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2022 First Quarter Letter

April 29, 2022

First Quarter Letter 2022


During the 1st quarter, the LAM Canadian Equity Fund was down -0.6% before fees versus a rise of 
+3.8% for the TSX Composite Total Return. The positive return of the TSX was driven by the Energy 
and Gold sectors which were up +36% and +20% respectively. As a reminder, we do not invest in 
highly cyclical businesses such as gold or  mining  and  metals  stocks,  and  our  investments  in 
energy  are  primarily  in  infrastructure  companies  that gather,  process,  store,  and  
transport  fossil  fuels,  and  are  less  volatile  than  exploration  and  production companies 
that assume the commodity risk. Considering our low exposure to the “commodity complex”, we are 
relatively satisfied with our return, particularly given that many of our holdings are reporting 
record results.
Our top contributors included AG Growth International, a global manufacturer of agricultural 
equipment used for grain and fertilizer handling and storage and food processing, which rose +36% 
on record financial results and  a  record  backlog.  Strong  returns  were  also  generated  by  
our  energy  infrastructure  holdings  such  as Enbridge, TC Energy and Gibson Energy, as well as 
renewable power producer Boralex. Various other stocks such as CP Rail, Dollarama and Telus 
contributed positive returns during the quarter.
Among  our  detractors  were  not  surprisingly  several  of  our  technology  holdings  such  as  
supply  chain management   solutions   provider   TECSYS,   e-commerce   and   government   
e-procurement   platform   MDF Commerce, and IT consulting firm CGI Group. Also, Pollard Banknote, 
whose instant lottery ticket business is generating record sales, nevertheless dropped -32% on 
higher input costs for specialty paper and ink, despite being an oligopoly with high barriers to 
entry and having attractive profit margins and strong free cash flow.
Given the volatility and  economic  uncertainty  going forward, our strategy  is to remain highly 
diversified by company in non-cyclical and non-economically sensitive sectors that are fairly 
recession resistant. These include several newer holdings such as vitamin manufacturer  Jamieson 
Wellness, P&C insurance company Definity, retailer Pet Value, and renewable power producer 
Northland Power. We are also well positioned to benefit from the continuation of many powerful 
trends such as aging demographics, the digitization and automation of businesses and optimization 
of supply chains, and the reduction of the world’s dependence on fossil fuels.
During the 1ˢᵗ quarter, our U.S. portfolio declined -4.9% versus -4.6% for the S&P 500 Total 
Return. Our small underperformance was due to a strong rebound in low-quality yet still expensive 
companies at the end of the quarter, which we suspect was mostly due to short covering. As we 
invest almost exclusively in high quality reasonably valued companies, we did not participate in 
this short-lived rebound which has since reversed.
Natural  gas  infrastructure  leader  Williams  was  our  top  performing  stock  with a  +28%  
return  driven  by  the energy sector, which was the best performing sector. Energy prices and 
other commodities got a big boost fueled by Russia’s invasion of Ukraine as these two countries are 
key commodity producers on the world stage. Arch Capital also did very well with a +9% return as 
property & casualty insurance companies are in a strong pricing environment and the stock is still 
relatively cheap at around 10x earnings. T-Mobile was also a positive contributor due to its 
defensive nature as a wireless carrier and the strongest 5G player in the U.S.
On the flip side, our biggest detractor was Meta Platforms (formerly Facebook) which was down 
sharply as the number  of  new  users  has  slowed  considerably.  The  company  is  also  
investing  billions  of  dollars  in  its “Metaverse” without any foreseeable return on investment, 
as a result of which we sold our shares. Lowe’s, the hardware giant, got hit as the rising interest 
rate environment could deter demand for home improvement products. Ross Stores, a retailer, was 
also down as inflation is expected to cut into  consumer discretionary spending. We still like both 
companies as they are leaders in their fields with excellent return profiles.
We  took  advantage  of  the  market  decline  to  add  some  new  names  such  as  the  
fast-growing  cybersecurity provider Crowdstrike, digital payment leader PayPal, and Charles River 
Labs, the world’s largest non-clinical drug research company. As we are in an environment where the 
Federal Reserve is withdrawing liquidity, we expect continued volatility in the markets and are 
keeping some cash for further opportunities.
The 1st quarter of 2022 was historic for global bond indices, and not in a good way. The quarter 
ended with one of the worst performances in over 40 years. The Canada Universe Bond Index ended the 
quarter with a return of -7% and the Hybrid Bond Index was down -5.3%. We were also impacted, but 
to a lesser extent, as the LAM Fixed Income Fund finished with a gross return of -3.1%. We are 
pleased with this relative outperformance given the very difficult rising rate environment we are 
currently navigating.
Yields rose considerably during the quarter, which explains the poor performance of the bond index. 
As yields rise, the value of bonds decline. Our large weighting of short maturity bonds, resulting 
in low portfolio duration, helped cushion the blow as these then to be less sensitive to rising 
rates than long maturity bonds. Higher commodity prices fueled by the war in Ukraine, combined with 
already persistent inflation, left central banks with no choice but to adopt a more aggressive tone 
regarding future monetary policy tightening. Consequently, short term interest rates have risen 
dramatically, and the yield curve has flattened to the point where yields on government bonds 
maturing in 2 years are trading at almost the same level as those maturing in 30 years.
Corporate credit spreads were also volatile during the quarter. Investment grade spreads widened by 
