Our ABC Response to Client Concerns

I have received several ABC client concerns on the ABC North American Deep-Value Fund and its effect on the three other ABC Funds. I would like to share a recent email:

“I’ve been a loyal unitholder of the ABC family of funds for
more than eight years and have seen the tough years when your
disciplined value style didn’t allow you to buy stocks like Nortel.
Everyone laughed that I was not buying up Nortel but I believed
in you and your disciplined approach. And then, of course, while
all the Nortel owners started crying in their beer, I felt vindicated
– as I’m sure you did.
Recently, however, with the launch of the NAD-V, I’m
beginning to get the feeling that you are focusing on the NAD-V
and as a result the other three funds that I own aren’t going to have
the same results as one has come to expect. I hope I’m wrong
but would like to know from you – are you getting distracted
from managing the performance of the other three funds so you can
ensure the NAD-V does well? Just wondering…”

My initial response to this question was one of surprise. Quite frankly, it never occurred to me that I might slight one fund over the other three ABC Funds. I regard myself as a professional, but more importantly, I have too much to lose – my reputation, my own invested money as the largest single individual client of ABC Funds, my Chartered Financial Analyst designation (CFA), an industry code of ethics and the fact that I have dedicated over 32 years to my profession and almost 18 years building the ABC Funds.

Firstly, let me state that I am quite sensitive to starting new funds in that I believe in quality of funds not quantity. I have no intention of making ABC into a puppy-mill of redundant funds. Rather, each fund or new fund must bring value-added to our investment management and high performance process. I believe just as the ABC American-Value Fund brought value-added to our ABC group with its founding in 1996, I strongly feel that ABC North American Deep-Value Fund will likewise bring many benefits to our existing funds.

The fact is that the ABC North American Deep-Value Fund (NAD-V) has provided my team and I with a new focus i.e. to analyze deeply undervalued micro-cap stocks as well as illiquid small cap/obscure new financings. Normally, we would overlook these securities due to their small size, absence of analytical coverage and lack of liquidity. In effect, we concluded that there were excellent potential investment opportunities which we ignored due to the open-ended structure and risk-averse nature of our three existing ABC Funds.

In forming NAD-V we wanted a finite-sized, closed-end (no monthly redemptions/no subscriptions) fund to take advantage of these profitable anomalies. At the same time we positioned NAD-V as a higher risk/higher reward, lower liquidity, specialty investment fund. By extension, given that the NAD-V had a higher risk/reward profile, its returns should logically surpass the three other ABC Funds. Keep in mind, however, that risk is a double-edged sword and that, at times, the NAD-V might underperform as well.

With the initiation of the NAD-V there are numerous symbiotic benefits for our other ABC Funds. For instance, in analyzing new attractive yet obscure investments the NAD-V serves as a prober or guinea pig for our other funds. Sometimes we end up not only purchasing these securities for the NAD-V but also for one or more of our three open ended funds. Recent examples of such purchases include: Saxon Energy Services (private placement), Atlas Cold Storage, Endev Energy, Royal Host REIT, PulseData and John B. Sanfilippo. On the other hand examples of illiquid yet deeply undervalued equities/fixed income securities deemed appropriate only for the NAD-V include: First Nickel 11% April 27/2007 debentures, Arapahoe Energy, Rally Energy Corp, Skye Resources, Foodarama Supermarkets, Merchants Group Inc., S & K Famous Brands and Avnel Gold Mining Ltd (private placement).

As a final point, given that my family and I are the largest individual unit holders of ABC Funds with over 80% of our invested capital in the three open-ended funds it is in my best interest to see that they all succeed. The fact is that these four funds are a large part of my deep passion for my work and I would never compromise my principles. I remain motivated and excited about ABC Funds and the prospects for “deep-value investing”. This will not change.

Irwin A. Michael, CFA