THE ABC PERSPECTIVE. Moving Ahead... With New Value

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1 THE ABC PERSPECTIVE Volume 29, No. 3 July 2018 Moving Ahead... With New Value Investing over the past few years has gone through a remarkable shift. This transformation was largely based upon technological innovation, expanding globalization, and evolving consumer preferences of the burgeoning millennial generation. Several years ago, upon considerable reflection, we concluded that with these macro technological improvements, many wide-ranging financial opportunities would accrue to the pliable investor. Consequently, we opportunistically repositioned our five ABC Funds toward what we viewed as new value. The concept of new value wasn t necessarily novel, as macro changes are never ending. This investment metamorphosis, however, pointed our research efforts toward those sectors which we expected to outperform over the next half dozen years. More importantly, this transformational shift brought us to the realization that new value would place less emphasis on book value or replacement cost (are the assets really worth it?) and more importance on cash flow, appreciating valuations, and growth initiatives. For instance, traditional department store retailing, which we had favoured in earlier years, we now believed would become vulnerable, as changing purchasing habits brought the ascendency of online retailers, such as Amazon and Alibaba. Hence, both Amazon and Alibaba became significant additions to our ABC portfolios, as well as Mastercard and Visa, the payment processors facilitating online transactions. 1. Technology: Activision Blizzard, Adobe Systems, Alphabet (Google), Apple, Microsoft, NVIDIA, and Salesforce.com 2. Healthcare: Anthem, Becton Dickinson, Boston Scientific, Thermo Fisher Scientific, and Johnson & Johnson 3. Fintech: Mastercard and Visa 4. Financial Services: East West Bancorp, First Republic Bank, and SVB Financial Group 5. Consumer Discretionary: Amazon.com, Alibaba, Brunswick, Facebook, Home Depot, Netflix, and Six Flags Entertainment 6. Industrials: Honeywell, Northrop Grumman, The Boeing Company, United Technologies, and Waste Management Looking ahead, while we expect periodic stock market volatility over the summer largely due to ongoing tariff concerns, incessant U.S. presidential tweeting, and interest rate uncertainty, we remain optimistic. This view is mainly due to solid U.S. and global economic growth, rising corporate earnings, increasing dividends, and company share buybacks. As a result, we are confident that this diversified, new value portfolio should continue to offer above average investment returns into Six favoured new value industries and a partial listing of our ABC preferred holdings include:

2 TM Economic Perspectives The American Economy: Still Growing Despite investors' persisting fears of an inverted yield curve leading to an eventual U.S. economic recession, the American economy is still growing. In fact, recent statistics indicate particular strength in employment, business activity, and consumer spending. Interestingly, it is the U.S. economy that appears to be leading global growth and that this unbroken expansion is, at least, sustainable into While increasing American economic activity should lead to rising interest rates, we believe such increases will be gradual and still relatively low enough not to impact business activity. Investment Perspectives Consumer discretionary: An Employment