Fourth Quarter 2015 Client LetterJanuary 1, 2016

Dear Cowan Absolute Return Fund Unitholder,

The Fund rebounded in the fourth quarter, generating a 2.5% gain that reversed part of the prior quarter’s loss. Thismeans we finished 2015 in roughly the same place we started the year (precise figures are in the following table).We’re investors, not astronomers, so we believe that the time it takes the earth to complete one trip around the sun isan arbitrary period over which to evaluate a portfolio. Nevertheless, it is long enough to justify some reflection upon ourperformance.

While we didn’t make you any richer during the year, we are content saying that we protected your capital; it was anugly year for most Canadian investors. Low oil prices combined with Valeant’s fall from grace contributed to the TSXlosing 8.3%1 in 2015. In our Q4 2014 letter we discussed why we believe that active management can offer Canadianinvestors better risk-adjusted returns than simply buying a passive TSX index ETF. This year’s performance provides agood example of why we feel that way.

Sticking with Canada for a moment, as bad as things were in 2015, we are worried that it could get even worse in thenear future. If you haven’t yet read it, our website commentary for the month of December describes a scenario thatcould push Canada into a deep recession.2 To summarize, absent a rebound in oil prices or an increase inmanufacturing exports, the Canadian economy is unlikely to have a prosperous 2016. This would keep Canadiansecurity prices depressed, likely even for those companies with no direct exposure to either oil or manufacturing.

Fortunately, the Fund has the flexibility to invest outside of Canada’s borders. So there’s no reason to conclude that aweak Canadian economy in 2016 will automatically mean weak investment returns for you in 2016. As of year-end,45% of the Fund was invested outside of Canada. This number could go higher if we see even better investmentopportunities abroad during the coming year.

2015 in ReviewSpeaking of international markets, the S&P 500 returned a positive, albeit modest 1.4% in 2015. But simply looking atthe headline returns of this index doesn’t tell the whole story about how most U.S. stocks performed during the year. In2015, the acronym “FANG” rose to prominence. FANG stands for Facebook, Amazon, Netflix, and Google, the marketdarlings for present-day technology investors. They’re darlings because the worst performer of the group posted a 34%return in 2015 (Facebook) while the best returned 134% (Netflix). These four stocks were responsible for almost all ofthe S&P 500’s gains last year. If you strip these companies out and turn the S&P 500 into the S&P 496, the index’stotal return for 2015 would have been only 0.3%.

The incredible performance of the FANG stocks reminds us of a discussion we had in our Q2 2015 letter titled “TechBubble v2.0”. In that letter we mentioned three of the FANG stocks by name (Facebook, Amazon, and Netflix) when wesuggested that technology company valuations were too high. With the benefit of hindsight, we can say that we wiselychose not to short sell any of those securities at the time, even though their valuations appeared elevated. We’ll comeback to this decision-making process later.

1 All index performance figures are quoted on a total return basis.2 http://www.cowanasset.com/letters-commentary/commentary/canadian-perfect-storm

Q4 2015Net Return 2.5%

Performance Summary

Full-Year 2015-0.7%

Since Inceptionin January 2014

(annualized)3.5%

Fourth Quarter 2015 Client LetterPage 2

Another way to review broader equity performance is to examine equal-weight indices. The individual equities thatmake up the headline S&P 500 index are weighted according to each company’s market capitalization. Thus, thelargest companies have the largest weightings in the index, which means they have a disproportionate impact on thereturn reported by the index. Instead, if we weight the market constituents equally, we can get a better idea of thebreadth of returns generated by equities. In the case of the S&P 500, the return of its equal-weight index was -2.8% forthe year, well below the 1.4% reported by its market-cap-weighted index. Therefore, with the exception of a few large-capitalization companies, many U.S. equities declined in 2015.

Globally, positive returns across most asset classes were also hard to come by during the year. For example, theFTSE All World Equity Index fell 1.6% while the Bloomberg Commodity Index fell 24.7%. If you are interested in thenitty-gritty, the following table shows total returns for a number of major financial assets (in local currencies). Of the 42assets listed, only seven generated returns above 5% in 2015.

