gi presentation q1 2011

G.I. Capital Corp.

G.I. Capital Corp.Investment Counselors and Portfolio Managers

www.gicapital.ca

5/5/2011 1G.I. Capital Corp. Confidential

G.I. Capital Corp.

What We Do• G.I. Capital Corp. (GI) is a wealth management firm focused on developing customized

investment solutions that preserve and build wealth for our clients.

• We actively manage discretionary private client and institutional portfolios on an absolute return basis.

• Our primary objective is to achieve equity style returns while substantially reducing the risk and volatility of our clients portfolios.

• As a result of our absolute return focus, we have become specialists in alternative investments.

• We are a boutique operation. We offer a high level of research, analysis, and service to a limited number of clients.

• We deal with higher net worth clients, with a minimum portfolio size of $250,000.


G.I. Capital Corp.

Who We Are

Jim Goren CFA, MBA, CGA

• Jim Goren is a Managing Director at G.I. Capital Corp. and is a Senior Portfolio Manager.

• 9 years of experience as a Portfolio Manager including a principal of a USD 100 million Venture Capital Fund.

• Over 11 years of experience performing financial analysis and research.

• In addition to having investment experience, Jim has over 7 years of experience as a CFO of large technology companies.

• He has spent more than 10 years overseas and has a very strong global investment perspective from first hand knowledge.

• Has earned a Masters of Business Administration (MBA) degree from York University, Schulich School of Business, as well as a professional accounting designation (CGA).

• Jim is a Chartered Financial Analyst (CFA).

5/5/2011 G.I. Capital Corp. Confidential 3

G.I. Capital Corp.


Mark Irwin, CFA

• Mark Irwin is a Managing Director of G.I. Capital Corp. and is a Senior Portfolio Manager.

• Mark received a B.A. in Economics from Queen’s University in 1993 and is a Chartered Financial Analyst (2000).

• 18 years experience in investment industry.

• After working for several independent financial advisory firms, Mark founded Integrated Financial Consultants Inc in 1999. The firm focused on structuring absolute return portfolios through Alternative Investments. In 2001, IFC established a strategic alliance with Converge Financial Inc., a financial planning firm. IFC’s mandate was to advise Converge’s larger clients on investment matters and to structure Absolute Return Portfolios for them.

• In 2002, IFC created a similar strategic alliance with Qualified Financial Services, a financial services firm with over 200 associated financial advisors.

• In 2004, Mark co-founded GI Capital Corp, a discretionary investment management firm, and in 2005, the clients and operations of IFC were rolled over to GI.

G.I. Capital Corp.


Bill Hallman, CFA• Bill received his Chartered Financial Analyst designation in 1994

• 18 years of investment industry experience

• Bill spent 8 years as an officer and director of a private investment management company in Toronto. He was responsible for international equity and fixed income research. He covered consumer services and the consumer non durable sectors on a global basis.

• Bill has a further 10 years of experience managing individual wealth as a financial advisor and branch manager at 2 different IDA firms.

• He is an honors graduate of the Canadian Securities Course, completed the Commodity Traders Futures course and holds diplomas in Accounting and Securities Administration.

• In 2010, Bill joined GI Capital as a Senior Research Analyst and is currently pursuing his Portfolio Manager’s designation.

G.I. Capital Corp.

How We Work with Clients

• Discretionary investment management based on customized investment policy statement (IPS).

• We use a third party custodian to hold our client’s assets, who provides monthly independent reporting directly to clients. GI Capital never has access to our client’s funds.

• Clients receive monthly statements from GI, showing allocation, monthly and year to date profit and return, based on the consolidated value of their accounts together with a report on the state of economy, financial markets and portfolio changes.

• We meet with clients to review their IPS and portfolio annually, semi-annually or quarterly, depending on portfolio size.


G.I. Capital Corp.

Portfolio Construction Process

• We start by creating a customized Investment Policy Statement for the client (see attachment “IPS”).

• This document outlines target returns, risk constraints, time horizon, income needs, liquidity constraints, tax situation, legal constraints, etc.

• The purpose is to ensure that the client and investment counselor have a clear understanding of how the portfolio is to be managed.

• Once investment policy and asset-mix strategies have been established, the portfolio manager assumes discretionary responsibility for building, managing and monitoring the investment portfolio. The portfolio is managed to align with changing client circumstances and the market environment.


