January 8, 2009

Dear Unitholders:

The net asset value of the Fund as of December 31, 2008 was $2,412.99 per unit in Canadian dollars. This represents a 32.2% decrease for the year and a 17.2% decrease for the fourth quarter in Canadian dollars.  The strength in the US dollar helped our reported Canadian dollar returns.  In US dollars, the Fund declined 45.3% for the year and 28.4% during the fourth quarter. 

The Fund’s return for 2008 is the worst on record since our inception in June 1960.  Similarly, the U.S. markets posted their steepest declines since the Great Depression.  It was simply a terrible year to be an investor in any asset class. The global economy and financial markets plunged and most money managers around the world reported distinctly negative returns irrespective of style.  While this bear market is persistent, it is important to remember that stock markets make their lows well before economic activity bottoms and negative headlines subside.

The Fund’s 45.3% decline in US dollars lagged the Indexes above as well as the average small cap manager who declined 42.1% for the year. Our sense is that the Fund’s dedication to small caps runs truer than the average small cap manager as well as the market cap weighted indexes.  This greater exposure to small cap stocks resulted in our underperformance this year. Table I below shows just how bad it was for the small cap investor in 2008. Clearly, the smaller the market cap and the lower the stock price, the worse the returns were.

We are very disappointed in our 2008 returns and wish we had performed better, though, we have seen similar poor results in our 49 years. In Table II below, we show that 28% of the years since our inception in 1960 have yielded negative returns. We are not happy about this but we view it as an inevitable part of aggressive investing. On the other hand, 72% of the time the Fund yields flat to very positive results. Accordingly, we know that the overall performance will be very respectable over the long term. Since 1960, the Fund has compounded at a rate of 11.8% which is twice the S&P500 return of 5.8%.

The other observation from Table II is that a bad year for the Fund is frequently followed by a good year. It is critical to remember that the aftermath of bear markets can be very rewarding. This is true for the market as well as for Formula. To illustrate this, we show the eleven worst calendar year crashes for the S&P 500 arranged chronologically in Table III below (with the comparable returns of Formula Growth Fund). We then show the returns in the one year and five year periods subsequent to the crash.

All five year periods show solidly positive compound returns for both the S&P500 and the Fund.  There are also sometimes substantial returns in the one year periods but, as can been seen, there are no guarantees of a positive result over the short term.  The bottom line is that if you have the staying power or a multi-year time horizon, considerable money can be made on the other side of bear market crashes over the long term.

Bear markets make stocks very cheap. Today, stocks have rarely been less expensive on a measure of: price to book, dividend yield versus treasury yield, as a ratio of GNP and, for that matter, recovering earnings power. Bear markets also tend to anger and confuse investors so much that they end up capitulating and developing a “show me” attitude. So, while investors hear the advice to buy stocks at the bottom, they have difficulty following this advice emotionally until the recovery is well under way. Our look back over the last 100 years, including our own 49 year history, suggests to us that it just might be time to buy stocks.

For 2008, there is no capital gain distribution. No T3 forms will be issued to our Canadian resident Unitholders. Please do not hesitate to call the office if you need any additional clarification on taxes or any other matter.

On behalf of the directors, officers, and employees of Formula Growth Limited, manager of Formula Growth Fund, we appreciate your continued support and please accept our best wishes for a healthy, happy and prosperous 2009.

Yours truly,