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Bcim.caVOLUME 3 ISSUE 2
June 30, 2007
The net asset value per unit of your Fund was down by 0.3% for the second quarter of 2007. In U.S. dollar terms, it was up by 8.1%. Relative During the quarter, we sold the remaining to equity indices, the return was better than both holding in Energizer, and bought a new posi- U.S. and international markets in Canadian dollar terms. The Canadian dollar was up by 7.8% reduced the holdings in Canon, Meredith, against the U.S. dollar and 13.2% against the Yen Scholastic and Westwood One, and added to during the quarter, a significant negative for your the positions in American Express, Ebay, TOP TEN HOLDINGS:
Please take note of a performance chart for your Energizer performed very well from when we Fund at the bottom right corner of this page. first bought it at just over $50 in December of This chart will become a permanent feature of 2005. We sold half the position in January of “Streams” going forward, and the numbers may this year at just under $83 and the other half be commented on but will not be reported in this at just over $89 in April. At these prices En- ergizer looked quite over-valued, especially relative to UPS. We profile UPS on page 3 of Significant positive contributors to the perform- ance during the quarter included Coca-Cola En- terprises, Intel and Scholastic. Small negative We sold part of the position in Westwood contributors were Ebay, Glaxo and Zimmer. One in early May after the stock rose signifi- cantly in response to rumours that the com- On a year-to-date basis, the return for your Fund pany would be sold. These arbitrage situa- was slightly better than global markets overall. In tions are not our specialty, and we thought it local currency terms there was significant positive Costco, Energizer, Intel, Learning Tree, Murata, Oracle and Reed Elsevier. Glaxo, Pfizer and This is a report from the Wall Street Journal in ence between Canadian and American
early June quoting Labor Department statistics: financial markets. While the provinces are
“The jump in so-called unit labor costs
still fighting over whether there should be one stemmed from a combination of factors: sharper national securities commission in Canada compensation growth, which was revised upward (securities regulation remains a provincial to 2.8% from 2.3%, and lower growth in produc- responsibility), the SEC is moving towards tivity, or output per hour, which was revised allowing foreign, and ultimately American, companies to file financial statements accord- ing to international accounting standards. Canada remains provincial, literally and figu- Two separate news items point out the differ-
.MARKET MUSINGS (CONT.) The chart to the right was taken from The Economist newspaper, and the editorial comments that the bubble in China still has some ways to go to match other
stock market bubbles. But who wants to be the last one out? I’ve made comments before in previous issues about doing business in Russia,
but recent events and a new book really point out how nasty the regime is. Both British Petroleum and Royal Dutch Shell have ceded control of major assets in Rus- sia to Russian state-controlled firms, arguably at fire-sale prices because they want or need to continue to operate in Russia. The book “Death of a Dissident” by Alex Goldfarb tells the real-life story of Sasha Litvenenko, the former Russian spy who was recently poisoned by polonium, and allegedly by Russian FSB operatives, in London. The book is thrilling, but sad because it describes the reality of Russia. How does one factor in political risk to business valuations? Consider China and Sometimes you run across something that you know is profound, but the implications are not obvious. I refer you to a working paper put out by the Bank of Canada in March on World Real Interest Rates. For the last fifteen years or so, world real interest rates
have both converged and followed a downward trend to a level, at under 2%, not seen since the 1970’s. While the paper has no defi- nite conclusions, it points to the decline in the growth of the world’s working age population, a decline in investment trends and other factors, but seems to put little weight on the “savings glut” that some government officials talk of more recently.
This one goes in the category of Dumb and Dumber. We looked at a company called Numico just a month ago when it sold for
E7.1 billion, representing 2.7x sales and 26x earnings. The company, in the name of growth, had just driven its returns on capital down with some pretty pricey acquisitions in its fields of baby food and nutrition. With only somewhat above average growth and poor capital allocation, we thought the price was pretty high. Now, Groupe Danone is buying Numico for E12.3 billion, or well over 4x sales and 40x earnings. The fit, and consequent synergies, with Danone is questionable. Maybe we are in a world of “eat or be There were some significant business developments among some of the companies we hold. American Express has reorganized into two groups– global consumer and business-to-business for better focus on the customer. It is also in the final stages of selling its pri- vate banking business. Results at American Express continue to be very good. Coca-Cola Enterprises should benefit from the acquisi- tion of Glaceau VitaminWater by the Coca-Cola Company. Although details have yet to be worked out between Coke and CCE, this fills out both companies’ non-carbonated product lines nicely. In addition, CCE has an agreement with Campbell Soup to distribute V8 and other single-serve beverages. Ebay has agreed to make changes and much-needed updates to its auction site to better serve sellers, and is introducing free classifieds into the U.S. market via its Kijiji business. Canon and Oracle have both reported better-than- expected results and have issued upbeat outlooks for this year. GlaxoSmithKline (GSK) has had negative press from an analysis done on Avandia, its hugely-successful diabetes drug, which suggested a higher risk of heart problems for people using the drug. At this point, all other studies of the drug do not support this finding, but the issue is