Beneficiary North American employment since the start of 2018 continues to improve. In the United States, for example, not only is there greater employment with average monthly payrolls additions of over 200,000, but also, wage growth has continued to rise. By extension, with increasing employment, gradually elevating wages, lower taxes, and subdued inflation, the American consumer now has "more money in his pocket". Consequently, the consumer discretionary sector has become and will continue to be a significant beneficiary of rising employment. Companies such as Amazon, Activision Blizzard, Brunswick, Home Depot, Netflix, and Six Flags Entertainment have been prime recipients of this incremental, discretionary cash flow. Portfolio Perspectives Still Optimistic All five ABC portfolios are fully invested in a diversified mix of larger capitalization, dividend-paying Canadian and American equities. Our optimism is predicated on sound U.S. economic growth, lower taxation, rising corporate earnings, increasing dividends, and company share buybacks. Although we expect periodic stock market volatility largely due to ongoing international tariff issues and interest rate uncertainty, we remain quite optimistic. Page 2

3 CASH % 0.41% FINANCIAL SERVICES % 13.87% Cash - CAD 0.40% Bank of Montreal 2.28% Cash - USD 0.01% Canadian Imperial Bank of Commerce 1.90% East West Bancorp Inc. US 1.46% CONSUMER DISCRETIONARY % 8.95% Manulife Financial Corp. 1.62% Amazon.com Inc. US 2.10% Royal Bank of Canada 2.42% Brunswick Corp. US 2.08% The Bank of Nova Scotia 1.75% Six Flags Entertainment Corp. US 1.79% The Toronto-Dominion Bank 2.44% The Home Depot Inc. US 2.98% HEALTH CARE % 11.30% ENERGY % 7.64% Becton, Dickinson and Co. US 3.09% Inter Pipeline Ltd. 1.58% Centene Corp. US 1.82% Keyera Corp. 1.31% Danaher Corp. US 1.13% Suncor Energy Inc. 2.70% Johnson & Johnson US 2.05% TransCanada Corp. 2.05% Thermo Fisher Scientific Inc. US 1.56% UnitedHealth Group Inc. US 1.65% UTILITY % 13.68% Algonquin Power & Utilities Corp. 2.52% TECHNOLOGY % 23.85% AltaGas Ltd., subscription receipts 1.87% Activision Blizzard Inc. US 1.85% Brookfield Renewable Partners L.P. 1.58% Alphabet Inc., Class A US 1.88% Emera Inc. 1.78% Apple Inc. US 3.14% Fortis Inc. 2.25% Broadcom Ltd. US 2.48% Hydro One Ltd. 1.64% Mastercard Inc., Class A US 4.21% Northland Power Inc. 2.04% Microsoft Corp. US 3.39% NVIDIA Corp. US 3.47% CONSUMER STAPLES % 2.94% Visa Inc., Class A US 3.43% PepsiCo Inc. US 1.46% The Kraft Heinz Co. US 1.48% INDUSTRIAL PRODUCTS % 10.89% Canadian National Railway 1.36% MATERIALS % 0 Canadian Pacific Railway Ltd. 1.25% CCL Industries Inc., Class B 3.02% Honeywell International Inc. US 2.21% Northrop Grumman Corp. US 1.73% TELECOMMUNICATIONS % 0 Republic Services Inc. US 1.64% Rogers Communications Inc., Class B 1.62% United Technologies Corp. US 1.04% SoftBank Group Corp., ADR US 1.83% Waste Management Inc. US 1.66% Page 3

4 CASH % 1.22% INDUSTRIAL PRODUCTS % 9.05% Cash - CAD 1.21% Canadian National Railway 1.46% Cash - USD 0.01% Honeywell International Inc. US 1.31% Northrop Grumman Corp. US 2.52% CONSUMER DISCRETIONARY % 13.38% United Technologies Corp. US 1.76% Alibaba Group Holding Ltd. ADR US 1.40% Waste Management Inc. US 2.00% Amazon.com Inc. US 5.12% Netflix Inc. US 3.63% HEALTH CARE % 10.26% The Home Depot Inc. US 3.23% Becton, Dickinson and Co. US 3.24% Boston Scientific Corp. US 2.54% ENERGY % 8.26% Centene Corp. US 1.56% Enbridge Inc. 1.86% Thermo Fisher Scientific Inc. US 