Looking for an Edge Since publishing our last newsletter, the market hasn’t provided much for investors to bank on. The TSX Index, Nasdaq Index, and Russell 2000 were all in negative territory for the quarter. A myriad of negative geopolitical headlines continues to overshadow any incremental bright spots in the market. All of this negativity has led to a lot of investor skepticism, which we see as healthy since any hint of exuberance has been squeezed out of the market. Barron’s Magazine published their Big Money Poll on October 21, 2019 and professional investors are now at their least optimistic since the poll began in 1999. To put that into perspective, investors are more pessimistic now than they were during the Global Financial Crisis in 2008-2009. Figure 1. At the time of this writing (October 23rd), over the past 6 months the TSX Total Return Index is down 0.40% Source: Bloomberg In addition to headlines, the recent manufacturing “mini-recession” is one of the culprits of the sideways market and extremely depressed investor sentiment. The manufacturing industry typically goes through 18-month cycles. We’re nearing the end of this cycle and, like the cycles of the past, expect it to turn positive. Combine this with the lagging impact of all the monetary stimulus around the globe over the past year and we should see an uptick in borrowing, manufacturing, and spending. In addition, the market is underpinned by a strong consumer, robust employment, cheap credit, as well as a record amount of cash on the sidelines. For these reasons we believe that the next move in the stock market is up. VOLUME XLIX OCTOBER 2019 INVESTMENT ISSUES • STRATEGIES • INSIGHTS FROM DONVILLE KENT

2 ROE REPORTER | DKAM As of September 30, 2019, the Capital Ideas Fund currently sits at 15.28% 1 year- to-date with sector exposure of: Technology 26%, Consumer Cyclical 25%, Consumer Non-Cyclical 21%, Financials 10%, Communications 7%, Industrials 5%, Materials 3% and Energy 2%. The fund now holds 69% Canadian equities and 31% US equities. Railroader Every so often there is a book that gets circulated around our office that sparks both conversation and action. Railroader , written by Howard Green, recently ignited this spark. You may recognize Howard Green as the founding anchor at Canada’s Business News Network (BNN). Green chronicles the life of Hunter Harrison, the brash railroad expert who grew up on a railway spending five decades in the industry and rose from a labourer to the CEO of multiple railroad companies. Canadians specifically might remember Harrison as he has his fingerprints all over historic Canadian institutions. He ran and turned around both Canadian National (CN) and Canadian Pacific (CP) (as well as Illinois Central and a brief tenure as CEO of CSX before his death in 2017). Howard does a great job providing in-depth and genuine insight into the life and, more crucially, the thought process behind Harrison’s decisions. The book was engaging from our point of view because we have met with hundreds, if not thousands, of management teams and we’re always on the lookout for what Hunter Harrison embodied. How was Harrison able to rise from lowly labourer to successful CEO multiple times over? Harrison knew more about railroads than anyone else. He grew up on a railroad and did every job along the way. Harrison was described as having an “encyclopedic knowledge of the industry” and used it to transform the businesses he led. There are instances in the book that describe his ability to identify a problem just by the smell. In other words, he had an edge. Harrison was also a “numbers guy.” He measured everything that could be measured. He was the first to implement computers in the day to day operation of a railroad and went on to pioneer Precision Scheduled Railroading, now an industry standard. When Harrison would look at the railroad’s daily printouts, the numbers would jump off the page and he could see what the issues were. As Green describes, “Soon he was scrutinizing the return on assets, capital spending, depreciation, cash flow and revenue. He also wanted all of the regions on the railroad to be cognizant of these numbers.” The combination of knowledge, measurement, and execution would show up in the railroad’s operating ratio, the industry standard in evaluating performance, which Harrison would improve far beyond what industry experts thought possible, at all of the railroads he led. He knew what trains were capable of when everyone

