GLUSKIN SHEFF + ASSOCIATES INC. ANNUAL INFORMATION FORM

Transcription

1 GLUSKIN SHEFF + ASSOCIATES INC. ANNUAL INFORMATION FORM For the Fiscal Year Ended June 30, 2008 SEPTEMBER 18, 2008

2 TABLE OF CONTENTS Page FORWARD-LOOKING STATEMENTS...1 GLOSSARY OF TERMS...2 CORPORATE STRUCTURE...5 DESCRIPTION OF THE BUSINESS...5 GENERAL DEVELOPMENT OF THE COMPANY...39 RISK FACTORS...39 DIVIDEND POLICY...46 DESCRIPTION OF CAPITAL STRUCTURE...48 MARKET FOR SECURITIES...50 DIRECTORS AND OFFICERS...51 ESCROWED SECURITIES...54 LEGAL PROCEEDINGS...55 INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS...56 TRANSFER AGENTS AND REGISTRAR...56 MATERIAL CONTRACTS...57 AUDIT COMMITTEE INFORMATION...57 ADDITIONAL INFORMATION AND INCORPORATION BY REFERENCE...59 APPENDIX A: AUDIT COMMITTEE CHARTER...A-1

3 FORWARD-LOOKING STATEMENTS This Annual Information Form contains forward looking statements which reflect the current expectations, estimates, forecasts and projections of management regarding our future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as may, would, could, will, anticipate, believe, plan, expect, intend, estimate, aim, endeavour and similar expressions have been used to identify these forward-looking statements. These statements reflect management s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, without limitation, those listed in the Risk Factors section of this annual information form. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this annual information form. These factors should be considered carefully and prospective investors should not place undue reliance on the forwardlooking statements. Although the forward-looking statements contained in this annual information form are based upon what management currently believes to be reasonable assumptions, we cannot assure prospective investors that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this annual information form and we do not intend, and do not assume any obligation, to update or revise these forward-looking statements. 1

4 GLOSSARY OF TERMS In this Annual Information Form, the following terms will have the meanings set forth below, unless otherwise indicated. Words importing the singular include the plural and vice versa and words importing any gender include all genders: Articles means the articles of incorporation of the Company, as amended. Assets Under Management or AUM means paying assets under management. Base Management Fees means fees calculated on the Company s various segregated accounts and private pooled fund vehicles as a percentage of AUM. Base Operating Expenses means expenses relating to salaries and benefits (excluding discretionary bonuses), occupancy, general and administrative expenses and business development expenses. Base Operating Income means Base Revenue less Base Operating Expenses. Base Revenue means Base Management Fees plus investment and other income. Closing Date means May 26, 2006, the closing date of the Offering. Coattail Agreement means the coattail agreement entered into among the Company, the holders of Multiple Voting Shares and CIBC Mellon Trust Company, as trustee, dated May 26, Company means Gluskin Sheff + Associates Inc., a corporation incorporated under the laws of the Province of Ontario. Employee Bonus Pool means the employee bonus pool established by the Company as part of its compensation policy. Employee Escrow means the Subordinate Voting Shares (originally issued to the Employee Trust on May 26, 2006) held in escrow by CIBC Mellon Trust Company, as escrow trustee. Employee Trust means a trust, the beneficiaries of which were employees of the Company when the trust was initiated. Equity Shares means the Subordinate Voting Shares and Multiple Voting Shares of the Company. Family Trusts means The Lauria Family Trust, The Leboff Spousal Trust, The Leboff Children s Trust, The JMF Children s Trust 2006, The Moody Spousal Trust, The Moody Children s Trust, The Dunkley Family Trust, The Webb Spousal Trust and The Webb Children s Trust. 2

5 Gluskin Sheff or GS+A means Gluskin Sheff + Associates Inc., a corporation incorporated under the laws of the Province of Ontario. Management Shareholder Escrow means the escrow agreement entered into among each of the Management Shareholders, the Company and CIBC Mellon Trust Company, as trustee, dated May 26, Management Shareholders means, collectively, Ira Gluskin, Gerald Sheff and the Non-Founder Shareholders. Multiple Voting Shares means the multiple voting shares of the Company. MVS Termination Date means the first to occur of (i) where both Mr. Gluskin and Mr. Sheff continue to act as directors and/or officers of Gluskin Sheff, the date that Mr. Gluskin and Mr. Sheff (or their permitted transferees) together control, directly or indirectly, less than 15% of the outstanding Equity Shares, subject to a 90-day cure period, (ii) where either one of Mr. Gluskin or Mr. Sheff is no longer an officer or director of Gluskin Sheff, the date that the other who remains an officer or director of Gluskin Sheff (or his permitted transferee(s)) controls, directly or indirectly, less than 10% of the outstanding Equity Shares, subject to a 90-day cure period, (iii) the date that neither Mr. Gluskin nor Mr. Sheff is a full-time employee, officer or director of Gluskin Sheff (as determined by the Board of Directors), and (iv) May 26, Non-Founder Shareholders means, collectively, Brad Dunkley, Jeremy Freedman, Joanne Lauria, Bruce Leboff, Jeff Moody and William Webb. Offering means the initial public offering of 7,200,000 Subordinate Voting Shares qualified under the prospectus dated May 19, Stock Option Plan means the option plan adopted by the Company on May 26, 2006, as amended and restated on November 9, 2006, as may be amended and restated from time to time. Performance Fees means fees calculated annually as a percentage of the appreciation (net of Base Management Fees and other expenses) in segregated accounts and private pooled fund vehicles above prespecified performance hurdles. Selling Shareholders means, collectively, Ira Gluskin, Gerald Sheff, the Non-Founder Shareholders and the Family Trusts. Subordinate Voting Shares means the subordinate voting shares of the Company. TSX means the Toronto Stock Exchange. 3

