Market Economies Are Not Self Healing

							                                                                                    47 Colborne Street, Suite 300
                                                                               Toronto, Ontario, Canada M5E 1P8
                                                                      T 416.482.2004 • 888.482.2007 F 416.482.0007
                                                                                    www.avenueinvestment.com




                   FIRST QUARTER 2010 - MARKET COMMENTARY




HIGHLIGHTS

• Review and Repair
• Global GDP Growth
• Corporate Restructuring and Profitability
• Employment and Social Welfare
• Rising Interest Rates
• The Avenue Portfolios
• A Case Study on Risk Management


Review and Repair

Even though Western market economies still face numerous financial challenges, we believe that
there are equally numerous reasons to remain positive and to maintain our investment in specific
companies and asset classes. Major economies are healing themselves slowly, global economic
growth continues to expand and many businesses and sectors continue to maintain and improve
their overall profitability.

Now that we are farther along the curve of this present financial crisis, past the fear and panic
stage and into the review and repair stage, we are nearer to being able to assess what needs to be
changed or improved in terms of enhanced regulation. It is our opinion that little of practical
benefit is presently being achieved by regulators and lawmakers.

If we look at the United States, for example, the national debt and deficit are both expansive and
potentially multi-generational. Domestic savings have not improved as much as envisioned and
the pervasive culture of self-entitlement seems to gridlock any potential for change in political
will and commitment to debt or deficit reduction. The myopic focus of the press and the public
on bank regulation and Wall Street compensation, in our view, fails to address the areas where
the crisis actually spawned. We feel these areas are: a regulatory system of subsidized real
estate, opaque derivatives imbedded in special purpose vehicles and the potential for rating
agency conflict-of-interest.
Global GDP Growth

Regardless of the lack of effectiveness of this ongoing introspection, world economies continue
to show signs of improvement. Most impressively, from a domestic viewpoint, these issues have
not impacted the main drivers of Canadian economic growth.


GDP Estimates                        2010           2011
Canada                               +2.7%          +3.0%
US                                   +3.1%          +2.9%
Euro area                            +1.2%          +1.4%
Japan                                +1.7%          +1.6%
China                                +9.6%          +8.1%
India                                +7.7%          +8.0%
Brazil                               +5.0%          +4.5%
*source: The Economist



The economic engine of the world is growing and is expected to continue to grow for the
foreseeable future. This will in turn create an environment of tightening commodity prices
which will for Canadians simultaneously stress households and industries while being the engine
of wealth creation for investors.


Corporate Restructuring and Profitability

At Avenue Investment Management, we continually ask questions about the businesses we own.
Do they have, or expect to have: a superior competitive advantage, the qualities of a toll both,
pristine or powerful balance sheets and a proven management. These questions are important
because when (not if) the economic environment weakens, these companies have the best
potential to become stronger, as their competitors decline or disappear. With this perspective,
we can define that although certain sectors (such as auto parts in Windsor) might be struggling,
many other Canadian businesses tied to the global economy will fit this profile and continue to
do well.

Many of these same companies are presently experiencing the byproduct of recent corporate
restructurings and the resultant pass through to enhanced profitability. This is a delicate way of
saying that 4% of our Canadian labour force was let go and as it turns out, their employers
remained as profitable as before. Canada has a labour force of 16 million people so a 4%
trimming equals 640,000 people newly out of work. All Canadians care about the state of
unemployment in this country and particularly the unemployed, but as investors it is our job to
also care about the productivity and enhanced profitability of the resulting business entity.


Employment and Social Welfare

This “lack of employment” issue highlights one of the key macroeconomic contradictions we are
facing. Most levels of Canadian government now have large deficits and high absolute levels of
debt. Our governments pay for things by charging income tax. Therefore, full employment

                                              -2-
through well-paid jobs is desirable and a prerequisite to reducing deficit and debt burdens. The
problem remains that companies that let people go are not hiring them back. Productivity gains
will occur domestically but job growth will occur internationally. Federal domestic stimulus has
the unique result in a globally interconnected market of encouraging consumption at home but
creating jobs abroad.

This financial crisis has truly highlighted the flattening of the world market. Most economic
theory has historically been applied to the Western world with an economy of about a billion
people. Although the same rules do apply, we are now dealing with an economy of 4 billion
people. (There are still about 2.5 billion people on our planet living at subsistence level.)
Therefore, a miner gets paid in the context of the global mining industry. Similarly, a banker is
rewarded in the context of the global financial industry. We believe that a hard conclusion is
inevitable; Western governments will be forced to roll back the generosity of our social welfare
states.