still being investigated by the FDA and others. Intel is benefit- ing from questions over the timing and performance of AMD’s new microprocessors due this year, and also from the significant ramp of its own new products and processes. And finally, Scholastic plans a record printing of the final Harry Potter novel, due out in a few weeks, and has approved an accelerated share repurchase of approximately 14% of shares outstanding. Since March there has been another disconnect between equity and bond markets. While long rates in the U.S. have moved from 4.5% to 5.15% currently (and briefly touching 5.25% in June), the S&P 500 is up by close to 10% in the same period. Perhaps the expectation of continuing economic and earnings growth is outweighing this move up in rates. But equity prices generally seem to be at the high end of valuation ranges, and it remains difficult to find good companies at good prices. We thank you for your continued support. STOCK FOCUS— UNITED PARCEL SERVICE INC. (NYSE-UPS) Everyone knows UPS—those ubiquitous brown trucks that seem to park where you’re not allowed to, keeping the wheels of commerce moving. UPS is the world’s largest package delivery company, with sales of US$48 billion and 428,000 employees. Over the last five years, package volume has grown by 4% annually and revenues have grown by a compound annual rate of 11%. International business makes up 25% of the total, and this business is growing faster than the company average. UPS acquired Overnite in 2005 to enter the less-than-truckload (LTL) business, and the freight-forwarding business of Menlo in 2004. The company has an engineering culture that borders on army-type logistics, but encourages employee ownership and promo-tion from within. The management team is relatively young. UPS has a U.S. domestic market share of 50%, ahead of FedEx at 21%, the postal service at 19%, DHL at 7% and others at 3%. Its worldwide export share of mar- ket is 16%, behind DHL at 24%, but ahead of FedEx (13%) and TNT (10%). UPS consistently ranks highest, along with FedEx, in surveys of customer service. And, of course, the barriers to entry in this business are formidable. UPS went public in late 1999 at a time when we owned FedEx in our portfolios. The debate over which company was better seemed to rest with the underwriters, as the stock came public at a pre-mium of about 80% to the market and to FDX, which made little sense at the time. However, the one enduring fact that worried us about UPS relative to FDX was the argument that UPS had one inte- grated business model (air plus ground together) while FDX had separate networks for air and ground, which gave rise to both superior margins and returns on capital for UPS. UPS has a brand that is recognized worldwide, un-matched scale and scope, significant customer rela-tionships, a AAA-rated balance sheet and technology that might be best in the business. Arguably, FedEx has many of these attributes as well but this is not a win-lose situation between the two compa-nies. These two companies have and will continue to gain market share at the expense of other com-petitors. The investment idea behind UPS rests on the notion that it is an information company that happens to have a lot of planes and trucks. UPS can leverage its technology and scale across new geographic mar-kets and across businesses (apply its capabilities to LTL, for example) and use information technology to reduce costs, improve service and gain market share. It can also apply its technology to reduce costs for customers, thereby giving itself more pricing flexibility. Few competitors can match UPS’ capabilities. The risks to UPS, other than the obvious economic ones, revolve around the sustainability of those margins relative to FDX, the potential for disruptions in their business through strikes (the labor force is unionized while FDX is not), and the potential for bad acquisitions (the supply chain and freight businesses that they bought need turning around). While the performance of UPS (the company) has been well above average since 1999, the stock has languished and currently sells at a discount to the market and to FDX, down from that lofty premium it used to have. With prospects of mid-to-high single digit revenue growth and double digit EPS growth going forward, the stock is cheap. We sold the rest of Energizer in order to buy UPS. Black Creek Investment Management Inc. is an investment coun- Formed in 2004 by Bill Kanko, it manages international equity portfolios for its clients, and is the Manager of The Black Creek Focus Fund, a pooled equity fund for accredited investors. This document contains financial highlights, but does not contain either interim or an-nual financial statements of the Black Creek Focus Fund. Unless you have indicated that you do not wish to receive a copy of the interim or annual financial statements of the Black Creek Focus Fund, when prepared, you will receive these financial state-ments at no additional cost. This document is intended for the sole purpose of providing existing securityholders of the Black Creek Focus Fund with up to date information about its investments and the investment adviser’s investment philosophy and strategies. This document is not in-tended to assist prospective investors in making an investment decision about investing in the Black Creek Focus Fund and should not be used for that purpose. This docu-ment is not intended to, and does not provide specific advice on the investment of se-curities and since each investor’s objectives, risk profile and circumstances differs, should not be used for that purpose. Please contact your tax, and legal adviser, as well as Black Creek Investment Management Inc. or another securities adviser, if you re-quire advice on the investment of securities for your own account.
Topical metformin inhibits chloride secretion but not sodium absorption across human nasal epithelium Maulik Shah, Vinothan Ganesaratnam, Deborah Baines, Emma Baker Division of Biomedical Sciences, St George's, University of London, United Kingdom Background: In cystic fibrosis (CF), mutations of the cystic fibrosis transmembrane regulator (CFTR) lead to reduced chloride secretion and i