Palos Income Fund LP smart. different. independent. Palos Management Inc. 1 Place Ville Marie, Suite 1812 Montreal, QC H3B 4A9 Phone: 514-397-0188 August 2013 www.palosmanagement.com
smart. different. independent. Founded in 2001, Palos is a boutique investment manager based in Montreal Specializes in a Canadian focused income and dividend funds that use alternative trading strategies We aim to generate a steady income stream, preserve our investors capital, deliver trading-enhanced returns, and manage risk. Approximately 16% of firm s assets under management are owned by directors and employees Team Charles Marleau CIM President & Senior Portfolio Manager Yarith Chhiv ENG, CFA, FRM, CAIA, CIM Senior Portfolio Manager / Risk Manager Lionel Alcoloumbre Vice President, Business Development Responsible for managing the funds and supervising all aspects of the company Bachelor in Economics from McGill University, Chartered Investment Manager designation. Member of the Institutional Equity Traders Association, Montreal University Club, Montreal Oil Club and the Entrepreneurs Organization Serves on the Board of Directors of a private school, numerous public and private companies and the Palos International Equity Income Fund PLC Responsible for managing the funds, derivatives and risk management Bachelor of Engineering from Concordia University, Major in Software Engineering, member of the Ordre des Ingénieurs du Québec Financial Risk Manager (FRM), Chartered Financial Analyst (CFA), Global Association of Risk Professionals (GARP), Chartered Investment Manager (CIM), Derivative Market Specialist (DMS), Chartered Alternative Investment Analyst (CAIA), Fellow of the Canadian Securities Institute (FCSI) Responsible for business development and sales Over 25 years of experience in business development and sales in Canada and the US. Worked at a senior level in real estate, mergers and acquisitions, and more recently in commercial banking Master's degree from Harvard University and a degree in architecture from École Supérieure d'architecture de Toulouse in France Active fundraiser for charities and foundations that benefit children and healthcare 2
Our strategy To achieve the fund s objectives of preserving capital, providing an attractive and steady stream of income, and delivering trading-enhanced returns, we apply a strategy that combines a long-term core portfolio with active trading strategies. Core Portfolio (80% of fund) > Long term, income-producing holdings (Canada and USA, dividend paying equity and fixed income) > We increase or decrease exposure to fixed income to reduce market or take advantage of opportunities > We avoid or take a strong position in particular industries based on our macro economic view > Fundamental bottom-up analysis of companies, often meeting with management as part of our due diligence Active Trading Strategies (20% of fund) > We seek to enhance the returns of the core portfolio through active trading strategies > Flexibility: these strategies enable us to nimbly take advantage of opportunities in the market > Market neutral: these strategies generally do not increase our market exposure > Several strategies: covered calls, pair trades, statistical arbitrage, merger arbitrage, syndication trading 3
Core Portfolio Freeport-McMoRan Copper & Gold Inc. Top Ten Holdings as at August 30, 2013 4.36% Bank of Nova Scotia 4.33% Gibson Energy Inc. 4.18% Suncor Energy Inc. 3.86% Enbridge Inc. 3.71% Toronto-Dominion Bank 3.58% Keyera Corp. 3.51% Alimentation Couche Tard Inc. 3.50% AltaGas Ltd. 3.48% Calloway REIT 3.40% The top 10 holdings listed are as of the date indicated and may differ in the future. The top 10 holdings do not include other assets or instruments that may be held by the Fund. 4
Case Study 1: Core Portfolio Core Holding: Magna International Magna International (TSX: MG) designs, develops and manufactures automotive systems, assemblies and components Trades around 4.6x 2013 TEV/EBITDA versus peers at 5.6x Average age of vehicles in US and Canada at all-time highs (10+ years) Expectation that US sales could reach 16mm by 2015 (versus 17mm peak in 2007 and trough of 10mm in 2009) Opportunity in Europe Benefits from global auto recovery without taking a position on brand (GM v Ford, etc.) Stock up approximately 40% YTD and we expect additional analyst upward revisions that should continue to drive stock 5
Case Study 2: Active Trading Pair Trade: Power Fin/Great West Power Corp. (TSX: POW) owns 67% of Power Financial Corp (TSX: PWF) which owns 68% of Great-West Lifeco (TSX: GWO) and 58% of IGM Financial (TSX: IGM) Creates many trading opportunities PWF generally trades at a 1% discount to the NAV of GWO and IGM When discount gets to 3%+ and provided fundamentals makes sense, we buy PWF and short GWO and IGM Allows for many profitable trading opportunities throughout the year POW PWF GWO IGM 6
Case Study 3: Covered Calls Covered Calls: Gildan Activewear Gildan has been a core holding for much of the past year As Gildan stock approached fair value, we began an active call-writing strategy Comfortable selling the stock at strike prices if assigned Gildan stock was volatile and thus selling volatility provided us with significant option proceeds Front-month, 5% out-of-the-money options provided about 1.25%-2% in proceeds, about 15%-25% annualized Win/Win Assigned/exercised at a rich valuation, or Option expires worthless providing us with significant yield enhancement The information shown herein is for illustrative purposes only. 7
Historical performance Source: Palos Management, as at August 30, 2013. Returns are reported net of all fees. 8
Disclaimer This presentation is intended for viewing by accredited investors (as defined in National Instrument 45-106) only. By reading and accepting this presentation you affirm that you are an accredited investor. If you are not an accredited investor the securities described in this presentation are not offered to you. No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted, or otherwise disclosed, distributed, reproduced, disseminated, transferred, in any form or by any means. This publication is proprietary to Palos Management Inc. The information and opinions contained herein have been compiled or arrived at from sources believed reliable, but no representation or warranty, express or implied, is made by Palos Management Inc. as to their accuracy or completeness. Neither the information contained, nor any opinion expressed herein constitutes a solicitation. The investments described herein may or may not be suitable for your investing needs. It is recommended that you consult with your own financial, legal or tax advisor to review any proposed investment or transaction. The Palos Income Fund LP is a non-prospectus fund and is available only to accredited investors as that term is defined in applicable securities legislation. Performance data represents past performance and is not indicative of future performance. This document contains certain forward-looking statements that are not guarantees of future performance and future results that could be materially different from those mentioned. Information expressed herein is subject to change without notice. "S&P" is a registered trademark of Standard and Poor's Financial Services LLC. "TSX" is a registered trademark of TSX Inc. All other trademarks mentioned in this material are the property of their respective owners. 2013, Palos Management Inc. Published by Palos Management Inc. 1 Place Ville-Marie, Suite 1812, Montreal, Quebec, Canada H3B 4A9 T: +1.514.397.0188 F: +1.514.397.0199 www.palosmanagement.com 9