1.54% Inter Pipeline Ltd. 1.25% UnitedHealth Group Inc. US 1.38% Suncor Energy Inc. 3.08% TransCanada Corp. 2.07% TECHNOLOGY % 28.87% Alphabet Inc., Class A US 2.87% CONSUMER STAPLES % 2.63% Apple Inc. US 3.52% The Coca-Cola Co. US 1.38% Facebook Inc. US 1.99% The Kraft Heinz Co. US 1.25% Mastercard Inc., Class A US 4.77% Microsoft Corp. US 3.65% FINANCIAL SERVICES % 15.05% NVIDIA Corp. US 2.69% Bank of Montreal 1.75% Salesforce.com Inc. US 2.40% Canadian Imperial Bank of Commerce 1.82% Skyworks Solutions Inc. US 2.43% East West Bancorp Inc. US 1.71% Tencent Holdings Ltd. ADR US 2.12% Morgan Stanley US 1.31% Visa Inc., Class A US 2.43% National Bank of Canada 1.67% Royal Bank of Canada 2.29% UTILITY % 8.46% The Bank of Nova Scotia 1.84% Algonquin Power & Utilities Corp. 1.96% The Toronto-Dominion Bank 2.66% AltaGas Ltd., subscription receipts 2.19% Brookfield Renewable Partners L.P. 1.19% MATERIALS % 2.82% Emera Inc. 1.47% CCL Industries Inc., Class B 2.82% Hydro One Ltd. 1.65% Page 4

5 CASH % 0.16% HEALTH CARE % 10.04% Cash - CAD 0.16% Anthem Inc. US 2.85% Cash - USD 0.00% Boston Scientific Corp. US 2.14% Centene Corp. US 1.25% CONSUMER STAPLES % 2.90% Danaher Corp. US 1.83% PepsiCo Inc. US 1.74% Thermo Fisher Scientific Inc. US 1.97% The Kraft Heinz Co. US 1.16% MATERIALS % 0.91% INDUSTRIAL PRODUCTS % 11.61% DowDuPont Inc. US 0.91% 3M Company US 1.60% Honeywell International Inc. US 1.86% FINANCIAL SERVICES % 15.22% The Boeing Co. US 4.81% Canadian Imperial Bank of Commerce 2.21% United Technologies Corp. US 1.62% First Republic Bank US 2.47% Waste Management Inc. US 1.72% Goldman Sachs Group US 1.03% JPMorgan Chase & Co. US 1.69% CONSUMER DISCRETIONARY % 16.21% Prudential Financial Inc. US 1.90% Alibaba Group Holding Ltd. ADR US 1.93% SVB Financial Group US 3.66% Amazon.com Inc. US 4.86% The Toronto-Dominion Bank 2.26% McDonald's Corp. US 1.11% Netflix Inc. US 3.16% TECHNOLOGY % 32.29% Six Flags Entertainment Corp. US 2.03% Adobe Systems Inc. US 1.36% The Home Depot Inc. US 3.12% Alphabet Inc., Class A US 2.84% Apple Inc. US 3.60% ENERGY % 5.35% Broadcom Ltd. US 2.52% Enbridge Inc. 1.54% Facebook Inc. US 1.87% Suncor Energy Inc. 2.34% Mastercard Inc., Class A US 4.26% TransCanada Corp. 1.47% Microsoft Corp. US 3.26% NVIDIA Corp. US 3.33% UTILITY % 5.31% Salesforce.com Inc. US 1.65% Algonquin Power & Utilities Corp. 2.04% Tencent Holdings Ltd. ADR US 2.47% AltaGas Ltd., subscription receipts 1.87% Visa Inc., Class A US 3.81% Emera Inc. 1.40% YY Inc. ADR US 1.32% Page 5

6 CASH % 0.15% CONSUMER DISCRETIONARY % 13.24% Cash - CAD 0.14% Amazon.com Inc. US 5.38% Cash - USD 0.01% Brunswick Corp. US 2.39% Netflix Inc. US 2.88% CONSUMER STAPLES % 2.84% The Home Depot Inc. US 2.59% Constellation Brands Inc., Class A US 1.62% The Coca-Coca Co. US 1.22% TECHNOLOGY % #### Activision Blizzard Inc. US 2.69% FINANCIAL SERVICES % 16.49% Alphabet Inc., Class A US 2.29% Bank of Montreal 2.21% Apple Inc. US 3.69% BB&T Corp. US 1.80% Facebook US 3.55% Canadian Imperial Bank of Commerce 2.45% Mastercard Inc., Class A US 3.57% Morgan Stanley US 1.45% Salesforce.com Inc. US 2.43% Royal Bank of Canada 2.00% Skyworks Solutions Inc. US 2.38% SVB Financial Group US 1.88% Tencent Holdings Ltd. ADR US 2.55% The Bank of Nova Scotia 1.82% Visa Inc., Class A US 4.08% The Toronto-Dominion Bank 2.88% INDUSTRIAL PRODUCTS % 7.15% HEALTH CARE % 12.95% Canadian National Railway 1.13% Anthem Inc. US 3.91% Canadian Pacific Railway Ltd. 1.03% Becton, Dickinson and Co. US 3.30% Ingersoll-Rand PLC US 1.67% Boston Scientific Corp. US 3.75% Raytheon Co. US 2.10% Danaher Corp. US 1.99% Waste Management Inc. US 1.22% ENERGY % 5.57% UTILITY % 9.90% Inter Pipeline Ltd. 1.37% Algonquin Power & Utilities Corp. 2.35% Suncor Energy Inc. 2.47% AltaGas Ltd., subscription receipts 1.78% TransCanada Corp. 1.73% Emera Inc. 1.27% Hydro One Ltd. 2.18% MATERIALS % 0 Northland Power Inc. 2.32% Avery Dennison Corp. US 2.20% CCL Industries Inc., Class B 2.28% Page 6