about 30 basis points which hurt our performance due to our high weighting in corporate bonds. 
However, high yield bonds  such as Secure  Energy  7.25%  and Nuvista 7.875%,  given  their shorter 
 duration and exposure  to  the energy sector, were resilient, with credit spreads barely impacted. 
Our exposure to rate-reset preferred shares with  “floors”  and  high  dividend  yielding  stocks  
such  as  Enbridge  and  TC  Energy  also  contributed  to  our outperformance.  We  have  also  
been  taking  advantage  of  rising  rates  to  reinvest  cash  at  higher  yields.  Our Canadian 
Fixed Income Fund is now yielding over 5% with a duration of just over 4 years, which should be 
very attractive going forward, particularly if inflation rates begin to decline and eventually get 
back below 3%.
The April 13 monetary policy report from the Bank of Canada (BoC) was an unusually clear and 
unequivocal message to Canadians that interest rates are going to rise further. The report stated 
that inflation is too high and the BoC is committed to reducing it back to the 1% to 3% target 
range. Interest rates will rise but how high and for how long will depend on how inflation responds 
to its tightening policies.
The backdrop to BoC policy is that the economy is strong and has moved into the area of excess 
demand that must be reduced. Policy is focused on moving the overnight rate above the so-called 
“neutral rate”, which, according to BoC calculations, is well above the current rate, even after 
the recent increase of 50 basis points. The removal of excess demand is a necessary condition to 
bring inflation down and the BoC is clear that there is considerable uncertainty as to how long 
that will take. But the key takeaway is that it is committed to make that happen. That is both good 
and bad news. In the short term it means that there will remain headwinds for stocks and bonds (and 
the risk of recession), yet we believe that financial conditions will return to normal, and 
investors should look through this period of uncertainty and volatility and focus on a longer 
From a broader perspective and in the near term, there are a variety of factors that are 
complicating investors’ ability to time the peak and decline of inflation and interest rates. The 
Canadian economy is very exposed to the  U.S. and  to  commodities.  The  U.S. has  higher  
inflation than  Canada  and the  policy  tone  of  the  Federal Reserve (FED) has become more 
hawkish. Commodity prices have risen sharply, driven by supply shortages, strong demand, Russia’s 
invasion of Ukraine and the global response to it. Strong commodity prices support Canadian 
incomes, economic growth and the Canadian dollar which is fundamentally good for Canada.
On the other hand, it is important to keep in mind that Japan, China, and the European Union are 
experiencing very weak economic conditions which bodes well for an easing of inflation pressures in 
the coming months. Moreover, as the data shows, inflation expectations beyond two years remain well 
anchored at close to pre- pandemic levels, reflecting the commitment of the BoC and the Fed to push 
inflation down. This suggests that the period of monetary restraint acting against excessive 
inflation may well abate by year-end.
Broad stock market  indexes were  initially holding up relatively well in the face of the 
developing monetary tightness for two reasons. First, the North American economy has been quite 
resilient and hence expectations of corporate earnings and growth remain supported. Second, a large 
portion of the rise in inflation has been caused by supply disruptions and temporary shortages due 
to supply-demand imbalances resulting from the pandemic. Supply side pressures should ease later 
this year, in good part reflecting lower demand caused by high prices and higher rates, but the 
consequences of the Russian war on Ukraine remain a wild card.
The bottom line for investors is that there will continue to be uncertainty and volatility in both 
equity and bond markets until data supports the view that inflation and interest rates have peaked, 
and that the BoC and the Fed can declare victory. Until then, a focus on quality is appropriate. In 
the longer run, Canada will remain in a strong position due to the ongoing technology revolution 
and strong demand for its natural resources as the world lessens its dependence on Russia. The 
undervalued Canadian dollar and cheap stock market relative to the world will continue to make 
Canada an attractive place for domestic and foreign investors.
Stephen Takacsy                                     Olivier Tardif-Loiselle                              Tony Boeckh
Lester Asset Management Inc. (“LAM”) publishes reports such as this one that may contain 
forward-looking statements.  Statements concerning LAM, the LAM Canadian Equity Fund and the LAM 
Canadian Fixed Income Fund (the “Funds”) or any related objectives, goals, strategies, intentions, 
plans, beliefs,  expectations,  estimates,  business,  operations,  financial  performance  and  
conditions  are  forward-looking  statements.   The  words  “believe”, “expect”, “anticipate”, 
“estimate”, “intend”, “aim”, “may”, “will”, “would”, “should”, “could” and similar expressions and 
the negative of such expressions are intended to identify forward-looking statements, although not 
all forward-looking statements contain these identifying words. These forward-looking statements 
are subject to important risks and uncertainties that could cause actual results to differ 
materially from current expectations. All data, facts and opinions presented in this document may 
change without notification. The information provided herein is for information purposes only, it 
is not intended to convey investment, legal, tax or individually tailored investment advice and it 
should not be relied on as such. It should not be considered a solicitation to buy or an offer to 
sell a security. It does not consider any investor’s particular investment objectives, strategies, 
tax status or investment horizon. Past performance is no guarantee of future results. No use of the 
Lester Asset Management name or any information contained in this report
d or redistributed without prior written approval.

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