6 Underwriters means RBC Dominion Securities Inc., TD Securities Inc. and BMO Nesbitt Burns Inc., Genuity Capital Markets, GMP Securities L.P. and Sprott Securities Inc. Underwriting Agreement means the underwriting agreement among the Company, the Selling Shareholders and the Underwriters dated May 18, Voting Control Agreement means the voting control agreement entered into among the Company and the Management Shareholders dated May 26,

7 CORPORATE STRUCTURE Name, Address and Incorporation Gluskin Sheff + Associates Inc. (the Company or Gluskin Sheff ) was first formed under the name Gluskin Sheff & Associates Inc. on April 17, 1984 under the Business Corporations Act (Ontario). By articles of amendment dated September 12, 1996, the Company (i) created and established rights, privileges, restrictions and conditions for an unlimited number of Preferred Shares, issuable in series, an unlimited number of Series 1 Preferred Shares and Series 2 Preferred Shares; (ii) cancelled the unissued existing common shares; and (iii) created an unlimited number of new common shares. By articles of amendment dated July 7, 2000, the Company created an unlimited number of Founders Shares, effected a conversion of the outstanding Common Shares into Founders Shares, cancelled unissued Common Shares, deleted the Series 1 Preferred Shares and Series 2 Preferred Shares. The Company changed its name to Gluskin Sheff + Associates Inc. by articles of amendment dated September 27, By articles of amendment dated May 25, 2006, the Company created Multiple Voting Shares, Subordinate Voting Shares and Preferred Shares issuable in series, effected a stock conversion and removed certain private company restrictions. The registered and head office of the Company is at 181 Bay Street, Suite 4600, P.O. Box 774, Toronto, Canada M5J 2T3. DESCRIPTION OF THE BUSINESS Gluskin Sheff is one of Canada s pre-eminent wealth management firms serving high net worth private clients and institutional investors. We provide discretionary investment management services to clients in both of these market segments. As at June 30, 2008, we had approximately $5.6 billion in AUM. Since our founding in 1984 by Ira Gluskin and Gerald Sheff, we have focused primarily on the high net worth private client market. With the founding philosophy that the interests of clients and their investment manager should be aligned, we were one of the first investment managers in Canada to manage assets on a Performance Fee basis. From inception in 1984, our revenue has included a significant Performance Fee component. The better we perform for our clients, the greater are our revenues and the better the return for our shareholders. We commenced operations on July 1, 1984, with $26 million in AUM in a limited partnership pooled fund then named The Gluskin Sheff Fund and subsequently renamed GS+A Growth Fund. Each of Ira Gluskin and Gerald Sheff invested $1 million in this fund, thus beginning a policy that has continued to the present wherein Mr. Gluskin and Mr. Sheff, as well as other senior members of the firm, invest alongside our clients in our various investment models. The GS+A Growth Fund has achieved an annual return net of all fees and expenses of 13.4% compounded annually from July 1, 1984 to June 30, Over this same period, the S&P/TSX Total Return Index returned 10.8% compounded annually. In terms of total net return, over this same period, The GS+A Growth Fund generated a return of 1,966.7%, while the return on the S&P/TSX Total Return Index was 1,080.5%. 5

8 Our approximately $5.6 billion of AUM as at June 30, 2008 represents a compound annual growth rate of AUM of 25.1% since the original $26 million was invested on July 1, In 2000, a number of key strategic decisions were taken which ultimately led to Gluskin Sheff transitioning into a broadly-based, client-focused wealth management firm, with an emphasis on achieving absolute, as opposed to relative, investment returns. As part of the firm s strategic shift, the equity ownership of the firm was broadened beyond the two founders. As a result of external recruitment, promotion from within and a reorganization of responsibilities, Gluskin Sheff now has a strong second generation of leadership and management. A strategic plan was developed and implemented beginning in Major elements of this strategic plan included: the adoption of a clear mission statement to become the pre-eminent wealth management firm in Canada serving high net worth investors ; the transformation from a manager of a few portfolio models to a broad-based, client-focused wealth management firm, offering a range of portfolio models and investment services for high net worth private clients and select institutions; the adoption and implementation of a risk-management culture in which we work with our clients to understand their risk tolerance and offer a diversified selection of portfolio models to help manage such risk; and a realignment of investment responsibilities among our portfolio managers, with individual portfolio managers having responsibility for the management and performance of specific portfolio models best suited to their own skills and abilities. In addition, we separated the management of our portfolio models from the provision of advice to clients on their individual asset mix needs, with separate teams of investment professionals dedicated to each function. We describe these teams (our Investment Management team and our Client Service & Risk Management team) and our philosophy below under Our Approach to Managing Wealth and Our Approach to Client Service and Risk Management, respectively. Management believes that these initiatives have produced a strong and cohesive firm culture. There is collegiality and cooperation throughout all areas of the firm, with a clear focus on serving the needs of our clients. In daily operations, employees are enabled to make decisions consistent with our mission statement and articulated commitment to excellence in all that we do. Compensation throughout the firm is related to the overall success of our business, which is itself driven by the returns we produce for our clients and the client service we provide. 6

