Resolute Growth Fund

Prior to launching the Resolute Performance Fund, Resolute Funds also managed the Resolute Growth Fund, a Canadian public mutual fund. The Resolute Growth Fund commenced investment operations on December 3, 1993 and was wound up effective June 2, 2006, after 12½ years of operations. The historical information of the Resolute Growth Fund set out below is presented for informational purposes only and no inferences should be drawn that the future performance of the Resolute Performance Fund will necessarily reflect the past performance of the Resolute Growth Fund. Past performance is no guarantee of future results, especially where 2 investment vehicles may have differences that impact such performance returns. The legal requirements that applied to the Resolute Growth Fund are different from those that apply to the Resolute Performance Fund. For example, the Resolute Growth Fund was subject to the requirements of National Instrument 81-102 Investment Funds (“NI 81-102”), while the Resolute Performance Fund is not, and this difference means that the investments the Resolute Performance Fund is permitted to make are or may be different from the investments the Resolute Growth Fund was permitted to make under NI 81-102. Such differences may arise from both the types of securities into which each vehicle is permitted to invest, as well as the amount or concentration of such security permitted. Further, the cost structure, including the fund expenses and management fees, that was applicable to the Resolute Growth Fund differs from that which applies to the Resolute Performance Fund. In addition to these specific factors, there may be other differences that could impact a performance comparison between the Resolute Performance Fund and the Resolute Growth Fund. However, given that there are many factors in common between these vehicles, including the individual responsible for portfolio management as well as the investment objectives and strategies, Resolute Funds believes that showing the past performance of the Resolute Growth Fund is a useful tool to judge the investment advisory track record of Mr. Stanley.

The following table shows the historical annual compound return of the Resolute Growth Fund for each year of operation compared to the performance of the S&P/TSX Composite Total Return (the “S&P/TSX Index”) over the same periods. The S&P/TSX Index is the headline index designed to measure market activity of stocks and trust units listed on the Toronto Stock Exchange (“TSX”). It is comprised of the stock prices of the largest companies on the TSX as measured by market capitalization. While the Resolute Growth Fund used the S&P/TSX Index for long-term performance comparisons, it was not managed relative to the composition of the Index and did not mirror the composition of the S&P/TSX Index. As a result, the Resolute Growth Fund has experienced periods when its performance differed from the S&P/TSX Index.

Resolute Growth Fund: December 3, 1993 – June 2, 2006

$10,000 invested at inception was worth $256,072 on termination

Years Growth Fund (%) S&P/TSX Total Return (%)
1993* 6.9 2.3
1994 (5.0) (0.2)
1995 8.5 14.5
1996 49.1 28.4
1997 (5.4) 15.0
1998 (12.2) (1.6)
1999 29.9 31.7
2000 76.2 7.4
2001 24.4 (12.6)
2002 40.2 (12.4)
2003 26.9 26.7
2004 38.4 14.5
2005 100.5 24.1
2006** 33.5 6.4
Compounded 29.63% 10.61%
Total Return 2,461% 252%

*This period was 29 days as the Fund commenced December 3, 1993
**This period was 153 days as the Fund wound up on June 2, 2006

The Resolute Growth Fund Story

“Over a dozen years ago I resolved to build the best fund I could.”

Tom Stanley & The Resolute Growth Fund

Laying the Ground Work

Starting in the investment industry as a retail broker in 1980, I was not an overnight success. I had no experience and knew virtually no one with any money. Certainly my salesmanship was poor. I quickly learned I would have to make people money if I were to keep my job. Warren Buffett said: “If you want to be successful, choose the right heroes.” I worked hard to learn from successful investors, both public like Warren Buffett, Charlie Munger and Sir John Templeton, and private. One of the greatest benefits for me of being a retail broker was the ability to observe the investment style of over 1000 investors, some wildly successful and some unsuccessful. I tried to determine what worked and what did not.

