Investment Policy Statement

Investment Analysis

Above average investment results can be obtained if you know your investment objectives, and your investments are evaluated and monitored on a systematic basis.

In formulating an investment strategy, SAMI considers and places importance to a number of factors. The following concerns are evaluated:

  • Safety of Principal
  • Liquidity of Investments
  • Current and Future Income Needs
  • Tax Consequences
  • Inflation Protection
  • Future Appreciation
  • Ease of Management

After you have considered these objectives and concerns, you can determine their importance to you. This will provide you with a basis for making sound ongoing investment decisions. The next step is to evaluate your present investments. These are summarized in the analysis which follows and detailed in your Investment Portfolio included as Appendix I. Proposed changes to your investment portfolio, consistent with your investment objectives are then compared to your current portfolio.

Investments and their Associated Risk

Level 1 Very Low Cash, Savings, GICs (CDIC covered), Treasury Bills, Money Market Funds, Annuities, Life Insurance Cash Value
Level 2 Low Pension Plans, Mortgage Funds
Level 3 Medium Low Asset Allocation Funds, Balanced Funds, Real Estate Funds Fixed Income Funds, Dividend Funds, Bonds
Level 4 Medium Equity Funds, International Funds, Real Estate
Level 5 Medium High Stocks, Specialty Funds.
Level 6 High Precious Metals, Collectibles, Commodities, Currencies
Level 7 Very High Business Interests, Penny Stocks, Options, Futures, Tax Shelters

Asset Allocation Strategy

An asset allocation strategy is designed to identify the mix of asset classes, such as equities, fixed income investments, cash, real estate, precious metals, etc., that is expected to provide a favorable and consistent long-term rate of return given your risk tolerance and any identified portfolio constraints.

Asset Class Mix

Your asset allocation strategy is aligned with your investment objectives and will focus on capital preservation and long-term capital growth.

To effectively implement your asset allocation strategy, equities, fixed income, and cash will be employed.

Investments will be made in the following categories and the breakdown of your portfolio is expected to be approximately as follows:

Weighted Average Value Of holdings:

Equities: 40-90%
Fixed Income: 0-40%
Cash: 10-50%

This mix is intended to be a guideline only and variations will occur depending on market conditions. Please note that it is expected that the percentage allocation to each asset class may vary as much as ±10%.

Notes on Asset Classes

  • Equities and Equity Exchange Traded Funds have historically produced the higher returns compared to other asset classes or fund that focus on specific asset classes. Increasing your weighting in this asset class within your portfolio will increase your portfolio volatility in the short term, but is expected to result in higher returns on a long-term basis. Investing in international equities also provides diversified currency exposure and typically reduces the volatility of your annual returns by increasing overall portfolio diversification.
  • Fixed-income securities such as government treasury bills (T-Bills) and treasury bonds have the lowest risk of any asset class. High-quality corporate bonds have higher risk compared to T-Bills, and typically provide a higher rate of return. Please note that during periods of rising interest rates, you may have to hold this asset class to maturity in order to achieve your prescribed rate of return

                                                                                                                         

Rebalancing & Tax Strategies

Rebalancing Strategy

Certain events may precipitate the need to rebalance your assets. Your asset rebalancing strategy specifies those events that may initiate a portfolio rebalance.

Your assets will be maintained in the appropriate proportions by rebalancing to the long-term policy target asset mix within the ranges specified in this IPS. This periodic adjustment, usually done on a quarterly basis, will take into account the impact of market returns on the underlying securities and allows us to maintain the critical balance of the portfolio(s). Rebalancing allows you to take advantage of short-term market volatility and maintain the long-term risk/return balance you desire. Your portfolio may be rebalanced if the associated transaction costs and/or tax consequences are considered reasonable

Please note that during periods of extreme market volatility, rebalancing may not be an effective strategy. A more effective approach may be to wait for markets to stabilize and then re-evaluate your asset mix at that time.

Tax Strategies

Sensitivity to taxation is an important consideration when evaluating the triggering of taxable gains and/or losses, should any exist.

Any investment income earned in a non-registered account will be subject to taxation at your marginal tax rate, based on the following tax treatment:

  • Interest income is subject to full taxation.
  • Dividend income from non-Canadian sources is subject to full taxation.
  • Dividend income from Canadian sources is eligible to receive a dividend tax credit.
  • Realized capital gains are subject to a 50% inclusion rate for taxation.