Rising Interest Rates

A more immediate concern for investors is the impact of rising interest rates. To be specific,
what we are talking about is the Bank of Canada raising the overnight Bank Rate from the
current level of 0.25%. We argue that this is an overall good thing as it demonstrates that the
domestic economy is repairing itself and that short-term interest rates will need to return to a
more sustainable level of 1.5% to 2.5%.

As investors, however, we care most about what rate a company can borrow at for the next ten
years. In the Canadian context, we believe that current 10 year corporate yields (presently
between 5% and 6% depending on the credit quality) is historically low and should remain
largely unaffected by the initial and expected rise in short term interest rates.


The Avenue Portfolios

Presently, many of the high yield corporate bond investments that we made over the last 18
months in both our Avenue Bond portfolio and the Avenue Total Return Equity portfolio have
improved in price to where little potential for further price appreciation remains. The Avenue
Bond portfolio is presently weighted more to midterm investment grade corporate bonds. The
Avenue Total Return Equity portfolio has just two high yield bond investments remaining in it.
We do not plan to make new investments here until such time that yield opportunities are
significantly higher.

In the Avenue Total Return Equity portfolio we have presently created a cushion of cash (7%) as
some high yield bond investments have recently been sold. As well, we look to add a margin of
safety as stocks that have appreciated are replaced with investments with lower valuations. For
example, Phoenix Technology Income Fund has been replaced with Alange Energy Corp. and
Cominar Real Estate Investment Trust has been sold to make room for Northwest Healthcare
Properties REIT.




                                              -3-
Regardless of which Avenue portfolio you consider, we are always left with the question “what
will the next hurdle in the investment road be”. Government default, currency devaluation or a
Chinese banking crisis, all have the potential to destabilize the global financial system going
forward. However, our job as “investors“ is to do just that, “invest” in what we believe are those
companies, sectors and asset classes that offer the best risk adjusted rate of return going forward.
That is, to invest and stay invested in entities that both make sense given today’s environment as
well as in the varied economic environments that, no doubt, lie ahead.


Avenue Investment Management
Getting there together




                                               -4-
A Case Study on Risk Management

This is the final of our four part series in which we attempt to dissect for our clients the
presentation that we gave at our annual spring cocktail gathering in Toronto last year.

Just mentioning the term risk management seems to conjure fears in investors that somehow too
much risk was being taken in the first place. The reality is that once you take a dollar out from
under the mattress and invest it you are taking risk. Risk management is just the process of
laying out self-imposed guidelines or self-discipline to limit any potential losses.

There is no clear definition of risk management and the industry uses the term to mean many
things. To use a car analogy, risk management has to be appropriate to the vehicle and the road
you are on. Bear Stearns and Lehman Brothers were driving in a formula one grand prix vehicle
without a roll bar, helmet or fire suit. Crashing was always a possibility and when it happened
they were unable to walk away.

Avenue Investment Management’s investment goal is more appropriate to highway cruising and
our vehicle of choice would be a Volvo. (Ironically, Volvo is now owned by the Chinese.) Risk
Management for us is about driving within the speed limit and having a functioning seat belt, air
bags and ABS brakes. Boring is good.

We maintain that risk management is the right term for this discipline and here we will lay out
the core of Avenue’s risk management discipline.

First, diversification through an appropriate number of individual securities (35 for the Avenue
Total Return Equity and 20 for the Avenue Bond portfolios respectively) is, we believe, an
important beginning to effective risk management.

The next most important tool to limiting risk is limiting exposure to any one sector. Avenue’s
sector guidelines below reflect a pension-style sector allocation for the Avenue Total Return
Equity Portfolio.

                                     Avenue           TSX
                                     Allocation       Sector 
Sectors                              Guidelines       Weightings
Financial                            25%              30.4%
Real Estate                          11%              1.3%
Utilities                            10%              5.8%
Energy                               20%              22.2%
Materials                            8%               8.4%
Gold                                 7%               10.9%
Other                                19%              20.7%


You will notice that our sector weights are not the same as the TSX Index sector weights. By
not investing in, measuring or rewarding ourselves through comparison to a “risky” index (such
as the TSX) we do not have a comparable risk/return profile. To us, this is a good thing as we
see our goal as striving to get comparable returns but with significantly less risk.


                                                -5-