October 9, 2009

Dear Unitholders:

The net asset value of Formula Growth Fund as of September 30, 2009 was $2,883.78 per unit. In U.S. dollars, the Fund increased 14.9% in the third quarter and 36.5% in the year to date period. In Canadian dollars, the Fund increased 6.0% for the third quarter and 19.5% for the first nine months of 2009. Year to date our results are well ahead of the U.S. Indexes listed in the table below and ahead of the average U.S. Small-cap Growth Manager who has gained 29.7%.

The U.S. dollar had another tough quarter as investors worry that the U.S.’s ballooning debts and unconventional policies could spark inflation. The weak dollar undermines the value of U.S. denominated investments, especially those with fixed payments like bonds. The dollar’s slide also is prompting questions about how long the world’s central banks will continue to consider it the best currency for their reserve holdings.

We believe we are in the 8th inning of a decade long run on the U.S. dollar. By most short term measures the dollar appears to be oversold and in the near term, inflation seems remote. As well it is difficult to imagine substantial additional erosion in the U.S. dollar as the major export nations will become competitively disadvantaged. Finally we see no obvious replacement for the U.S. dollar as the world’s reserve currency for quite some time.

The stock market continues to confound the bears in 2009. The third quarter was the S&P 500’s best quarter since 1998 when the markets were recovering from the Asian financial crisis and the internet bubble was beginning to inflate. The skeptics point out that while the economic conditions may have stopped getting worse there has only been a marginal uptick in the relevant economic metrics. Bear camp consensus concludes that employment in the U.S. will likely deteriorate further, that both management and corporations have been big sellers of stock, and that the rally has gone too far, too fast.

Investors need to remember that the economic recovery following the 1990’s S&L crisis was also weak with poor job creation yet corporate profits rebounded strongly on productivity gains. Formula Growth Fund soared during this anemic economic recovery as we also did in the late 1970’s. Equity price moves are far more related to corporate earnings than they are to macro economic (and political) trends.

We are fairly certain that for 2010 corporate earnings will finally be up a large percentage. Since the 1930’s, whenever corporate earnings are down more than 15% in any year (like the past two years), the subsequent year averages a 28% rebound.  While it seems obvious that earnings get much easier after steep decline, this is often ignored by most investors.  The average investor tends to be overly cautious during the crucial, early stage of a bull market. Frankly they are usually shell-shocked for some time after bear market experiences.

This year is no different. Equity markets are up strongly yet cash is still overwhelmingly flowing to the safety of bonds. During the four weeks ending September 23rd nine billion dollars were pulled from equity funds while forty-six billion dollars were invested in bond funds. An accommodative Federal Reserve, a tide of sidelined liquidity and an upcoming stretch of solid earnings comparisons should continue to bode well for stocks.

Near the end of the quarter, Formula Growth was interviewed by The Wall Street Transcript; a copy of the interview is included for your information.

For our taxable Canadian residents, there are no realized capital gains so far this year. Please do not hesitate to contact the office towards the end of the year for tax planning purposes and clarification.

Yours truly,