9 AUM As at June 30, 2008, we had approximately $5.6 billion of AUM, of which approximately $4.85 billion, or approximately 87%, was managed on behalf of high net worth private clients, including entrepreneurs, professionals, family trusts, private charitable foundations and estates. The balance of approximately $745 million, or approximately 13% of our AUM, consists of funds managed on behalf of institutions. In addition to the AUM referred to above, we also had, as at June 30, 2008, approximately $1.0 billion of nonpaying assets under management. These non-paying assets consist primarily of fixed income assets in respect of which we charge either no or nominal fees, client assets held in special holding accounts and employee-related accounts. We do not include non-paying assets under management in our AUM in this annual information form since we earn either no or nominal fees on these assets. DISTRIBUTION OF ASSETS UNDER MANAGEMENT BY RELATIONSHIP SIZE As at June 30, 2008 ($ millions) AUM Relationships Number of Relationships Average per Relationship AUM % of AUM > $30 Million 23 $60.9 $1, % $20 Million to $30 Million 11 $ % $10 Million to $20 Million 63 $ % $ 5 Million to $10 Million 114 $ % $ 2 Million to $ 5 Million 428 $3.1 1, % < $2 Million 1, % $5, % From June 1, 2003 to June 30, 2008 our AUM grew from $673 million to $5.6 billion, a compound annual growth rate (CAGR) of 51.6%. Changes in AUM reflect net contributions of capital from new and existing clients, as well as from net market appreciation or decline. The following table shows the sources of growth of our AUM from July 1, 2006 to June 30, Since our inception in 1984, we have only grown organically. We have not acquired any other company or assets. 7

10 GROWTH OF ASSETS UNDER MANAGEMENT ($ millions) Year ended June 30 Three month period ended June Opening Assets Under Management... $5,399.9 $3,730.9 $5,116.1 $4,734.3 Total Additions , Total Withdrawals... (564.3) (402.0) (145.5) (98.9) Net Additions Market Appreciation (Decline) 1... (36.8) Closing Assets Under Management... $5,597.3 $5,399.9 $5,597.3 $5,399.9 Note: 1. Net of fees and other expenses. CLIENTS We provide private client services to high net worth investors, including entrepreneurs, professionals, family trusts, private charitable foundations and estates. We also have a select number of institutions as clients. We do not participate in the retail mutual fund segment of the investment management industry. As described elsewhere in this annual information form, however, some of our private pooled fund vehicles are structured as mutual funds or mutual fund trusts but these are not offered to the public. ASSETS UNDER MANAGEMENT BY CLIENT TYPE ($ millions) May 31, 2004 May 31, 2005 June 30, 2006 June 30, 2007 June 30, 2008 CAGR June 1, 2003 to June 30, 2008 High Net Worth Private Clients $911.0 $1,876.3 $3,116.8 $4,742.2 $4, % Institutional Clients % Assets Under Management $1,252.3 $2,286.1 $3,730.9 $5,399.9 $5, % 8

11 High Net Worth Private Clients As at June 30, 2008, approximately $4.85 billion, or 87% of our AUM, were managed on behalf of high net worth private clients. AUM for such clients grew to this level from approximately $471 million as at June 1, 2003, representing a compound annual growth rate during that period of 58.1%. When the firm commenced business in 1984, we required a minimum investment of $1 million to establish a client relationship with our firm. In 2005, we raised this minimum investment requirement to $2 million. Institutional Clients As at June 30, 2008, approximately $745 million, or 13% of our AUM, were managed on behalf of institutional clients. AUM for such clients grew to this level from approximately $202 million as at June 1, 2003, representing a compound annual growth rate during that period of 29.3%. Our four largest institutional clients are Canadian pension funds, which collectively represent approximately $385 million, or approximately 52% of our institutional AUM as at June 30, These four pension funds have been clients of the firm for over 12 years. In addition, we manage approximately $360 million in assets for other institutional clients. OUR APPROACH TO MANAGING WEALTH Gluskin Sheff s success as an investment manager has been built on our track record of strong long-term investment performance, along with our reputation for fair dealing, integrity and client service. We seek to attract and retain clients by providing them with prudent advice on the diversification of their investable wealth among various asset classes, and delivering strong investment performance once their assets are invested in our various portfolio models. The investment professionals from our Client Service & Risk Management team advise our clients on which combination of our portfolio models and in which relative proportions is appropriate to meet their investment goals. Once the asset mix decisions have been made, the investment professionals from our Investment Management team are responsible for the selection of the specific securities and relative weightings of the securities that comprise each of our portfolio models. This division of responsibilities between the Client Service & Risk Management team and the Investment Management team permits each group to focus on managing risk in a separate but complementary fashion and to contribute most effectively to the prudent investment of each client s investable assets. Management believes that Gluskin Sheff s strong investment returns are a consequence of our experienced, cohesive and highly motivated Investment Management and Client Service & Risk Management teams, our focus on generating absolute, rather than relative, investment returns and our disciplined risk-management process. 9