Sodhi does not provide tax advice.  You must consult with your tax advisor/accountant with respect to matters involving taxation issues.  Your portfolio management fees may be tax deductible.  Please consult with your tax advisor to determine if this is the case for your particular circumstances.

Risk Tolerances and Performance Expectations :

The Investor recognizes that the objectives of the Portfolio cannot be achieved without incurring a certain amount of principal volatility. The Portfolio is comprised of a 30% allocation to low risk securities, 60% allocation to medium risk and 10% high risk securities.

No guarantees can be given about future performance and this Statement shall not be construed as offering such guarantee.

There are two types of investments the fund typically makes — investments in great businesses selling below their intrinsic value.

There are no options or derivatives etc. that the portfolio delves into at all. Typically the portfolio assets are divided between under 15 securities with the typical allocation for a given security being 10% of assets in the portfolio. Before doing the rigorous analysis on a given company, Sodhi is looking for specific answers to the following three questions:

  1. Do I understand this business well? Is it well within my circle of competence?

If the answer is no, the security is simply skipped over.

Is this a great business?

If you look at the universe at public or private companies, applying Buffett’s definition of a great business would mean a business that has some of the following characteristics:

  • Recurring Revenue Streams (e.g. IBM)
  • Ability to raise prices ahead of inflation (e.g. Johnson & Johnson)
  • Some sort of Monopoly or Oligopoly type market positioning (e.g. American Express)
  • Strong franchise/brand that gives it insulation from most competitors (e.g. Coca Cola)

Most businesses do not have ANY of the above characteristics and some may just have one of the above. A business that has more than one of the above characteristics is, by definition, rare.

If he finds a great business then Sodhi asks the third, and more difficult, question:

Is it on sale at a price well below its intrinsic value (IV)?

The combination of a great business and it being on sale is, by definition, an anomaly. Manager looks for these anomalies. When they occur, after rigorous analysis, Manager backs-up the truck

In terms of defining our investment style we consider ourselves a Growth at Reasonable Price (GARP) investors.

In high-growth markets, GARP companies have shown a history of fast growth, and we expect they’ll continue to do so. GARP companies are also priced well below their intrinsic value (IV), but probably not as cheap as the straight value plays.

The best returns will come from great, high growth companies that are available well below Intrinsic Value. In fact, most of Warren Buffett’s wealth has come from GARP investments, including Coca Cola, American Express, IBM, and Johnson & Johnson to name a few.

GARP businesses remain in in our portfolio until:

  1. They go well beyond Intrinsic value. I hate to sell a good GARP business unless it’s well beyond intrinsic value.
  2. A better GARP business comes along, and it presents a better investment opportunity.

The second part of our investment style is based on Principle Protection. Almost 100% of our equity portfolios are in matured businesses, with some companies that have been in operations for nearly 75 years. Our mature investments are in companies that maintain clean balance sheets, and have established an economic moat within their industry – meaning they are very difficult for competitors to compete against.We are very long term focused and would like to earn a minimum of 6% annual growth within 5, 10 and 15 years of business.

Change Protocol

Notification of Changes to Your Financial Situation

To ensure that this investment program continues to meet your ongoing needs, it is imperative that you provide immediate updates of any material changes in your financial or family situations that could affect your risk tolerance, time horizon, liquidity needs, income needs, return requirements, tax situation, or other unique needs and circumstances. Such events may include, but are not limited to, retirement, a significant change in taxable income, relocation, a significant change in investment strategy for other assets not supervised by Sodhi and family situations that may impact your financial requirements.

Procedures for Modifying This Investment Policy Statement

Sodhi recommends that we schedule a review of your portfolio at least once per year. However, review and modification of this IPS is possible at any time and it should be reviewed if there are any significant changes to long term goals or risk tolerances. Sodhi does not charge for this service. A new IPS must be prepared and authorized by you in writing, prior to account holdings being affected by requested changes.

Summary

This IPS forms the foundation of a comprehensive, long-term investment plan for you based on your stated investment objectives and risk tolerance. On a longer-term basis, return results are expected to adhere to the investment objectives identified in this document. Avoiding investment decisions based on short-term market fluctuations will increase the likelihood of achieving your investment objectives. However, return results are not guaranteed and overall returns are contingent on market fluctuations and performance.