In June of 1982, I saw Sir John Templeton, one of the greatest fund managers of the 20th century, speak on television’s Wall Street Week. He talked about his values, his philosophy, and predicted the great bull market of the 80’s. At that moment I was inspired to run a mutual fund as my life’s work. It took ten and a half years of striving to get my opportunity to run a fund. I took courses and studied my craft. Approaching 40, even with a successful track record of managing money, I could not get hired to run a fund, so I founded the Resolute Growth Fund on December 3rd, 1993. I was fortunate to have a small group of long term clients who supported this venture by investing alongside me. Our Fund’s assets at the year end 1993 were $2.1 million dollars.

What did I hope to accomplish? Contrary to popular practice, I did not seek out high net worth individuals but wanted to serve regular people to help them become high net worth. I hoped to run the Fund honestly, competently, and in a thrifty fashion to allow a moderate cost structure to enrich unitholders over the long term. Accordingly, I initiated the Fund with an all inclusive management fee of 2 % (which included all expenses except for commissions) and did not allow soft dollar deals (which I consider essentially a kick back on the commissions paid). I also initiated old fashioned town hall style annual information meetings so that I could speak and listen to unitholders directly. Merriam-Webster defines Resolute as “fully committed to achieving a goal”. I picked the name Resolute to signify my determination and commitment to achieving these goals.

The Cautious Early Years

In the first three years 1993, ’94 & ’95 the performance of Resolute Growth was unimpressive, losing money in ’94 and underperforming the market in ’94 & ’95. Our team was skeptical, particularly about the internet and computer stocks that were market leaders. Their valuations even back then made no sense to us. On October 7, 1994 in our letter to unitholders we stated “We are cautious. U.S. long term treasury rates have hit highs lately ... rising interest rates are definitely not good for stocks.” By October 1995 referendum jitters were depressing Canadian stocks and we became bullish. In our October 16, 1995 letter we stated that “we are finding additional special situation “small caps” that represent outstanding opportunity.” We had found that one of the best ways to add value for our unitholders was to dig and unearth underfollowed and undervalued small capitalization (small cap) stocks.

A Good Year and the Copycats Came Out

The small caps served us well. 1996 was a good year for the market and a great year for the Fund with a 49.1% return, led by our big winner Scintrex and other small cap discoveries. We were also prepared to maintain heavy weightings in stocks, instead of trimming back winners or “portfolio balancing” as was so prevalent in the industry. For example, by September, Scintrex was about 36% of the Fund. 1996 was also the year when we became aware of copycat investing - a practice of mimicking the holdings of managers who were doing well. Investors seeing our strong performance, instead of buying the Fund, copied our holdings. We started seeing groups of our top stocks being traded simultaneously. It became very apparent to us the importance of maintaining a high degree of confidentiality when we were doing well. A good card player does not show his hand.

The Bubble and the Greater Fool

1998 was the year we sold Scintrex, a company with great management, and intriguing products (like bomb and drug sniffers) but in a very difficult, competitive industry. We were then in a short list of an eclectic mix of value and growth small caps. They ranged from Armbro (a construction company), to Camvec (owner of AMJ Campbell Van Lines), to Cangene (a biotechnology company supplying plasma based products), and Dimethaid. Dimethaid was engaged in the commercialization of some innovative therapeutic products including a topically applied arthritis pain reliever, PennsaidTM, and immune modulator WF10TM, which potentially could be used in the treatment of AIDS and cancer. As part of my extensive diligence, about a dozen clients volunteered to become subjects in the clinical trials of Pennsaid with telling results. We also sought out and spoke with users of WF10TM. As we moved into 2000, Dimethaid, our largest holding, appreciated sharply in price, even though the milestones we hoped it would achieve did not happen. We sold.

