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25 Adelaide Street East, Suite 1914 Toronto ON M5C 3A1

At Sprung Investment Management, our focus is to create investment portfolios for our clients that enable them to achieve their unique, long-term investment goals. In this endeavour, we strive to act with the utmost integrity, utilizing all of our analytical skills, knowledge and intuitions. PRIVATE CLIENT FOCUS Sprung Investment Management is an independent discretionary investment management firm that serves the investment needs of high net worth private clients including business owners and entrepreneurs, professionals, family trusts, estates, and private charitable foundations. OUR PEOPLE At Sprung Investment Management, the investment team collectively has over 120 years of diversified investment experience. All of our principals hold the Chartered Financial Analyst designation and as such adhere to the CFA Institute Code of Ethics. Each has made a commitment to continuing education. RISK PERSPECTIVE We understand that our clients have worked hard to get where they are and we appreciate that they don’t want to lose it. As the chosen stewards of their investment assets, our risk management approach is to preserve their capital by purchasing under-valued securities, with a margin of safety that we expect will deliver income and capital appreciation over the long term. PERFORMANCE Sprung Investment Management has a track record of low volatility of returns since the company’s inception in June 2005. This has served our clients well over this relatively difficult investment period that includes the bear market of 2007- 2008. Our performance numbers are available by request. CLIENT SERVICE At Sprung Investment Management, satisfying our client’s financial needs is our top priority. Each and every client is special and receives individual attention and customized investment advice based on his/her specific objectives and risk tolerance. Our principals are always available to speak directly to clients. INVESTMENT STYLE In building equity portfolios, individual security selection is based on “bottom up” research that is valuedriven and often contrarian to current popular thinking. We assess quality and continuity of return on equity, current price relative to intrinsic value, economic value added and quality of management. Although our typical investment horizon is two to five years, we constantly evaluate our current holdings against new opportunities that may offer better value. Our view is that a strong sell discipline is a critical component to long-term investment success. Our investment approach on the fixed income side is to conduct rigorous credit analysis in the context of future economic and interest rate expectations.

25 Adelaide St. E., Suite 1914, Toronto, ON M5C 3A1 | Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 2


LAND OF CONFUSION (Song by Genesis) “If you’re not confused, you’re not paying attention.” - Anonymous “What is right is not always popular and what is popular is not always right.” – Albert Einstein

Here we go again! As we enter the last quarter of 2013, US politicians are once again playing a game of brinkmanship; unfortunately one that could have dire consequences for the world’s economy. Politicians continue to entrench opposing positions rather than engage in positive action. It is highly unlikely that the entire US government will shut down as essential services will remain active, but nevertheless, investors dislike uncertainty and markets have been under pressure as the Third Quarter closed. Investor behaviour during the quarter appeared less than consistent with past experience. Despite this contradictory behaviour, results generally finished in positive territory.

Canadian Dollar Q1 Q2 Toronto Stock Exchange S&P 500 MSCI EAFE* 91 Day T-Bill DEX** CDN/US dollar

3.3% 13.2% 6.8% 0.2% 0.7%

-4.1% 6.5% 1.3% 0.2% -2.4%


6.2% 3.1% 8.7% 0.3% 0.1%

5.3% 24.4% 17.7% 0.7% -1.6%

US Dollar Q1 Q2



10.6% 2.9% 5.2% 19.8% 4.4% -2.1% 10.9% 13.4%

-2.2% -3.2%

2.2% -3.8%

* Europe, Asia and Far East Index ** Canadian Bond Universe Index

25 Adelaide St. E., Suite 1914, Toronto, ON M5C 3A1 | Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 3

As noted last quarter, it appeared to be a bit of a conundrum as the Federal Reserve discussed reducing the degree of market intervention undertaken thus far, presumably due to indications of a stronger performing economy, yet investors reacted negatively as fears that the lesser levels of intervention would be insufficient to maintain current yields. In other words, there is a discontinuity between the reality of improving economic conditions and the perception of the investment market participants as to the durability of that growth. Statistics continue to indicate that inflationary expectations are low. Typically, this would be a good environment for bonds yet the pressure on yields has been to the upside pushing bond prices down. The appetite for equities has been improving suggesting a willingness to engage in riskier assets. The American economy has been showing signs of improvement while the Euro-zone has been somewhat more stable yet emerging markets have been weaker as growth there has slowed. As a result, this appetite for risk has not translated to the emerging economies but has in fact been shunning them. Expectations for global economic growth has dampened as a result since the emerging economies have a much larger impact now than a few years back. Yet, as previously noted, the trend has generally been into equities despite lower expectations in global growth. Could inflationary expectations transform into deflationary fears as the emerging markets slow and their currencies lose value relative to the developed countries? Commodity prices were generally better in the Third Quarter however they remain largely down for the year to date. Lower commodity prices generally translate into an improved environment for consumers while low inflation is typically good for bond prices. Mounting debts in the public sector will eventually put pressure on interest rates to increase but the day of reckoning will be postponed as long as the politicians can push it forward. In the interim, emerging markets have demonstrated great resistance to currency adjustments. As the above text indicates, investors today appear confused. Their focus would appear to be on immediate reactions to geo-political events. This was evident in August when developments in Syria negatively impacted equities. Although this uncertain environment would normally be perceived to be positive for gold, the price has declined in the latter part of the quarter. This concentration on exogenous events has taken the focus off fundamentals. Shocks will continue to impact short-term market directions as investors over-react to economic news releases. This environment will provide opportunities for value investors over the coming months.