12 Experienced Investment Management Team Our Investment Management team is deep in talent, ideas and experience. We have attracted, trained and retained individuals with strong academic qualifications, a proven talent for investing and a desire and ability to work in our team-oriented environment. Compensation is related to overall firm performance, which is itself driven by the returns we produce for our clients. The current in-house Investment Management team (that is, excluding the principals of our sub-advisors) includes 15 professionals with collective industry experience of over 178 years. Management believes that we have assembled and enjoy the benefit of the strongest, most stable, and most effective Investment Management team in our history. The Gluskin Sheff Investment Management team has expertise in equity, income trust, royalty trust, real estate investment trust, fixed income and alternative investment management. The depth of experience of the Investment Management team is illustrated in the following chart and accompanying biographies: INVESTMENT MANAGEMENT TEAM As at June 30, 2008 IRA GLUSKIN PRESIDENT & CHIEF INVESTMENT OFFICER (44/24) PORTFOLIO MANAGERS ANALYSTS SECURITIES TRADERS William (Bill) Webb* Brad Dunkley Kai Lam Jeannine LiChong Evan Clark Reno Giancola Jeff Hales Michael Isenberg Paul Nash Matt Ritzel Adrian Wong Daniel Edde Shaen Ramsay Amanda Van Veen 16/13 10/10 11/6 12/12 5/2 5/3 7/4 7/2 11/7 9/2 3/2 15/14 15/10 8/4 (#/#) = Years of Industry Experience / Years with GS+A * - See Succession planning Ira Gluskin. See Directors and Officers. William (Bill) Webb. See Directors and Officers. 10

13 Brad Dunkley, is Vice-President and Portfolio Manager focusing on North American equities, and is the portfolio manager of three of our proprietary long/short funds. Mr. Dunkley received an Honours Bachelor of Business Administration degree with a minor in economics from Wilfrid Laurier University and was the recipient of the Gold Medal for the business program. He has also earned his Chartered Financial Analyst (CFA) designation. Kai Lam, is Vice-President and Portfolio Manager focusing on Global equities. Mr. Lam received a Bachelor of Commerce degree with First Class Honours from Queen s University. He has also earned his Chartered Financial Analyst (CFA) designation. Prior to joining Gluskin Sheff in 2001, Mr. Lam was Vice-President of Research with Thornmark Asset Management, an investment counselling firm focusing on North American equities. Prior to that, Mr. Lam worked with CIBC World Markets as an Institutional Equity Research Associate. Jeannine LiChong, is Vice-President and Portfolio Manager focusing on Canadian equities and income trusts. Ms. LiChong received an Honours Bachelor of Arts degree and Master of Accounting degree from the University of Waterloo. She has also earned her Chartered Accountant (CA) designation and Chartered Financial Analyst (CFA) designation. Prior to joining Gluskin Sheff in 1996, Ms. LiChong worked in Toronto and Montreal with Canadian Pacific Limited. Prior to Canadian Pacific, Ms. LiChong worked with Deloitte & Touche. Ms. LiChong is a member of the Board of Directors of The Royal Conservatory of Music and The Women's Musical Foundation. Evan Clark, is an Equity Analyst focusing on North American equities and income trusts. Mr. Clark received an Honours Bachelor of Commerce degree from the University of Toronto. He has also earned his Chartered Financial Analyst (CFA) designation. Prior to joining Gluskin Sheff in 2007, Mr. Clark was an Associate with OMERS Capital Partners, the private equity arm of OMERS. Prior to this, Mr. Clark was an Analyst in the corporate development group at Shoppers Drug Mart Inc. Reno Giancola, is an Equity Analyst focusing on Canadian and U.S. securities. Mr. Giancola received an Honours Bachelor of Business Administration degree, with distinction, from Wilfrid Laurier University. He has also earned his Chartered Financial Analyst (CFA) designation. Prior to joining Gluskin Sheff in 2005, Mr. Giancola was an Analyst with Scotia Merchant Capital, the private equity arm of the Bank of Nova Scotia. Mr. Giancola was a research associate at Gluskin Sheff as part of his university co-op program. Jeff Hales, is an Equity Analyst focusing on Canadian and U.S. securities. Mr. Hales received a Honours Bachelor of Arts degree in Economics and Financial Management from Wilfrid Laurier University, earning the Governor General s Academic Medal as the top student in his graduating class. He has also earned his Chartered Financial Analyst (CFA) designation. Prior to joining Gluskin Sheff in 2004, Mr. Hales was an Associate with TD Capital, the private equity arm of TD Bank Financial Group. Prior to that, Mr. Hales 11