It was a tough time to keep up to the market because we avoided the internet and other high tech computer stocks. We discussed this at length in our April 13, 2000 letter: “1999 was an extremely unusual year. While the market indices appeared to do well, the results are misleading. For example, if you removed Nortel, BCE and JDS Uniphase from the TSE 300 total return, the index drops from a return of 31.7% to 4.6%. The median stock price return on the TSE 300 was only 2.1%, while on the S&P 500 index it was a negative 1.3%. The areas of the market that did do well, were primarily the Internet and other technology shares, often called the “new economy” stocks. Many of these stocks are trading at fifty or one hundred times sales, with high losses. It is a small wonder that so many fund managers had trouble keeping up to the indices. We are extremely skeptical about the valuations and the prospects for most of these Internet and technology issues, for reasons too extensive to list in this letter. A bubble is not too strong a word to describe this phenomenon.”

Many unitholders were not happy with our aversion to tech stocks and redeemed. For this reason, it was also difficult to attract new investors, but we stayed the course. In our April 2000 letter we also stated: “We are not momentum investors, nor will we buy a stock just because it is in a popular sector. We will not buy an over-valued stock on the theory we can sell it at a more over-valued price to a “greater fool”.” 2000 was the year the tech bubble finally burst.

The Energy Opportunity

Starting in the second quarter of 2000, we heavily invested in energy. The reasons were outlined in our letter of October 11, 2000: “It is a personal opinion that the markets are overly complacent about the tightness of oil and gas supplies. The following are some brief comments about these commodities: Prices of $30/barrel are not as high as they seem from an historical perspective; Adjusted for inflation this is about one half of 1980 prices or equivalent to $7/barrel in 1973. The Current world production of 77 million barrels/day, is only a few million barrels/day short of total current production capacity.

World demand continues to grow, particularly fueled by Asian demand growth. Oil production from existing fields, declines by approximately 10% per year, this means there has to be constant exploration and development just to keep current production levels.

There is not enough new oil being brought into production to replace the existing depletion and to meet the increased growth in demand. I believe prices will have to stay high enough to create profits for this industry, to in turn encourage more investment in the development of supply. In the meantime oil and gas supplies will remain tight and prices vulnerable to supply disruptions, political or otherwise and/or rising demand... there are tremendous opportunities in the energy sector. In spite of the oil and gas price surge in the last two years and the corresponding massive rise in cash flow and profits, oil and gas stocks have barely moved to reflect this reality. The Aug. 10, 2000 Globe and Mail Report on Business headline “Oil Surge Fails to Impress Bay St.” succinctly describes this situation....We cannot say if or when the negative investor sentiment towards the oil and gas sector will change but we find both the valuations and opportunities in this sector compelling.” The aforementioned factors have contributed to the increase in the price of oil by roughly seven times over the past 6 years, with enormous benefits to producers and those with producible assets. What served us so well through the 2000 - 2004 period was buying cheap small oil & gas stocks that either grew up or were taken over by Income Trusts. By 2004 we just could not find too many well managed juniors that were that cheap anymore. Therefore we found another way to invest in energy – uranium and oil sands stocks.

The Value of Being a Contrarian

Uranium is an essential commodity primarily used to supply the nuclear power reactors that produce 16% of the world’s electricity. Mine production has been lower than demand every year since 1985 driving inventories dangerously low. Demand is still rising particularly in five Asian countries, China, India, Japan, South Korea and Russia who are on reactor building sprees. We heavily overweighted an industry that was virtually unfollowed on Bay Street. Uranium prices subsequently skyrocketed to over $40 from their 2001 lows of $7.10, with of course enormous benefits to the underlying stocks.

We made an even bigger investment in the Canadian oil sands, containing arguably more oil than Saudi Arabia. Our reasoning was simple: if oil prices remained much higher than the price that was forecast by Bay Street, the oil sands companies with their massive reserves of admittedly higher cost oil would benefit enormously. Pessimism about oil remained rampant; the Street was continually forecasting far lower prices for oil than currently existed. In the summer of 2003 our favorite was UTS energy, a small cap with proven oil reserves that were valued in the market place at $0.08 a barrel! There was no current analyst coverage of the company at that time. Our strategy worked.

