April 9, 2008 

Dear Unitholders:

The net asset value of the Formula Growth Fund as of March 31, 2008 was $3,230.82 per unit.  For the quarter, this represents a 9.2% decrease in Canadian dollars and a 12.7% decrease in U.S. dollars.

In the first quarter, our results were in-line with the U.S. indexes listed in the table above and ahead of the average U.S. small-cap growth manager who lost 14.9%.  It was a very difficult and turbulent quarter as the credit crunch that began last fall upset stock markets around the globe.

During the twentieth century, the U.S. stock market’s upward march has been interrupted by long and difficult stretches a number of times.  Two obvious examples were during the Great Depression and during the inflation plagued 1970’s.  It is increasingly apparent that the first decade of the twenty-first century is another one of these long stretches of poor returns.

The U.S. stock market is now trading below where it was on December 31, 1999. In this decade, U.S. stocks have even been beaten by conservative, 3-month T-bills which have returned 3.3%. This has surprised most investors as it is commonly accepted that stocks offer the best returns over the longer term. 

Table II below illustrates the malaise in U.S. equities since 2000. A quick look at the compounded rates of return in the right hand column shows how mediocre results have been since the Bubble. The table also shows that although Formula has not been immune to the same substandard performance, we have at least held our head above water and have exceeded market returns.

In fact, in each of our five decades since our founding in 1960, we have always managed to add value, after fees, when compared to the U.S. market averages.  Table III shows this by comparing our results by decade to the S&P 500 and to the U.S. small-cap growth market as represented by the Russell Growth Index (which was developed in 1978).

While relative outperformance offers a degree of comfort on a professional basis, Formula is all about absolute performance. We recognize that our unitholders want to make money and not necessarily debate relative performance.  So, after a protracted period of poor absolute performance, what is an investor to do?

If you are a long term investor, the first thing to do is to be patient. Returns earned from equities are never linear. Table II shows it is usually feast or famine for returns for both Formula and the market in general. In tough, turbulent times, one should focus on the opportunities that others are ignoring. These days, that would clearly be the out of favour, U.S. stock market. 

The time to buy any asset class is when it is out of favour and not after it has a great run.  In Table IV, we show which sectors have been working this decade while the U.S. market has floundered.  Unfortunately for Formula Growth Fund, the top performing asset categories have mostly been driven by the bull market in commodity prices.  Formula does not traditionally invest in business models that rely primarily on commodity prices to drive growth.  We will always worry about the sustainability of such business models.

The second thing to do during difficult times is to ensure that you stay diversified as diversity is one of the keys to long term investment success. We stay diversified in the portfolio by investing in approximately 100 small-cap stocks out of a universe of thousands.  In addition, our investments span a wide variety of U.S. industries.  We are always trying to rebalance towards sectors and companies that are exhibiting unit growth in their business models but are lagging in terms of stock price.

Hopefully in your own portfolio you have profited during the past few years in some of the sectors shown in the grey highlighted area in Table IV.  In our opinion, it is now time to reconsider the laggard U.S. stock market and re-balance away from the recently hot sectors.

As for your investment managers’ own investment portfolio, we do practice what we preach.  All employees are deeply invested in Funds managed by the firm.  In fact, we have been investing more over the past year due to the strongly held conviction that through continued hard work we will return to our long term rates of return.  At the same time, in order to ensure that we have the skills and horsepower at Formula Growth, we continue to substantially invest in people, technology and infrastructure.

As of March 31, 2008, there are no realized capital gains for tax purposes.  This year’s unitholders’ meeting will be on Monday, May 26th at the University Club (see the details below) on Mansfield Street just below Sherbrooke Street.  We hope to see you there!

Yours truly,