August was an extraordinarily difficult month for equity investors worldwide. The extreme price declines, particularly in the early part of the month, appear to have been caused by a confluence of factors, including: the fallout of the U.S. debt ceiling impasse; European sovereign debt and banking concerns; fears of a double dip North American economic recession; negative investor psychology; and a flight to liquidity. Interestingly, the stock market drop occurred in spite of generally good corporate balance sheets, and some 70-80% of reported Q2/2011 corporate earnings being better than expectations.

The S&P/TSX Composite Index had a tumultuous start to the month. By Monday August 8th, it had already declined 10%. While the Index ended the month down only 1.5%, the recovery was largely a result of a late month rise in Canadian large capitalization stocks, especially bank and gold equities. Unfortunately, small to mid capitalization stocks lagged the Index. It is worth noting that major global indices also languished during the month, with the Dow Jones 30 Index down about -4.5%, the S&P 500 down almost -6%, and European countries down between -8% to over -20%.

The ABC Funds were not immune to this market turmoil. We were admittedly disappointed that a number of our small/mid capitalization deep value stocks lagged larger capitalization equities in the market recovery of late August. However, we were not totally surprised, since this is typical of past stock market declines and subsequent market recoveries. Indeed, we have been through difficult periods like this a number of times over the past 20-30 years, and as a result, we are not fazed by the excessive market volatility and remain committed in our hunt for value.

Despite the current extreme market conditions, we are steadfast in our view that our ABC Funds’ holdings are solid. With a slight economic upturn and a swing in investor psychology, we believe the market will stabilize and our value investments will improve significantly. In addition, our five ABC Funds are presently sitting on a cash reserve of over $55 million. This sizeable war chest will allow us to take advantage of extremely undervalued equities, with the market providing extraordinary opportunities to purchase common stocks at deep discount valuations.

As a final comment, while it might sound trite, investment patience and discipline are paramount during this challenging period. To this end, we remain focused and committed.

Irwin A. Michael, CFA