A Changing Industry

After 10 years of operation, in 2004, with the skyrocketing legal, compliance and liability issues facing both the mutual fund and brokerage industry, it became apparent changes had to be made. Also, as we had a fixed all inclusive management fee, we were constantly absorbing cost increases both because of administrative and regulatory burdens. We tried first to contain these costs by raising the size of an initial purchase from $10,000 to $25,000, then $50,000. We did this with great reluctance. I also needed to become a full time manager, so I retired after 24 years of being a retail investment advisor. The Fund just kept growing. New investors kept finding us thanks to mutual fund performance tracking services like GlobeFund and Morningstar as well as word of mouth. We became concerned about our ability to manage the Fund as effectively as we had been if we became too big. Consequently, in October 2004 we restricted purchases for new investors and in August 2005 we stopped all purchases. It was always my goal to build the best fund I could, not the biggest.

Why We Terminated the Fund

In 2005 it became increasingly concerning to us that the Ontario government’s new regulations, first National Instruments 81-106 and then 81-107, would severely impair our ability to make investors money. The reasons were extensive but the reduction in the confidentiality of what we were buying and selling was one example. As we never held 25 stocks during the entire life of the Fund, provisions requiring us to report our top 25 holdings would effectively force us to disclose our entire portfolio every three months. This would hurt our ability to accumulate and sell the small illiquid stocks that have served us so well and investors’ returns could suffer. Unfortunately our strong performance, particularly our triple digit performance of 2005, placed us under a lot of scrutiny from competitors and potential copycats. We tried very hard to persuade the regulators to give an exemption in an expensive, frustrating and exhausting effort. We offered to keep the Fund closed forever, and to waive all withdrawal fees to any existing investor who wanted to opt out, so we would have grandfathered only existing investors who wanted the exemptions in place. In spite of this and the overwhelming support of a 99.58% vote by Growth Fund unitholders to have an exemption from 81-106, the regulators rejected our request for exemptive relief. It was never my intention to run a mediocre fund so with a great deal of sadness we announced its wind up for June 2, 2006, exactly twelve and a half year after inception. I believe that the time for a public mutual fund like ours in Ontario is over.

What Worked

In retrospect, it was only a handful of ideas that allowed us to outperform. As Warren Buffett was quoted in the August 1996 issue of Outstanding Investor Digest: “We like to put a lot of money in things we feel strongly about. And that gets back to diversification. We think diversification, as practiced generally, makes very little sense for anyone who knows what they’re doing...If you know how to value businesses, it’s crazy to own 50 stocks or 40 stocks or 30 stocks, probably - because there aren’t that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super- wonderful business and instead put your money in #30 or #35 on your list of attractiveness just strikes... me as madness.” It worked very well for us to concentrate our investments, particularly in inefficiently priced small cap stocks. While it took a long time to buy or sell them, sometimes even a year, the benefits were enormous. Obviously for this style of investing to work it was important to have the highest level of confidentiality.

Resolute Growth was always a maverick fund. Accordingly, in an industry full of classification and pigeonholing we tried to avoid unnecessary limitations on our investment approach. Change is the only certainty and having flexibility meant as markets changed we did as well.

On a personal note it was the fulfillment of my career dreams running a fund and achieving the returns we have had for you. Our 10-year track record at the end of May exceeded all funds in Canada and the US, as per GlobeFund and Morningstar. In fact, for this period, we were not able to find a public fund in the world with a superior ten year track record. Many of the “regular people” who invested early and held the Fund through our many ups and downs are now indeed high net worth. In closing, I would like to reiterate my appreciation for the support, encouragement and help I received from you, the unitholders, over the years particularly during our tough patches. I am truly grateful to have been granted the opportunity to serve so many wonderful people and to enrich so many lives.

Moving On

On June 14, 2005 I founded Resolute Performance Fund to serve a limited number of investors hopefully for the remaining years of my career. My goal is simple - to run a fund honestly and competently with a moderate cost structure to enrich unitholders over the long run. While the Fund has changed, I have not.


Tom Stanley