14 worked in the investment banking division of Goldman Sachs in New York. Mr. Hales was a research associate for two terms at Gluskin Sheff as part of his university co-op program. Michael Isenberg, is an Equity Analyst focusing on North American equities. Mr. Isenberg graduated from University of Pennsylvania Law School with Honours. He received an Honours Bachelor of Science degree from Cornell University in Prior to joining Gluskin Sheff in 2007, Mr. Isenberg was an Associate in the Investment Banking Division of Genuity Capital Markets. Prior to that, Mr. Isenberg was an Associate in the Investment Banking Division of Merrill Lynch in New York and an Associate in the Derivatives, Hedge Fund and Structured Finance Group of Shearman & Sterling LLP in New York. Paul Nash, is an Equity Analyst focusing on the implementation of quantitative analytic models and applications used in support of the firm s stock screening and risk management activities. Mr. Nash received a Bachelor of Arts degree and a Master of Arts degree from the University of Toronto, and is a Ph.D. candidate at the University of Edinburgh. Prior to joining Gluskin Sheff in 2001, Mr. Nash worked in private client services with Foyston, Gordon & Payne Investment Counsel. Matt Ritzel, is an Equity Analyst focusing on Canadian and U.S. securities. Mr. Ritzel received an Honours Bachelor of Science degree from the University of Waterloo, and a Master of Business Administration from York University. He has also earned his Chartered Financial Analyst (CFA) designation. Prior to joining Gluskin Sheff in 2007, Mr. Ritzel was an investment analyst at Investors Group Investment Management. Prior to that, Mr. Ritzel was an equity analyst and trader for the Canadian operations of Sun Life Financial. Adrian Wong, is an Equity Analyst focusing on Canadian equities and income trusts. Mr. Wong received an Honours Bachelor of Business Administration degree, with distinction, from Wilfrid Laurier University. He is currently a Level III Candidate for the Chartered Financial Analyst (CFA) designation. Prior to joining Gluskin Sheff in 2006, Mr. Wong was an Analyst with CIBC Capital Partners, the Merchant Banking Group of CIBC. Mr. Wong was a research associate for three terms at Gluskin Sheff as part of his university co-op program. Investment Philosophy and Style At Gluskin Sheff, we focus on long-term, absolute return investment performance through disciplined securityspecific selection. When considering a potential investment, we view ourselves as a prospective business owner. As such, investment decisions are based on bottom-up research and an assessment of an issuer and its management. We look for companies with long-term growth and stability, a proven track record, shareholderminded management, and a share price that is below our estimate of intrinsic value. This provides a margin of safety and the opportunity for long-term gains. At the same time, we remain flexible enough to invest in special situations, such as mergers and acquisitions, and in situations where we identify catalysts we believe will unlock value. 12

15 Our Investment Management team monitors the issuers we invest in and their changing business environments. Because our Performance Fees can be significant, our business priorities are primarily focused on doing well for our clients with the assets we currently have under management. While we are naturally interested in growing the assets we have under management, we believe the best path to this growth lies in being diligent in our investment processes and delivering solid, risk-adjusted returns for our existing clients. In approaching our research, we believe that an understanding of the fundamental attributes of a business and its underlying assets enhances the potential for investment returns. Therefore, the acquisition of information from a variety of sources is a critical step in our investment analysis and decision-making process. The Investment Management Process A Disciplined Approach Our Investment Management team focuses on and analyzes individual securities. Our portfolio management process rests on three style attributes. We are: (i) (ii) (iii) primarily bottom-up investors; focused on company fundamentals; and heavily reliant on our internal investment research. Bottom-up investing. We are primarily bottom-up investors, which means that our emphasis is on the investment attributes and merits of specific issuers and their securities, albeit within the context of their industries and the economy as a whole. We are committed to reaching our own investment conclusions based on independent research. Our bottom-up approach to investing is tempered by our assessment of the current market environment. We watch for and are mindful of macro factors and trends. In addition, we consciously ensure that our portfolios contain a diversified selection of securities across the capitalization spectrum (largecap, mid-cap and small-cap issuers), across industries and sectors, and in special situation securities where the issuer might be involved in a restructuring or a turnaround with unrecognized value. We use databases and analytical tools that allow us to screen for and compare potential investment opportunities across a wide variety of securities markets. Company fundamentals. As investors, we consider ourselves owners of businesses. As such, investment decisions involve the research and assessment of a company and its management. Individual securities are assessed according to a combination of their capital-gain potential and their downside risk. We seek to make investments in businesses that generally have the following characteristics: strong financial positions, evidenced by strong balance sheets and cash flow; competent management with a sound business strategy and demonstrated ability to increase shareholder value; and a favourable ratio of reward to risk. 13