7 CASH % 0.21% CONSUMER DISCRETIONARY % 13.77% Cash - CAD 0.20% Alibaba Group Holding Ltd. ADR US 2.64% Cash - USD 0.01% Amazon.com Inc. US 3.81% Netflix Inc. US 3.11% UTILITY % 7.67% Six Flags Entertainment Corp. US 2.35% Algonquin Power & Utilities Corp. 2.32% The Home Depot Inc. US 1.86% AltaGas Ltd., subscription receipts 1.70% Fortis Inc. 1.87% CONSUMER STAPLES % 1.10% Hydro One Ltd. 1.78% The Coca-Cola Co. US 1.10% TECHNOLOGY % 32.40% FINANCIAL SERVICES % 14.44% Adobe Systems Inc. US 3.76% Bank of Montreal 2.06% Alphabet Inc., Class A US 2.00% Canadian Imperial Bank of Commerce 1.39% Apple Inc. US 3.30% East West Bancorp Inc. US 1.84% Baidu Inc., ADR US 1.23% First Republic Bank US 1.77% Broadcom Ltd. US 2.44% National Bank of Canada 1.10% Facebook Inc. US 1.77% Royal Bank of Canada 2.01% Mastercard Inc., Class A US 4.21% The Bank of Nova Scotia 1.66% NVIDIA Corp. US 2.64% The Toronto-Dominion Bank 2.61% Salesforce.com Inc. US 1.87% SAP SE ADR US 1.90% INDUSTRIAL PRODUCTS % 9.43% Tencent Holdings Ltd. ADR US 2.39% Canadian National Railway 1.20% Visa Inc., Class A US 1.78% Canadian Pacific Railway Ltd. 1.12% YY Inc. ADR US 3.11% Rockwell Automation Inc. US 1.33% Siemens AG, ADR US 1.64% HEALTH CARE % 11.53% The Boeing Co. US 4.14% Becton, Dickinson and Co. US 2.81% Boston Scientific Corp. US 2.88% ENERGY % 5.93% Centene Corp. US 1.63% Keyera Corp. 1.60% Thermo Fisher Scientific Inc. US 2.79% Suncor Energy Inc. 2.46% UnitedHealth Group Inc. US 1.42% TransCanada Corp. 1.87% MATERIALS % 2.19% TELECOMMUNICATIONS % 1.33% CCL Industries Inc., Class B 2.19% SoftBank Group Corp., ADR US 1.33% Page 7

8 TM Two Favoured ABC Common Stock Holdings Alibaba Group Holdings Ltd.: is a Chinese e-commerce, technology, and financial giant, focused on facilitating online business for both consumers and corporations. Alibaba is particularly attractive as it provides direct exposure to China s rapidly expanding consumer sector, led by a flourishing middle class, steady increases in personal consumption, and e-commerce penetration. In fact, according to Citron Research, China is projected to account for 58% of global e-commerce sales by Alibaba is well positioned for this growth as it currently holds an 80% market share of Chinese online retail sales. Despite rising international trade tensions and protectionist political rhetoric, Alibaba s strong domestic business is well insulated, as the bulk of its sales are made in China. Furthermore, Alibaba has become a dominant force in banking and financial technology. Its affiliate, Ant Financial operates AliPay, a widely popular online payments platform, with over 870 million active users. The company s cloud computing business, Alibaba Cloud, is growing at an impressive 103% pace year over year and now ranks as the world s fourth largest provider of cloud computing services and infrastructure. Thermo Fisher Scientific Inc.: is a world leader in biotechnology product development and genetic testing. The company develops and manufactures laboratory products, analytical