April 8, 2009

Dear Unitholders:

The net asset value of the Formula Growth Fund as of March 31, 2009 was $2,420.21 per unit.  For the quarter, this represents a 0.3% increase in Canadian dollars and a 2.5% decrease in U.S. dollars.  

In the first quarter, our results were well ahead of the U.S. indexes listed in the table above and ahead of the average U.S. small-cap growth manager who lost 8.2%.  It was, once again, a very difficult and turbulent quarter as the credit crunch that began in the fall of 2007 continued to weigh heavily on stock markets around the globe.  Most observers agree that a 20% move up or down defines a bull or bear market.  On this basis, the first quarter was actually so turbulent that we experienced both a bull and bear market.  The first 9 weeks of 2009 saw the market decline 25% followed by a March rebound of 23% by the 26th of the month.

There have been 10 recessions since World War II.  The average length of the recessions has been 10 months from peak to trough.  So far, the current global recession has not been unusual because of its steep declines in GDP or industrial production or even due to the rapid rise in unemployment.  The recession is striking this time due to the enormity of the U.S. government’s response to it.  The immensity of the Keynesian-type bailout by the Federal government is truly unprecedented; dwarfing even the response to the Great Depression in the 1930’s.  Given the extent of the bailout, we are convinced that the U.S. economy will recover sometime in the next 12 months which is more or less within the normal time frame of all post 1945 recessions.   Typically, the stock market rallies well before the end of recessions.  Perhaps March is the beginning of a long lasting rally for equities.

We must admit, that although we are confident that stock markets will recover as the current recessionary storm subsides, we are uncomfortable with what we believe will be the unintended consequences of the supersized stimulus in the future.  Our guess is that the US and other pro-stimulus governments will be dealing with a combination of higher taxes, elevated levels of inflation, currency concerns and more meddlesome regulations. 

Clearly the best economic backdrop for Formula Growth Fund is a normal one.  By normal we mean moderate GDP growth with moderate levels of inflation and reasonable levels of interest rates.  These normal environments allow the quality of the companies included in our portfolio to shine through without having to compete against stocks and sectors benefiting from financial alchemy and cheap capital. 

Over the past ten years, there has been a shocking lack of normalcy in the US economy. From the internet bubble, to the sub-prime bubble to the “too big to fail” dogma currently driving public policy, the environment has been anything but stable. These conditions have made it very difficult to earn sustainable rates of returns in equities including Formula Growth Fund.  Growth rates in earnings have either been too high and therefore the stocks too pricey or earnings have been non-existent. This has resulted in great volatility and negative returns.

In a normal environment or when the world struggles its way back to normal, Formula does quite well.  Smaller, nimble growth companies are able to quickly reorient business plans in order to reignite earnings per share growth.   For example, during the inflationary and incendiary 1970’s after the Nixon impeachment, Formula did spectacularly well.  During the late 1970’s, while the US fiddled with bad international and domestic policies, the Fund compounded for the 6 years ending December 1980 at over 40%.  It is telling, though, that for the 6 years before this period the Fund compounded at a negative 10% per year.  These negative returns set the stage for the cheap valuations for small stocks which allowed them to roar ahead, irrespective of what the government was doing.  

On a personal note, effective June 1, 2009, our great friend and partner Kimberley Holden will be retiring from her role as Vice President of the company.  As most of you know, Kim has been with Formula for over 20 years.  She has contributed enormously to the success of the Fund during this period.  We wish to acknowledge the unique and valuable contribution she has made to Formula over these many years.  To help ease the transition, for 12 months following her retirement, she will be active with Formula as a consultant.

As of March 31, 2009, there are no realized capital gains for tax purposes.  This year’s unitholders’ meeting will be on Monday, May 25th at the University Club (see the details below) on Mansfield Street just below Sherbrooke Street.  We hope to see you there!

Yours truly,

*Notice Of Annual Unitholders’ Meeting*

Date: Monday May 25th, 2009

Place: The University Club
2047 Mansfield Street
Montreal, Quebec

Time: 5:00pm – 7:00pm