16 Internal Investment Research. Internal research is vital to our investment management approach. We invest in our portfolio management systems and research capabilities and continue to invest in leading-edge research capabilities. Our Investment Management team has extensive analytical experience. All team members are actively involved in research and share their ideas, research and conclusions. An essential element in the identification and monitoring of investment opportunities is the constant flow of information. Our investment professionals obtain this information from annual reports, securities and other regulatory filings, newspapers, magazines, trade journals, consulting reports, brokerage house research reports, industry conferences and research analysts. Members of our Investment Management team use a variety of computerized databases. In addition, we maintain an extensive dialogue with industry experts, both within and outside the brokerage community. Once we identify a potential investment opportunity, we commence our internal analysis. This often includes financial modelling, the gathering of competitive intelligence, and visits and interviews with some combination of management, suppliers, competitors and customers. We research the issuers we are considering investing in and share our findings internally. The final step entails the analysis of an issuer s securities, including historical valuations, trading behaviour, current market psychology and share ownership. We consider our equity investments for what they are a pro rata share of ownership in a business enterprise. The result of this research process is the high level of confidence in the security positions we add to our portfolio models. The 10 largest investments in many of our long-only portfolio models comprise between 30% and 45% of the overall portfolio value. Our performance record attests to the fact that our extensive research adds value in identifying those securities. Monitoring Investments Once an investment decision has been implemented, we continue to monitor our investment. Our Investment Management team often visit company facilities, interviewing management, suppliers, and customers in order to fully understand the opportunities and challenges particular to individual issuers. To better understand the prospects of an issuer relative to its industry, we perform on-going research and often meet with industry competitors, as well as maintain a dialogue with industry experts and analysts. We often monitor the trading liquidity and quantitative and technical performance of the securities included in our portfolio models using proprietary software models. These systems allow our portfolio managers to monitor the volatility and performance of an investment relative to the market, interest rates and relevant commodities and currencies on a real time basis. Financial results, corporate filings, brokerage research reports, news and price targets regarding our investments are monitored, both to inform and update our view of an issuer s performance and to provide us with a better understanding of the market s opinion regarding an issuer. 14

17 We typically impose an upper limit on the value of any one security within a portfolio model. With the exception of securities in our intentionally more concentrated Top 15 Model and our long/short fund portfolio models, generally no individual security represents in excess of 8% of the total market value within a portfolio model. We also monitor the amount of sector risk within our portfolio models. Determining When to Sell We maintain a strong sell discipline. A security is generally sold for one of the following reasons: The security becomes expensive on a fundamental basis. When we purchase a security we often set a price target or valuation range based on our internal modelling. When the price target is reached, we review the holding to assess whether the fundamentals or the environment have changed sufficiently to warrant a higher target price; if not, the security is sold. The issuer does not meet our performance expectations or its management otherwise disappoints, causing our Investment Management team to question the future upside potential of the security. The security s market performance has caused it to exceed 8% of the value of a portfolio model, generally our maximum investment limit. A particular sector of a portfolio model becomes too large a portion of an overall portfolio model, so that security positions within that sector need to be reduced. Unexpected deterioration in an issuer s fundamentals or the business or economic environment that undermines our investment thesis. New ideas necessitate the sale of securities for better investment opportunities. Changes in our macro-economic view that may affect specific industries, sectors or securities. Portfolio Models Gluskin Sheff offers a range of portfolio models designed to serve our clients needs. Certain of our portfolio models are only available in segregated accounts; some are available only in private pooled fund vehicles. Other portfolio models are available by way of both segregated accounts and private pooled fund vehicles. The choice of whether to invest through a segregated account or a private pooled fund vehicle is generally determined by the amount of capital to be invested. We believe that each client s investment goals and risk tolerances are unique, and that what might be considered a conservative asset mix for one can be an aggressive asset mix for another. We therefore do not maintain a single balanced portfolio for all clients. When permitted or requested to do so, we develop customized asset mixes that are tailored for each client. We allocate the client s investable assets among our various portfolio models according to individual investment objectives. When developing this customized asset mix, we look to reduce the volatility of a client s assets by diversifying into different asset classes (e.g., equities, income trusts, long/short funds and fixed income). 15

18 We offer our clients a range of portfolio models. Our equity portfolio models are generally comprised of securities of approximately 35 to 45 issuers and range from the more conservative income and value-oriented portfolio models to our relatively less conservative growth-oriented portfolio models. Clients assets are allocated among our portfolio models in accordance with their investment and risk objectives after consultation with the investment professional members of our Client Service & Risk Management team. The Company also continues to seed a number of new portfolio models, principally long/short funds, some of which the Company expects to introduce into its line-up of portfolio offerings available to clients. When permitted or requested to do so, the investment professionals of our Client Service & Risk Management team work with a client to develop an asset mix which best suits that client s return objectives and tolerance for risk. Client investment plans are developed and reviewed and rebalancing is done at the asset mix level. Review meetings, based on client needs, are held to review progress and to determine whether any material changes to the plan objectives are appropriate. 16