25 Adelaide St. E., Suite 1914, Toronto, ON M5C 3A1 | Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 4


“Nothing is so unbelievable that oratory cannot make it acceptable.”- Cicero

After a negative second quarter, fixed income markets continued their slow grind towards higher rates until the Federal Reserve postponed its tapering program causing what is expected to be a temporary reversal. As a result, bonds were essentially flat in the quarter. The initial reaction to the continuation of the “quantitative easing” program may have been positive but on further reflection, the implications are less rosy. The delay on tapering the stimulus may imply that the Federal Reserve considers the economy weaker than the market participants. In any case, their lack of action after the buildup in anticipation, eroded that most precious commodity of central bankers – credibility. In our view, a modest reduction in the level of bond buying would have satisfied both the expectations of market participants, while having no meaningful negative impact on the economy. The European situation seems to have settled down with modest economic improvements becoming evident. Still, high unemployment and crushing levels of debt remain and will have to be dealth with. In the meantime, another round of bailout for Greece will have to be decided on in November. Germany’s leadership in this stabilization process was once again confirmed with Mrs. Merkel's recent electoral success. Nevertheless, she is faced with crafting a coalition that may be less ameanable to her goals of extending continued support for Germany’s less stable Euro partners. At quarter-end the spectacle of the US legislative process’s inability to come to terms with crafting a budget was faced by the market. It is likely that after further posturing some form of agreement will eventually be reached. Nevertheless, it is extremely unlikely that both parties will agree to deal with the ongoing deficits that continue to accumulate, in a meaningful manner. It would appear that only some massive external shock will focus the attention of legislators on dealing with debt and deficits. Whether the reduction this summer in Japanese and Chinese purchases of US Treasury securities is an early warning sign or just a blip in international investment flows, remains to be seen. The total return performance of the bond market as measured by the DEX Universe Index for the third quarter was a minimal gain of 0.1%. The benchmark ten-year Government of Canada bond yield increased by 0.1%, to 2.5%.

25 Adelaide St. E., Suite 1914, Toronto, ON M5C 3A1 | Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 5

Our Team Michael Sprung, CFA: Chief Investment Officer • Chief Investment Officer • More than 30 years experience in Canadian Investment industry, overseeing portfolios up to $2.5B • Senior level positions with YMG Capital Management, Goodman & Company, Ontario Teachers’ Pension Fund, Ontario Hydro and Cassels Blaikie & Co. • Frequent contributor to BNN-TV, Globe & Mail, National Post and Money Sense Fred Palik, CFA: Vice President, Fixed Income • Extensive experience in fixed income management in a variety of senior positions, primarily in the insurance and hospital sectors. • Member of the Toronto CFA Society and the CFA Institute. Lois O’Sullivan, CFA: Vice President More that 25 years experience in investment management. • Co-founder of Sprucegrove Investment Management, specializing in international markets. • Senior level roles at Confed Investment Counselling and Confederation Life Insurance Company. • Fellow of the Life Office Management Institute (FLMI), the Toronto CFA Society and the CFA Institute. Joie P. Watts, CFA, FSCI: Vice President & Portfolio Manager • Over 30 years of progressive experience in the securities and investment industry. • Senior level roles at Burns Fry Limited, Merrill Lynch Canada and Nesbitt Thomson. • Managing Director of Instinet Canada Limited for over 10 years • CEO of Shorcan ATS Limited, a specialized marketplace for equity dealers trading as principal. Robert D. Champion, MSEd: Vice President, Client Services • Joined Sprung Investments Management in 2012 after several years with Successful Investor Wealth Management. • Prior to that, he had a fifteen-year career in OEM industrial sales. • Manager with investment-publishing division of MPL Communications in the 1980s and early 1990s. MPL publish Investor’s Digest and Investment Reporter. • Robert is a Chartered Investment Manager (CIM) candidate.

Stay connected with Sprung Investment Management: Twitter Twitter handle: @SprungInvest Facebook Linkedin See Michael on BNN

25 Adelaide St. E., Suite 1914, Toronto, ON M5C 3A1 | Phone: 416.607.6642 | www. SprungInvestment. com | P a g e | 6

Sprung investment management commentary 3rd quarter, 2013