Before I go into my outlook for 2012, there are two things of note with regards to the portfolios I manage in 2011.

Firstly, unlike 2008, which was also a very difficult year in the equity markets, global economies did not collapse, nor did the banking system collapse.  Corporations faired better in 2011 versus 2008.  Firstly, their balance sheets were much stronger with many companies boasting large cash reserves and secondly, although economies slowed, most companies in the resource sector continued to make good profits both in energy and materials as commodity prices held up reasonably well and demand continued unabated.

With the corporate longterm outlook being favourable despite the funds returns being disappointing, many of the names I had invested in were takeovers this year.  This was particularly true of the copper space, in which Equinox, Quadra and Peregrine were taken over.  Although stock prices didn’t cooperate, companies with desirable high quality assets reached valuations that definitely got corporate and state owned companies interested in acquiring them.  If valuations continue at these current low levels, I believe we will continue to see more and more takeouts of quality companies.

Secondly, another point of interest is the longer term track record of the funds under management.  I have stated numerous times that my true speciality is in stock picking (witnessed by the numerous takeouts in the portfolios).  When a year such as 2011 occurs in which the market is driven largely on macro issues, the funds usually suffer as was the case in 2011.

Despite the underperformance experienced in 2011, I would like to highlight the funds’ long term returns.  As I probably have no need to mention, volatility continues to be high, but despite the volatility, the longer term numbers continue to show good returns when looking back to inception as can be seen by the graph on the following page:

Small Cap Equity, Net Returns

Finally we come to the 2012 outlook.

As I look back to 2011 there were many macro shocks that markets could not overcome, compounding a correction that began in the Spring of 2011 which at the time seemed like a normal enough mid-cycle correction given the strong performance of the funds in 2010.

The market took many blows as mentioned earlier and economies around the world have slowed but remain stubbornly resilient.  In fact, at this juncture, it looks as though the worst may finally, dare I say, be over.;

The U.S. growth is accelerating based on the latest economic data points.  China’s GDP has slowed to the 8% level and inflation seems to be under control.  Chinese authorities have in fact recently shifted their focus away from controlling inflation—their top priority over the past year—and toward growth.  China will focus on expanding domestic demand to counter a slowing global economy, the government said in a statement released after a meeting of the central economic work conference.  The memo was definitely more pro-growth than the one issued a year ago, strongly suggesting that fiscal policy in 2012 will be more proactive than 2011 and monetary policy will be eased.  We are looking for another cut in the reserve ratio for Chinese banks over the next few weeks.

Looking at Europe there is no doubt that the sovereign/banking debt crisis going on in Italy, Spain, Greece and Portugal is having a negative impact not only on European growth but global growth given the Euro zone still accounts for 20% of the global economy.  But here again, despite the slowing it is still nowhere near the levels experienced in 2008.

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