support solutions. Verisk’s software offerings save their customers both time and money, enabling them to minimize risk and maximize value. When a business views you as an integral solution for them to improve profitability, they view you as a partner and not an expense. This type of relationship is a win-win for both parties and that value can be seen in Verisk’s profitability. Source: Bloomberg

7 ROE REPORTER | DKAM Aspen Technology (AZPN) – Aspen was created out of a project between Massachusetts Institute of Technology (MIT) and the US Department of Energy (ASPEN = Advanced System for Process Engineering). This project has evolved to Aspen becoming the world’s leading supplier of asset optimization software solutions for a variety of industries. They combine data management with analytics solutions to provide predictive and actionable insights. They have bolstered their machine learning and artificial intelligence capabilities with recent acquisitions. Just last week, Aspen acquired Mnubo, a Montreal-based provider of purpose-built artificial intelligence and analytics infrastructure for the Internet of Things. Much like Verisk, Aspen has the same dynamic of improving their customers’ profitability and is therefore seen as a partner to their clients and not a cost. Aspen allows businesses to do more with less and this has led to some of the highest net margins we have ever seen. Source: Bloomberg

8 ROE REPORTER | DKAM Final Thoughts As we enter the second half of 2019, we know that there will be some volatility ahead but we’re confident in our strategy of owning compounders and focusing on long-term returns. This being the case, we’re excited to be putting money to work in this environment. As always, we would like to thank the entire Donville Kent family, including all of our investors and employees. If you would ever like to discuss any investment related topics, always feel free to reach out. J.P. Donville & Jesse Gamble info@donvillekent.com

9 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 June 30th, 2019. 2 S&P TSX Composite Total Return Index is the Net Total Return version of the S&P/TSX Composite Index. 3 S&P 500 Index is the Net Total Return version of the S&P 500 Index. 4 Bloomberg sector breakdown. 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.