19 The following table lists the allocation of the Company s AUM among its portfolio models, as well as setting out the fee structure and primary portfolio manager(s) for each portfolio model: ASSETS UNDER MANAGEMENT BY FEE STRUCTURE & PORTFOLIO MODEL As at June 30, 2008 ($ millions) Management Fee 1 Performance Fee Portfolio Models Portfolio Manager(s) AUM 2% 20% of appreciation (Dec 31 Performance Year End / losses carried forward for 1 Year) Income Long/Short Fund Income Long/Short Trust Equity Long/Short Fund Equity Long/Short Trust High Yield Long/Short Fund High Yield Long/Short Trust Short Fund Short Trust Quantitative Long/Short Fund Quantitative Long/Short Trust Incubator Fund Brad Dunkley Brad Dunkley Brad Dunkley Brad Dunkley Marret Asset Management Inc. (2) Marret Asset Management Inc. (2) Brad Dunkley Brad Dunkley William Webb William Webb Marret / Arrow Hedge Partners (2) $ $ 1, % NIL RRSP (Pooled Fund) William Webb $ ½ % 25% of appreciation over 15% (June 30 Performance Year End / appreciation less than 10% carried forward for 1 Year) Value Growth Global North American Growth (Segregated Accounts) Small-Cap Top 15 (Segregated Accounts) RRSP (Segregated Accounts) U.S. Equity (Segregated Accounts) Ira Gluskin William Webb Gryphon International Investment Corp. (2) William Webb Brad Dunkley Ira Gluskin William Webb William Webb 1, $ 2, ½ % 25% of appreciation over 15% (Dec 31 Performance Year End / appreciation less than 10% carried forward for 1 Year) EAFE Fund U.S. Equity (Pooled Fund) Top 15 (Pooled Fund) Gryphon International Investment Corp. 2 William Webb Ira Gluskin $ % 25% of appreciation over 9% (June 30 Performance Year End / appreciation less than 5% carried forward for 1 Year) Premium Income Jeannine LiChong $ Various Various (June 30 Performance Year End) Institutional & Special Mandates Ira Gluskin, William Webb, Brad Dunkley & Jeannine LiChong $ $ 5,597.3 Notes: 1. For a description of our Base Management Fees and our Performance Fees, see Our Business Our Revenues Base Management Fees and Performance Fees. 2. Sub-advisors. 3. Includes institutional mandates managed primarily in accordance with our Premium Income portfolio model ($177 million), our all-canadian Growth portfolio model ($216 million), our North American Growth and U.S. Equity portfolio models ($112 million) and our Value portfolio model ($240 million), and private client mandates managed primarily in accordance with a combination of our Value and Premium Income portfolio models ($138 million) (all numbers are approximate). 17

20 The majority of our AUM pay Performance Fees based on a June 30 performance year end. Our Long/Short Fund portfolio models, together with some newly introduced private pooled fund vehicles, pay Performance Fees based on a December 31 performance year end. The investment objectives of our primary portfolio models are described below. GS+A Value. The objective of the value portfolio model is to achieve positive returns while protecting capital through investment in well-managed Canadian issuers. We look for issuers operating within a backdrop of positive industry dynamics. Investee issuers whose securities are included in the value portfolio model typically exhibit attractive valuations on either a cash flow or net asset value basis. GS+A Premium Income. The objectives of the premium income portfolio model are to provide steady income distribution together with an opportunity for capital appreciation through a diversified portfolio of stable, incomeproducing investments across a broad range of industries. This portfolio model consists primarily of business income trusts, oil and gas royalty trusts and real estate investment trusts. It is intended for clients looking to earn a steady stream of income, while retaining an opportunity for capital appreciation. The focus of the premium income portfolio model is on issuers with the capacity to maintain and grow their distributable operating income. We follow these issuers, to satisfy ourselves that management remains focused and committed to business strategies that will maintain the stability of distributions. In diversifying our premium income portfolio model, we consider the nature of the underlying assets, the stability of cash flows in the underlying business, the experience of management and the extent to which distributions are tax-deferred. The Premium Income Fund had a three year average annual compound rate of return greater than 12.5% and greater than 21.5% over the last five years. GS+A RRSP. The objective of the RRSP portfolio model is to achieve positive absolute returns through investment in a diversified portfolio of income, value and growth-oriented equities. The focus of this portfolio model is on wellmanaged issuers with strong balance sheets. Securities within the RRSP portfolio model will typically exhibit experienced management teams, strong business and industry fundamentals, a history of profitability and attractive valuations. GS+A Growth. The growth portfolio model seeks to invest in undervalued growth companies. Securities are chosen from the Canadian marketplace, as well as from U.S. and global equity markets. Quantitative tools and analysis are used to screen for companies that achieve high returns on invested capital relative to their market valuations. The objective of this portfolio model is to achieve long-term capital appreciation; it is comprised of securities of issuers that we believe exhibit sustainable competitive advantages, evidence of strategic execution over the entire course of the business cycle, and proven management ability. These securities are supplemented with equities that we perceive as having attractive intrinsic valuations and improving fundamentals. The Growth Fund was ranked as the second best performing Canadian-managed fund of all North American equity funds (excluding Small-Cap) at June 30, 2008 as measured by three year performance and in second place over a five-year time frame by Canadian Manager Search. 18