G.I. Capital Corp.

Benefits of Dealing with G.I. Capital

• Real-time management of Client’s portfolio.

• Customized portfolio construction through personalized Investment Policy Statement.

• Clients have access to Portfolio Managers.

• Clients have opportunity to invest in high return/low volatility alternative investments not offered through mainstream channels.

• Clients have opportunity to access financial instruments at amounts and prices below what they would if they went directly to the issuer, ie minimum subscription amounts range from $250,000-$1,000,000 per investor.


G.I. Capital Corp.

Investment Instruments/Strategies We Use:

• Long-Short Equity

• High Yield Bonds

• Private Mortgages

• Private Equity

• Private Real Estate

• Infrastructure

• Commodities

• Hedge Funds


G.I. Capital Corp.

Private Mortgages

• Private mortgages have yielded 9-15% at conservative Loan-To-Value ratios. These are not sub-prime mortgages, rather there is a lack of supply (capital) as a result of the credit crisis.

• Example: Developer wishes to finance against completed condo project in Calgary to proceed with new projects.

• Borrows $4.7 mil first mortgage, split into two pieces: i) first @ 8%, ii) second @ 14%.

• 55% Loan To Value, based on reduced market value (to reflect new environment) of 35 condo units.

• Short term loan (18 months) repaid through sale of units.


G.I. Capital Corp.

Event Driven Situations: Uranium One• The Russian state controlled firm of ARMZ announced its intention to acquire 50% of Canadian

listed uranium producer Uranium One, slated to be the #3 global uranium producer by production.

• Shareholders, apparently voting with their feet ahead of the acquisition vote, sold the shares down to ~$2.20 from ~$2.80. The story was that no one trusted the Russians entity, and didn’t want to be in business with them.

• Our view was that the deal with the Russians actual de-risked the company, given it had much of its production in Kazakhstan—what was the risk of the government pulling one of their licenses now?

• The deal came with a “change of control” special dividend of $1.06-$1.43 USD. At our cost of $2.28 CAD, we were effectively paying $1.17 CAD net of the dividend for a company that we had a net asset value (NAV) estimate of $3.75-$4.00.

• Lastly, if the deal did not go through, we assumed the shares would go back to their pre-deal level of ~$2.80/share.

• Outcome: the deal proceeded as expected, we received the $1.06 USD dividend, and sold the shares at $5.50/share.


G.I. Capital Corp.

Event Driven Situations Ace Aviation• Ace Aviation is a holding company that held cash, 75% of Air Canada, and 28% of Aero

Technical Support & Services Holdings, an airline maintenance company. (at the time of our initial investment in 2009)

• ACE announced that they are winding up the company and will distribute assets to shareholders, although admittedly they have not given any time frame.

• We calculated that ACE has traded 30-40% below the value of the assets that it will distribute. However, Air Canada is highly volatile, so we have opportunistically shorted Air Canada shares to hedge our ACE position.

• Results since entering the trade in 2009, i.e. long ACE.B, Short AC.B:

– Long ACE: profit of 112%

– Short AC.B: profit of 23%

– AC warrants (acquired through covering short position into financing round): profit of 13%.


G.I. Capital Corp.

Distressed Real Estate Opportunities

• The crashing real estate market in the US has created some distressed investment opportunities that offer first mortgage protection, but also offer participation in the upside.

• Developer has distressed project in Arizona consisting of ~200 unit low-rise apartment complex being converted to condos. The first mortgage holder is calling their loan which will result in total loss of capital for the developer.

• Developer makes an offer to the bank to buy them out at 50 cents on the dollar, or ~$35,000/door, significantly below estimated fair market value.

• Offer is financed through first mortgage on the project with 10% interest plus 50% of development profits, for an estimated return of ~20% annualized.


G.I. Capital Corp.

Long-Short Equity• Traditional financial advisors and portfolio managers often speak of the

opportunities to profit from owning shares. However, market direction tends to be the biggest driver of returns in the short term, so even undervalued companies will decline in value during a bear market.

• One way of hedging “long” undervalued positions, is to “short” overvalued shares. “Shorting” is where an investor borrows stock and sells it in the market, in anticipation of it declining in value, and then buys it back (“covers”) later. When covered at a lower price, profit is realized. If covered at a higher price, then the trade results in a loss. That way, the portfolio is hedging out market risk (beta).