SOURCE : DEUTSCHE BANK , MARK - I T GROUP , BLOOMBERG

Our final observation for this 2015 market recap highlights how some Canadian investors were able to profithandsomely. If a Canadian bought an S&P 500 index fund on December 31st, 2014 and sold it on December 31st,2015, he or she would have realized a 20.7% return. This may seem like a confusing result since we previouslymentioned that the S&P 500 returned only 1.4% during the year. The additional return, as it turns out, was generatedby a Canadian dollar that depreciated significantly versus the U.S. dollar during the year. In fact, any Canadian couldhave realized a comparable return if he or she exchanged loonies for greenbacks at the end of 2014, and simplystuffed these U.S. dollars under the mattress. We wouldn’t recommend this investment approach for the future,however, partially because we feel uncomfortable giving you any advice for the bedroom.

Currency HedgingLast year was the worst year ever for Canadian dollar versus the U.S. dollar. The loonie began the year worth $0.86per U.S. dollar and ended the year at $0.72. Fortunately, the Fund started the year with 35% of the portfolio in U.S.securities that were purchased using U.S. dollars.

Fourth Quarter 2015 Client LetterPage 3

While we don’t trade foreign currencies directly in order to generate gains, we do factor FX fluctuations into ourinvestment decisions. The biggest driver of exchange rate differentials between Canada and the U.S. is the differencein interest rates on government debt. The reason is a common-sense one. If interest rates are higher in, say, the U.S.,investors who buy that government’s debt can receive higher interest payments than they would by owning Canadiangovernment debt. This increases demand for U.S. debt, which is denominated in U.S. dollars, at the expense ofCanadian debt, which is denominated in Canadian dollars. Thus, investors have to buy more U.S. dollars, driving up itsvalue relative to the Canadian dollar.

The second-biggest driver of exchange rate differentials between Canada and the U.S. is the price of oil. Canada is anet exporter of oil, and the U.S. is our biggest buyer. When the price of oil is high, the U.S. sends more U.S. dollars toCanadian oil companies. But since these companies pay their employees in Canadian dollars, the U.S. dollarsreceived must be exchanged. Therefore, this increased supply of U.S. dollars creates a higher demand for Canadiandollars, which pushes up the value of the loonie relative to the greenback.

There are a number of other factors that cause exchange rates tofluctuate (changes in purchasing power parity being one of them) but wespend zero time contemplating their impacts. Interest rates and the priceof oil are good enough for our purposes. As someone who lived a longtime ago first said, “It is better to be roughly right than precisely wrong”.3

Although 2015 saw foreign exchange rates work in our favour, that won’talways be the case. If the price of oil was to rebound in 2016, much of ourgreenback-driven gains would be reversed. This leads to the topic ofhedging currency exposures. We don’t do it, and that’s mainly because ofour long-term time horizon. We are of the view that currency movements in both directions will cancel each other outover the long term. So for the most part, it’s best to just ignore them. Furthermore, it costs money to hedge. So simplyeliminating short-term volatility is a very poor justification for spending money.

History supports our view on currency hedging. It has shown that hedging adds no value to the returns generated byportfolio managers. A Morningstar study showed that, from 1988 to 2013, a hedged foreign-stock index has beaten anunhedged one by just 0.1% per year.4

This is not to say that currencies should never be hedged. It is often advisable for companies to hedge currenciesassociated with individual projects if there is a mismatch between projected revenues and expenditures. These capitalprojects, which often have payback periods of much less than five years, are short enough that significant, one-wayswings in exchange rates could be experienced. Such a movement could turn a project once expected to be profitableinto one that isn’t. Hedging in these situations becomes especially important if a large amount of debt is used to fundthe project. Debt repayments are fixed and must be made regardless of volatility in currencies.

So we do take currency fluctuations into account before investing internationally. But since we don’t hedge any ofthese projected fluctuations, you may wonder what actions we do take. The answer lies in the margin of safety we buildinto our valuations. When purchasing international securities, we insist on a larger price discount than we would for acomparable Canadian security. That way, if FX movements work against us, we will have cushioned the blow bypaying less to buy the security in the first place. Like other parts of our investment philosophy, it’s not a complicatedapproach, but it is an effective one.

3 Ironically, this aphorism is often misattributed to John Maynard Keynes. It most likely came from a British philosopher by the name of CarvethRead.4 http://www.barrons.com/articles/cold-comfort-for-investors-1434768813

Shorting is really, reallyhard to do successfully,

and really, really painful toendure when wrong.

