As you are aware, Trimark Enterprise Small Cap Fund had a difficult year, especially hard hit during the third quarter. There was not a single reason for this, but rather a number of causes, some of which were interrelated. It is important to put our investment style into perspective given 2001's environment. We have always built our portfolios with a value bias. The majority of our holdings create a solid foundation of companies offering strong relative value within the small-cap universe. This portion of the portfolio generally performed in-line with expectations through August of this year, recognizing the difficult overall marketplace. On top of this base of solid value-oriented securities we have historically layered a number of higher-risk, higher-reward, often long-tail in nature, stocks. When exogenous shocks hit the system and threaten to exacerbate an already struggling economy - as happened on September 11th - growth-oriented securities invariably underperform, but all stocks generally move lower. In fact, growth-oriented securities were problematic from the start of the year, as discussed below.

Firstly, investors during the first nine months of 2001 had little tolerance for companies that were pre-earnings, regardless of whether operating milestone were being met or not. This was particularly true for a number of technology stocks where, while timelines for commercialization have been pushed out because of lengthening sales cycles, progress is nonetheless being made. Where we are comfortable with the execution of the business model, we have opted to hold on to these positions and were hurt severely for this stance through the end of September.

Secondly, the high level of uncertainty within the economy and global political arenas greatly increased the price investors were willing to pay for liquidity or, conversely, the discount demanded for assuming illiquidity. This culminated in September when the BMO Nesbitt Burns Small Cap Index (NBSCI) underperformed the Toronto Stock Exchange Total Return (TSE 300 TR) Index by 6.3 per cent. While obviously not pleasant, there were a number of attractive valuations created by this downturn.

The final key point relates to the overall positioning of the portfolio. The account was set up to benefit from the economic recovery that did not materialize in the short term. This is evident both in where the account was overweighted and underweighted. Besides Technology, which I have already touched upon, the account's second largest exposure was the energy sector, which, although strong in the early part of 2001, turned in a poor performance in the third quarter. Demand destruction because of the economic slowdown and high prices earlier in the year led to inventory builds and lower commodity prices. This in turn ratcheted through to much lower prices.

Conversely, where the account was not present, or only in a small way, proved to be the favoured areas - the gold sector, for instance. The Nesbitt Burns Small Cap Index (NBSCI) had a weighting of 9.5 per cent in this area on September 30, while we have had no exposure all year as we fail to find anything we believe represents good value. Similarly, real estate and financial services, among the Index's better performers, were areas where we were meaningfully underweight.

Thankfully the fourth quarter saw a return to somewhat less emotional market conditions. This has continued thus far in 2002 and our performance is reflective of the better environment.

Moving on to the overall small-cap environment, we believe that there are lots of attractive opportunities in the marketplace currently. The stage appears to be set for a period of strong relative performance from North American small caps. As the economy enters a recession there tends to be a flight to deep value, stocks that are deemed to be less risky, less expensive and less volatile; liquidity is sought. Also, capital markets become tougher to access and the smaller, "growthier" companies tend to suffer more on this front, as well.

However, as signs of an economic bottoming develop, this process tends to reverse and small-cap securities and more growth-oriented stocks come to the fore. Earnings growth visibility returns and access to capital improves. This is where we believe the overall market is poised today.

The many rate cuts implemented by the United States Federal Reserve Board in 2001 have certainly lowered the overall cost of financing, but probably more importantly, the relative cost of the capital for small securities has narrowed, although it remains historically high.

Small companies also tend to benefit at this point in the cycle from their lower exposure to foreign markets. We believe the U.S. is likely to lead an upturn. Thus this lower dependence on foreign subsidiaries and exports should serve the small-cap sector well.

Obviously the return to net inflows for equity accounts will also serve as an underpinning for the demand for small-cap securities. While overall valuations themselves are not necessarily a catalyst, the reasonable prices on small-cap securities today does, at a minimum, translate into lower risk.

Based on December data from Merrill Lynch, U.S. small caps were trading at 94 per cent of the cash flow multiple of large-cap companies. This was lower than at anytime from mid-1978 through mid-1998. Similarly, small caps were at 52 per cent of the price-to-sales ratio of larger-cap stocks, the lowest observed anytime from 1976 to mid 1998 These lower valuations exist despite a 23 per cent higher five-year projected growth rate.

In Canada, the NBSCI traded at 75 per cent of the TSE 300's price-to-book ratio, 76 per cent of the TSE 300's price-to-earnings ratio, and 65 per cent of its price-to-sales ratio, none of which are high by historical standards.

To conclude, we share your disappointment regarding 2001 results. However, we believe 2002 is likely to be a good year for small-cap securities and the Trimark Enterprise Small Cap Fund is positioned to take advantage of this improved environment.