21 GS+A Income Long/Short Fund. The objective of the Income Long/Short Fund is to generate long-term positive absolute returns by primarily investing in income producing products and high-yielding equity securities, both long and short. We take long positions in our best ideas and we sell short securities where we expect negative total returns on the specific security or sector of securities; securities that have a high enterprise valuation relative to their business prospects; as part of a paired trade, where the short side is paired with a long position based on an expectation of relative underperformance of the security sold; securities are also shorted in order to adjust the beta (volatility) of the entire portfolio model in response to changes in the equity markets. GS+A Equity Long/Short Fund. The objective of the Equity Long/Short Fund is to generate long-term positive absolute returns by primarily investing in equities and equity-based securities, both long and short. We take long positions in our best equity ideas and in securities that have low enterprise valuations relative to prospective cash flows. We sell short securities where we expect negative total returns on the specific security or sector of securities; securities that have a high enterprise valuation relative to their business prospects; as part of a paired trade, where the short side is paired with a long position based on an expectation of relative underperformance of the security sold; securities are also shorted in order to adjust the beta (volatility) of the entire portfolio model in response to changes in the general equity markets. GS+A Global Fund. The objective of the Global Fund is to achieve long-term capital growth by investing in equity securities publicly traded on stock exchanges in the United States, Europe, Australasia and the Far East. This portfolio model is managed by Gryphon International Investment Corp., in its capacity as sub-advisor to the Global Fund. GS+A Small-Cap. The objective of the Small-Cap portfolio model is long-term capital appreciation. The portfolio model is primarily invested in Canadian common equities with public float capitalizations of less than $500 million. The portfolio model is comprised of a mix of growth and value equities. The growth equities are selected for their capital appreciation potential and proven management experience. The value equities are selected based on improving business fundamentals, and trade at discounts to their intrinsic values. GS+A Top 15. The objective of the Top 15 portfolio model is to achieve strong positive absolute returns through investment in a concentrated portfolio of approximately 15 securities, each of which is already held in at least one of our other portfolio models. GS+A U.S. Equity. The objective of the U.S. Equity portfolio model is to achieve long-term capital gains by investing in a variety of undervalued growth and value securities listed on U.S. stock exchanges. The investee issuers are selected for their absolute return potential and favourable risk-reward profile. GS+A EAFE Fund. The objective of the EAFE Fund is to achieve long-term capital appreciation by investing in equity securities publicly traded on stock exchanges in Europe, Australasia and the Far East. It is a larger capitalization portfolio comprised of leading global companies. The focus is on companies with sustainable 19

22 competitive advantages, strong financial positions and management teams with a track record of success. The portfolio model is comprised of companies that generally have above-average growth rates, attractive dividend yields and are well capitalized and managed by a disciplined and experienced management team. These companies generally trade at discounts to their intrinsic enterprise value. This fund is managed by Gryphon International Investment Corp. in its capacity as sub-advisor to the EAFE Fund. GS+A High Yield Long/Short Fund. The objective of the High Yield Long/Short Fund is to achieve positive returns by employing capital structure arbitrage, with the manager identifying valuation inconsistencies between various securities within an issuer s capital structure, or between comparable securities issued by issuers operating within the same industry. This fund is managed by Marret Asset Management Inc. in its capacity as sub-advisor to the High Yield Long/Short Fund. GS+A Short Fund. The objective of the Short Fund is to generate positive total returns by selling short overvalued securities when catalysts for negative price performance have been identified. The Short Fund utilizes short strategies and as such, the Fund will have a net short position at all times. The magnitude of the net short position will vary depending on the manager s assessment of opportunities, timing, and risk levels in the equity markets. GS+A Quantitative Long/Short Fund. The objective of the Quantitative Long/Short Fund is to achieve attractive absolute returns through a disciplined quantitative approach to investing; to create a portfolio with a relatively low correlation to the broader equity markets, and to create a portfolio that may generate positive returns during periods of both positive and negative investment returns for the broader equity markets. The Quantitative Long/Short Fund utilizes long and short investment strategies. The Portfolio will invest primarily, but not exclusively, in U.S. and Canadian listed securities, including publicly traded equity securities, equity derivatives and ETFs (exchange traded funds). The manager s experience and judgment will be employed in both the selection and weighting of these investments and in the final stock selection process. Accordingly, the portfolio will not be managed in a "black box" fashion. Strategies and financial instruments employed, such as entering into margin transactions, are within the discretion of the manager. GS+A Incubator Fund. The Incubator Fund is a closed-end fund established to gain economic exposure to Accelerator Capital Fund Inc. ( Accelerator ), a Cayman based fund that seeds early stage hedge funds, managed by seasoned, but largely undiscovered managers, based primarily in Canada. It targets equity like returns for investors with fixed income like volatility through investments in a diversified pool of strategies and managers. Accelerator supports these managers by offering critical early stage investment capital, support in building operational infrastructure, capital raising and marketing assistance. Accelerator will earn two income streams: investment returns on seed capital invested with the underlying managers and revenue sharing in the underlying managers fees (management and performance fees). Accelerator is managed by Accelerator Capital Management Inc., a 50/50 joint venture between Arrow Hedge Partners Inc. and Marret Asset Management Inc. Both firms employ teams of dedicated professionals with proven track records in the hedge fund marketplace and experience in building businesses. 20