Volume 48 July 2019

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