• Having said that, given the current state of the markets, there are more long opportunities than short, and typically we would have a net long position.


G.I. Capital Corp.

Our Present View


G.I. Capital Corp.

Overall View of the World Economy from the Canadian Perspective

1. Unprecedented Levels of Debt in USA – have pierced the real estate bubble and destabilized the Global Financial system. The Fed has lowered the rates close to zero, and through massive bail outs and stimulus packages has stabilized the economy.

2. Massive Deficits in US from the stimulus and bailout are leading to further devaluation of the USD economy.

3. Inflationary Pressures are building as the price of fuel and food items are escalating to higher levels.


G.I. Capital Corp.

Overall View of the World Economy from the Canadian Perspective

4. Debasement of the USD will continue and potentially pick up speed due to three factors:

• Government’s desire to devalue the currency

• Financial problems at the state level

• Lack of Trust in the government

5. More State governments will fail leading to unconventional bailouts by the federal governments and international monetary authorities.

6. Emerging Economies of China and India are the key engine of economic growth.

7. Canadian $ and Markets will continue to outperform on the back of the commodity trade.


G.I. Capital Corp.

Unparallelled Increase in Debt as % of GDP• Total Credit Market in

US in terms of Debt as % of GDP has skyrocketed to levels not seen since the Great Depression of the 1930s. In the aftermath of the 30s fiasco, GDP fell 26% during the payback of the years that followed. This collapse in GDP could repeat again.


G.I. Capital Corp.

Long Term Correlation between Interest Rates and Stock Market Returns

Interest rates and stock market performance have a negative correlation.

We are at a 40 year low in interest rates. The next major move in rates is up, which

means that markets will not perform as well as they did in the 1982-2000 period.


G.I. Capital Corp.

Inflation Drives Interest Rates

The Fed Fund Rate has been at 0.25% since 2008, while consumer price inflation has remained at approximately 2% or less. We expect interest rates to start moving up later this year as signs of inflation percolate through the system in terms of fuel costs, food costs, etc. At present we are witnessing inflation in the emerging markets which should spill over to the developed economies.


G.I. Capital Corp.

Sub Strategy/Asset Class Outlook 12 to 24 months

Inflation The increase in global liquidity is leading to inflation. We have already observed inflation in the emerging markets as well as increases in prices on agricultural goods and fuel

USD The USD has been artificially propped up as investors unwind carry trades and as they seek a safe haven. The USD devaluation will continue as a result of the US government printing money via stimulus programs and bailouts.

Gold/Oil Gold and Oil have led the recovery and as long as the inflationary trade continues, will outperform the market.

Interest Rates Interest rates are at a 40 year low. With the potential inflation ahead, the next big move in interest rates is up . The unemployment rate in US has improved from over 10% in 2009 to 9% in 2011. Lower unemployment is signaling higher rates.


G.I. Capital Corp.

The Challenge For Traditional Investment Management

• Given the low interest rate environment and the low growth prospects for the economy, traditional returns will be low.

Asset Class NormalizedReturn

PortfolioWeight

Weighted Return

Fixed Income 4% 40% 1.6%

Equities 9% 50% 4.5%

Cash 0% 10% 0.0%

Fees (2.5%)

Net Return 3.6%

Plus Managers/Advisors’ Alpha ??


G.I. Capital Corp.

Investment Philosophy


G.I. Capital Corp.

GI PhilosophyAbsolute Returns

– Our goal is to earn positive returns for our clients each year, as opposed to being benchmarked to a particular stock market index such as the TSX. For our medium risk profile, we target average returns that are 2-3 percentage points higher (net of all fees) than the long term average return for a balanced portfolio, defined as 40% bonds and 60% equities, while targeting a volatility level that is significantly lower than that offered by a traditional balanced portfolio.

Wealth Management Approach

– Many firms specialize in one particular asset class or sector, i.e., .,Canadian Equities, or Real Estate, etc. We take a wealth management approach and assume that we are managing all the clients’ assets. As a result, our portfolio is broadly diversified across many asset classes such as stocks and bonds, as well as hedge funds, real estate and private equity. In fact, we look at the portfolio from the investors point of view, i.e, we consider any and all types of investments, not just public stocks.