3 ROE REPORTER | DKAM else couldn't even imagine their potential. The ability to transform a commodity business to a service-based business that customers are willing to pay a premium for is truly remarkable. Railroader provides a great example and opportunity for our investors to understand an important aspect of our investment philosophy. We estimate that we meet, either on location or in our office, 75-100 management teams per year. Some investors don’t share this focus and don’t take the time to speak with management but we have found that when you do meet a great CEO or management team, the business excellence and expert knowledge is palpable. We want a CEO who knows their specific business better than anyone else and, just like how we would like nothing more than to talk stocks and investing, they would like to talk for hours about Software as a Service (SaaS), real estate services, kids’ toys, or paper shredding. When we research a business, we are always asking ourselves whether the business has an edge. We look for management teams that “speak our language.” They have industry knowledge but are also numbers focused with a track record of execution. Both Donville Kent and excellent CEOs believe if you can’t measure it, you can’t manage it. You won't be surprised to hear, that a CEO with industry expertise who measures margins, return on capital, and return on equity (efficiency measures), is a great indicator of a company having an edge which is therefore most likely a great stock. What might be surprising is how infrequently one can find this combination. It is estimated that Harrison created a combined $50 billion in value for his shareholders. This is reason enough to believe in the value of having an edge. Our Edge We then have to consider if we, as investors, have an edge. We referenced this from a different point of view in the April 2019 newsletter when describing an efficient market with pockets of inefficiencies around the corners. A deep value fund may have an edge based on their knowledge of bankruptcy law or a quantitative fund may have an edge based on proprietary algorithms. Our edge stems from: 1. Focusing solely on businesses with high returns on equity (ROE). This metric is a great hurdle for companies to clear because a high ROE signifies efficiency, a competitive advantage or business moat, and a management team capable of recycling their capital at high rates of return. Note that we wouldn’t argue with someone who would rather use return on invested capital (ROIC), internal rate of return (IRR), or payback periods, but we feel ROE

4 ROE REPORTER | DKAM encompasses the positives of these metrics while being more appropriate for public stocks. By being a numbers first firm with an algorithmic mentality and knowing this metric inside and out, we are able to invest in high quality businesses with quality management. As a result, it keeps us away from whatever unprofitable fad is having its time in the limelight (ex. lithium stocks, crypto currencies, marijuana stocks, unprofitable high growth tech IPOs, e-sport stocks). 2. The mindset and shareholder base that allows for a long-term outlook allows the magic of compounding (ROE) to work its powers. Without the ability or mentality to buy and hold an investment, one won’t be able to reap the benefits of compound growth. ROE can be thought of as the engine underneath the hood of the compounding machine. A 20% ROE business is a high horsepower racecar, a 7% ROE business is a Honda Civic, and an unprofitable business isn’t a car with an engine at all, it is a rusty bike with a broken chain. 3. Knowing the minutiae of our businesses. This is an extremely important point. Through continually meeting with management, visiting businesses on location, performing alternative data analysis 2 , and constantly updating our models, we can be confident in our investments. This knowledge gives us conviction and allows us to see through day to day price gyrations and prevents emotion from dictating our investing strategy. Take Apple Inc. for example. Apple is a great company, we all know and love the product, but as investors we have no edge. There's nothing we know that the majority of the market doesn't already know too. 4. The ability to concentrate on a select few investments not only allows one to understand those businesses in greater detail but it also focuses investors’ capital on our highest conviction stocks to maximize returns. We rely on our own thorough research and believe the further one is removed from the financial modelling, the meetings with management, and the research process in general, the less one is capable of picking winners.

5 ROE REPORTER | DKAM Final Thoughts This has been a long time to tread water in the market and the impatience is palatable. However, we continue to be patient and stand by our investment process. Once momentum returns to the market, we will be ready to use our edge and put capital to work. In the meantime, we continue to search for the next Hunter Harrison. 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

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 30th, 2019. 2 Specialized analysis - Examples of alternative data • Rate of change in job postings • Online product reviews • Online inventory tracking • In store product placement • Social media engagement (rate of change of followers, activity, global scope) • Consumer satisfactory ratings (competitor ratings) • Talking to consumers, competitors, employees • Periodically visiting locations As researchers we piece all this data together to get a better sense of the business. Buffett referred to this as scuttle butting, the scope and access has evolved over the years. 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.