instruments, life science solutions, and specialty diagnostics to serve customers such as biotech and pharmaceutical companies, laboratories, and hospitals. Thermo Fisher has established itself as a prime one-stop shop and "go-to" provider to the healthcare sector, through its long history of organic growth and strategic acquisitions. Thermo Fisher is well-positioned due to a number of secular tailwinds. For instance, shifts in demographics, including the aging baby boomer population and rising wealth in emerging markets, will boost the demand for healthcare products. Additionally, technological innovations and advancements in the biotechnology and pharmaceutical industries will continue to benefit Thermo Fisher, as they provide the needed "picks and shovels" in an ever important healthcare sector. Administrative Information There are units of the ABC North American Equity Fund & ABC Global Equity Fund available for purchase. Contact our office for more information. Purchase requests must reach our office by the last business day of the month and redemption requests (for our open funds) must reach our office no later than ten business days before the last business day of the month. Clients that are invested in our closed-end funds are able to redeem their reinvested distribution units on a monthly basis. Also, you can participate in the annual 10% redemption right if you provide the completed form by November 30 for a December 31 transaction date. If you need assistance with either of these options, please do not hesitate to contact our office. All cheques are to be made payable to RBC Investor Services. All client requests are to be directed to ABC Funds. We continue to request that clients assist in updating their Know Your Client forms. This information is a regulatory requirement to assess the suitability of our various ABC Funds to individual client s needs. RBCITS is the custodian of the ABC Funds and is responsible for providing our clients with account statements, tax slips and requested funds. We ask that you retain all statements for your records as there may be additional costs for retrieving historical data. Please contact our office to inform us of any changes in mailing or addresses. If we do not have your current contact information, you may not receive the information we are sending out. This newsletter is published by I.A. Michael Investment Counsel Ltd. and the ABC Funds 18 King Street East, Suite 1010 Toronto, Ontario M5C 1C4 Telephone: (416) Toll Free: OPEN ABC Fax: (416) Web site: invest@abcfunds.com The information contained in this investment letter is not and under no circumstances is to be construed as a solicitation or recommendation to buy or sell securities, including, without limitation, any units of any of the ABC Funds. While the information contained in this newsletter has been drawn from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor in providing it does I.A. Michael Investment Counsel Ltd. assume any responsibility or liability. I.A. Michael Investment Counsel Ltd., its directors, officers, and other employees may, from time to time, have positions in securities mentioned in this letter. I.A. Michael Investment Counsel Ltd. is the manager and investment advisor of the ABC Funds, and as such, receives from the Funds certain management and investment advisory fees based on the net asset value of the Funds from time to time. Irwin Michael is the sole shareholder of I.A. Michael Investment Counsel Ltd.