Fourth Quarter 2015 Client LetterPage 4

The Big ShortThe poor returns realized by many assets around the globe created some pain for portfolio managers this year. Therewere few places to hide in 2015, as some of the top-performing indices were the ones that simply broke even. Someinvestors subscribing to a contrarian philosophy were hit especially hard, as many of them bought oil stocks shortlyafter the price collapse, thinking that prices would rebound in no time.

But there was another group of contrarian investors that had more success in 2015: Canadian short sellers. Somehigh-profile securities that were favourites among shorts, such as Valeant and Home Capital Group, realized significantdeclines during the year. Even us, who had a position in an ETF that is short the Russell 2000 index, realized someprofits from the various equity market declines during the year.

Even though it is possible to profit from market declines, you rarely hear portfolio managers cheering when equitiesdecline in value. This is because very few managers do any short selling. And the reason why so few engage inshorting is that it is really, really hard to do successfully, and really, really painful to endure when wrong.

Before we discuss why this is the case, there is a misconception we feel the need to address. Since short sellers arehoping for price declines, some people view these types of investors as nefarious. Recently, Chinese regulatorsattempted to limit the ability of investors to short after their markets realized significant declines over the summer. Overthe years, there have even been people who have, sometimes successfully, called for short selling to be bannedoutright.

The general rationale for those with a distaste for short selling is thatwhen stocks go up, it’s good, and when stocks go down, it’s bad. Indeed,most market commentary (ours included) adopts the general tone thatincreasing share prices are beneficial to making money. But this is only asuperficial analysis of market dynamics. Short sellers are importantparticipants in the markets and can even help prevent people from losingsignificant sums of money.

The reason is that while high prices are great for investors looking to sell a stock, low prices are equally great forinvestors looking to buy a stock. Short sellers, by providing downward pressure on prices with each transactionundertaken, make it less likely that someone else will pay too much when buying that same stock. And if you need aconcrete example of the damage that can be caused by prices getting too high, think back to all those investors whobought shares of internet companies at the peak of the tech bubble.

Now, we mentioned that being a successful short seller is difficult. The main reason is that short sellers are constantlyswimming upstream. Over the long-term, an economy will grow, so companies – in aggregate – will make more money,and share prices will increase to reflect this.

Secondly, the mechanism of going short a stock results in short sellers paying money just for the privilege of waiting. Ashort seller must pay for things like margin interest, plus additional fees if it is hard to find someone who will loan theactual shares required to sell. Furthermore, if the stock pays a dividend, the person who loaned the shares still expectsto receive those payments. So the short seller must pay, out of pocket, an amount equal to the dividend.

Thirdly, short sellers face the prospect of unlimited losses. When going long a stock, the most an investor can lose isthe amount spent to purchase the security, because the lowest a price can go is $0. But the amount a short seller canlose is directly proportional to how much a stock price can increase. And share prices have no upper bound. Thus,when prices increase, those who are short are often forced to cover their positions (i.e. buy back the stock theyoriginally sold) just to limit the damage done to their portfolios – even if they still believe the price is too high. Someinvestors who unsuccessfully shorted FANG stocks this year found themselves in this group.

It only takes one buyer tonegate an otherwise

sound short thesis.

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Fourthly, it only takes one buyer to negate an otherwise sound short thesis. For instance, many respected short sellershad recently targeted K-Cup maker Keurig Green Mountain. While these short sellers undoubtedly thought their thesishad merit, they nonetheless woke up to unfortunate news in early December: the company was being bought by aprivate equity firm for a price that represented a 78% premium to the stock’s most recent closing price.

We have the utmost respect for investors who have built a reputation as successful short sellers. The amount of workrequired to form a sound short thesis is gigantic, and the process of actually shorting is unpleasant. When it comes toshort selling, we believe that life is too shor... um… abbreviated to make a living doing it.

Knowing When to Walk AwayOur search for foreign equity exposure over the past few months led us to a company that turned out to be more of ashort candidate than a long. Constellium came to our attention after its share price declined 70% from the previoushigh. The company manufactures a variety of aluminum products for aerospace, automotive, and packaging industriesaround the world, and holds the #1 or #2 market share in each of its key markets. One of the reasons we wereoriginally drawn to the business model was that the company claimed to be mostly immune from swings in aluminumcommodity pricing.

Constellium also has a compelling growth opportunity ahead of it. Ford recently made a substantial increase in thenumber of aluminum parts in its F-150 pickup. This made the truck one of the first mass-produced vehicles to embracealuminum parts. Emissions regulations and oil prices make the lighter aluminum more attractive than vehicles’traditional use of steel. Constellium, among others, thinks that the F-150 will be the first of many mass-producedvehicles to make the switch to aluminum.