Alternative Investments

– In attempt to earn positive returns each year, and to keep volatility low, we must look beyond traditional investments. As such the portfolio typically contains a high percentage of alternative investments such as hedge funds, private equity, private mortgages, managed futures and real estate.

Top Down/ Bottom Up Process

– We start by looking at the Global Macro picture and try to development themes that will lead us to focus in on particular markets or sectors, ie Uranium, Health Care, China, etc. We then do fundamental analysis on the particular securities we are interested in. For investments that are smaller cap, and/or longer term much more emphasis is put on fundamental analysis.

Diversification

– Most traditional portfolios are diversified by sector, and somewhat by region, but ultimately have a substantial weighting in equity markets, which can become highly correlated during economic downturns. We truly diversify, not only amongst sector and region but by asset class as well, including commodities, hedge funds and private debt and equity.

Active Management

– We are continually monitoring our positions, and will trade in and out of them if we feel it will add value. This does not mean we will always avoid losing positions, but rather it means that we are not taking a passive “buy-and-hold” approach to investing.

Long and Short

– One of the ways we try to achieve absolute returns and reduce volatility is by having the ability to “long” or “short” positions. Being able to go short means that we have opportunities to profit from companies or sectors falling in price over the medium term, while also being able to reduce volatility through hedging in the short term.

Concentration

– Wealth is usually created through owning equity in assets that are experiencing a long term growth path, whether it be in shares of public or private companies, real estate or other assets. Therefore, when we find an exceptional idea that we have a high degree of conviction in, we will concentrate our allocation in that position, usually up to 5% based on cost.

Value

– We perform fundamental research on our holdings such as reading annual reports, building financial models, speaking with management, and speaking with analysts in an attempt to establish the intrinsic value of the company. We then look for opportunities where we can buy at a market price that represents a significant discount to intrinsic value.


G.I. Capital Corp.

Absolute Returns vs. Relative Returns

• Traditional portfolios are measured against a series of benchmarks which are usually represented by a number of market indexes, i.e. portfolio returns are measured relative to the index.

• We manage our portfolios on an absolute return basis, meaning that it is our goal to make profits for our clients every year, regardless of market returns. To accomplish this, we must combine traditional investments such as stocks, bonds with Alternative Investments.


G.I. Capital Corp.

Understanding Diversification

• The traditional way of thinking of diversification is to think in terms of two main asset classes, i.e. Equities, Fixed Income, and then diversify accordingly by sector, geography and credit.

• The problem with the traditional model is that equities and fixed income are often correlated as they both tend to move indirectly with the level of interest rates. Furthermore, during times of distress, all asset classes become highly correlated.

• We believe a proper asset allocation model should be built based on asset classes or strategies that have distinctly low correlations with each other. To achieve this, one must go beyond traditional stocks and bonds, and encompass alternatives investments like private mortgages, private equity, real estate, hedge funds, commodities and managed futures.


G.I. Capital Corp.

Target Portfolios for Accredited Clients

Target Allocation for Accredited clients with Moderate Risk profile


G.I. Capital Corp.

How are Investment Counselors/Portfolio Managers (IC/PM) different from traditional retail investment professionals

• IC/PM firms are licensed to manage portfolios on a discretionary basis, whereas most retail advisors are licensed only to sell securities or other financial products.

• Most portfolio managers hold the Chartered Financial Analyst designation and must abide by a strict code of ethics.

• IC/PM firms are compensated through fees based on portfolio size and performance, as opposed to commissions, so their interests are more aligned with their clients.


G.I. Capital Corp.

How Safe Is It to Work with an Independent Boutique Firm?

• All client assets are held at a separate custodian, or in client name, never in the name of GI.

• Custodians are large, well-capitalized financial institutions that are members of Canadian Investor Protection Fund (CIPF), and as such carry $1,000,000 of insurance per account.

• GI carries a $50,000 financial bond as insurance.

• Custodians provide independent monthly reporting of transactions and holdings to the client.


G.I. Capital Corp.

Conclusion

• Dealing with GI means having a direct relationship with your own personal portfolio manager, who is focused on actively managing your portfolio, not selling you a product.

• Our access to, and use of unique investment products and strategies enable us to create a portfolio that is not entirely driven by market forces, and could perform well even in a sideways market.

• Our fee structure, combined with the fact that we invest along side our clients, aligns our interests with our clients, i.e. we work for you, not for a dealer or a fund company.


gi presentation q1 2011

Documents