Once we began to scratch below the surface, however, we became less enthused about the company. A key part ofour research included a visit to the company’s recently-acquired manufacturing plant in Muscle Shoals, Alabama.When asked about the company’s amount of debt, which we believe to be worryingly high,5 management replied thatthe balance sheet does not need to be fixed. Furthermore, the company has recently been trying to increase theMuscle Shoals plant’s profitability, and we were not sure that these efforts would be successful.

Finally, over the past few months a large number of other aluminum companies have announced increases to theirown auto parts manufacturing capacity. This raises an important consideration when undertaking an analysis of acompetitive industry: simply participating in a rapidly-growing industry does not ensure rapidly-growing profits for anysingle company. Competition can be fierce, which can drive down prices and cause profits to vanish.

Our conclusion was that the outcome for Constellium will be a binary one: either (1) the automotive aluminum partsmarket grows rapidly over the coming years and Constellium is able to capture a significant part of this market whilegenerating attractive margins; or (2) Constellium won’t generate any incremental profit from the automotive industrywhile concurrently being saddled with extremely-high debt. It is hard for us to envision any middle ground if the autoparts venture is not a rousing success. As a result, we chose to pass on the opportunity to buy Constellium, as webelieved there wasn’t ample protection against a permanent impairment of invested capital.

Second HarvestOn December 16th, the investment team spent the day volunteering for Second Harvest, the largest food rescueprogram in Canada. Second Harvest collects food from a number of generous donors in Toronto and delivers the foodto over 200 social service agencies. This is food with a short shelf-life, which would otherwise go to waste if not

5 At the time of our visit, the company’s debt-to-capitalization ratio was 93% and debt-to-EBITDA was 6.5x. It had a junk rating from both S&P (B)and Moody’s (B1).

Fourth Quarter 2015 Client LetterPage 6

redistributed in a timely manner. Second Harvest collects and distributes enough food to provide over 22,000 mealsevery day.

Each member of our team was assigned to a Second Harvest truck where he, along with the driver, delivered food tothose in need. We all had a rewarding time and unanimously agreed to do it again in the future. As an added bonus,Second Harvest convinced the normally camera-shy Mike to do his best superhero impression for the organization’smarketing material. Two out of the three members of our investment team are quite happy to share this picture withyou.

We chose to support Second Harvest because their mission is a common-sense one that reminded us of our owncommon-sense approach to investing. We wanted to volunteer our time to an organization we believed in, and wecould find none better than Second Harvest. If you’re interested in making a donation to Second Harvest, you can findmore information on their website: www.secondharvest.ca.

New Fund LaunchedWe’re excited to introduce our new fixed-income offering, the Cowan Income Opportunities Fund. This new fund will befocused on North American securities such as government debt, corporate bonds, high-yield bonds, preferred shares,and convertible debt. Like the Cowan Absolute Return Fund, we use a bottom-up approach, meaning that we evaluateeach individual security on its own merits, instead of making investment decisions based on how we think the wholeeconomy will perform. For both funds our primary focus is capital preservation. So we’ll look for companies with strongbalance sheets and sustainable cash flows.

The Income Opportunities Fund is suitable for individuals who require exposure to income-producing securities.Additionally, by varying the weighting within a client’s account of the equity-focused Absolute Return Fund and income-focused Income Opportunities Fund, we can accommodate anyone who would otherwise need exposure to a singlebalanced investment fund.

Since we’re talking about our funds, a reminder that you have until the end of February to make RRSP contributionsthat will count against your 2015 taxable income. Both of our funds are RRSP eligible, so call or email us and we’ll behappy to discuss the best place for you to contribute your additional investment capital.

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New Team MemberThe Cowan Asset Management team has grown! Christina Capulli joined us during the quarter, having previouslyworked for our sister company, The Guarantee. Christina is our new financial analyst, taking care of the manyimportant accounting, reporting, and administration tasks that the investment team isn’t clever enough to tackle. We’rehappy to report that Christina says her time with us so far has been “rewarding”; we’re assuming she didn’t say thissolely because she has already received her first paycheque.

Finally, we’d like to thank you for being a client during 2015, the second year of operations for the Cowan AbsoluteReturn Fund. We look forward to a successful 2016 and beyond!

Sincerely,Cowan Asset Management Investment Team