Why Canadian Small Cap Is Beautiful June 22 2016 · Canadian Small Cap Potential Is Evident From Active Manager Results Asset Class Median Manager Annual Excess Return Canadian Small

Hillsdale Investment Management

Why Canadian Small Cap Is Beautiful

June 2016

Harry Marmer, MBA, CFA – Executive Vice President, Institutional Investment Services 416.913.3907/[email protected]

Discussion Points

Size Is A Major Differentiator In Canada

Large Breadth In Canadian Small Caps

Active Management Potential In Canadian Small Caps Is Significant

Current Market Environment

Hillsdale’s Competitive Attributes

Why Small Cap Is Beautiful

Appendix

2

Size Is a Major Differentiator of Manager Returns in Canada

3

Equity Factor Risk Model: Factors’ Frequency of Statistical Significance2006-2012

Source: Axioma AXCA Canada.

There Is Large Breadth in Canadian Small Caps

Source: See Footnote 1. Data as of March 31, 2016Note: Values rounded where indicated

*Small Cap Universe includes all small cap stocks with market capitalization less than or equal to $2 Billion.

4

TSX 60 S&P/TSX CompositeCanadian Small Cap

Universe*

Number of Stocks 60 235 2781

Average Market Cap ($Billions)

$23.9 $8.2 $0.5

Total Market Cap ($Billions)

$1,431 $1,937 $381

Top 10 Stocks (%) 49% 38% 9%

Top 20 Stocks (%) 70% 53% 16%

Asset Class Odds of Adding ValueLow Average High

Canadian Small Cap

U.S. Small Cap

Global Small Cap

Global Equity

Emerging Markets

Canadian Equity

U.S. Equity

Canadian Fixed Income

High Active Management Potential In Canadian Small Cap

5 Source: Perspectives On Institutional Investment Management, By Harry S. Marmer, Rogers Publishing, 2002

Canadian Small Cap Potential Is Evident From Active Manager Results

Asset Class Median Manager Annual Excess Return

Canadian Small Cap 7.9%

U.S. Small Cap 2.0%

Global Small Cap 1.1%

Emerging Markets 1.7%

Canadian Equity 0.9%

U.S. Equity 0.4%

Canadian Fixed Income 0.0%

Global Equity 1.9%

*Based on Back Test of Hillsdale’s Global Small Cap Equity Strategy.Source: Hillsdale Investment Management, eVestment Alliance. Returns are based on local currency. Median manager annual excess return is based on the median of the calendar year median manager excess returns vs. respective benchmarks. Hillsdale annualized excess returns are based on strategy inception date and are ending December 31, 2015. Inception date of Hillsdale’s Canadian Small Cap is Jan 1996. Inception date of Hillsdale’s US Small Cap is Mar 1996. Inception date of Hillsdale’s Back Test of Global Small Cap Strategy is Jan 2003. Inception date of Hillsdale’s Canadian Core Strategy is May 2009. Inception date of Hillsdale’s US 130/30 All Cap Strategy is Jul 2007. Cdn Fixed Income is represented by the Canadian Fixed Income universe.

6

Inefficiencies Are Created By The “Neglect Effect”:Canadian Investors Neglect Investing Canadian Small Caps

Valued Added Potential Valued Added Potential

Large Cap Cdn Equity

Exp

ecte

d R

etur

n of

Ass

et C

lass

(%)

Large Cap US Equity

Fixed Income

Valued Added Potential

Alternatives

0

2

4

6

8

10

12

14

16

Allocation to Asset Class (%)10 20 30 40 50 60 70 80 90 100

Smal

l Cap

Equ

ity

Source: John Ilkiw, CPPIB, presented by Christopher Guthrie, in “US Small Cap: A Breadth of Opportunity” May 20107

Highest Value Add Potential

“Small” Small Cap Allocation

Canadian Small Caps Have Different Fundamental Drivers Than Canadian Large Cap Stocks

Sector WeightsS&P/TSX Composite – S&P/TSX Small Cap, March 31, 2016

Source: See Footnote 18

Difference

-24% -16% -8% 0% 8% 16% 24%

Gold

Consumer Discretionary

Technology

Industrials

Materials x-Gold

Utilities

Energy

Consumer Staples

Health Care

Telecommunications

Financials

TSX Composite - TSX Small Cap

S&P/TSX Composite

S&P/TSX Small Cap

Financials 37.9% 14.3%

Telecommunications 19.3% 0.0%

Health Care 5.7% 4.2%

Consumer Staples 0.9% 3.9%

Energy 4.7% 15.9%

Utilities 2.5% 4.6%

Materials x-Gold 3.1% 7.4%

Industrials6.8% 10.9%

Technology 8.2% 5.5%

Consumer Discretionary 4.4% 8.8%

Gold 6.6% 24.5%

Diversity Between Large & Small Cap Is Reflected In Index


Sector S&P/TSX Composite S&P/TSX SCI Sector S&P/TSX Composite S&P/TSX SCI

Royal Bank of Canada Dundee Transalta Superior Plus Corp Toronto Dominion Laurentian Bank of Canada Brookfield Power Innergex Renewable Energy

Bank of Nova Scotia First National Financial Northland Power Valener BCE Potash Saskatchewan Labrador Iron OreTelus Barrick Gold Silver Standard Resources

Rogers Communications GoldCorp First Majestic SilverValeant Pharmaceuticals Knight Therapeutics Canadian National Railway Russel MetalsChartwell Retirement Res Extendicare Canadian Pacific Railway Stantec

Prometic Life Iences Theratech Bombardier Chorus Aviation Inc Alimentation Couche Tard North West Co Blackberry Wi-LAN

Loblaw Clearwater Seafoods CGI Mitel NetworksMetro AGT Food & Ingredients Open Text Computer Modelling Group

Suncor Energy Birchcliff Energy Thomson Reuters Yellow Pages Canadian Natural Resources Baytex Energy Manga International Boston Pizza Royalties

TransCanada Corp Enerflex Shaw Communications Corus Entertainment

ConsumerDisc.

Financials

Health Care

Energy

Materials

Industrials

Telecom

Utilities

ITConsumer Staples

Top Holdings Per Sector

These Factors Contribute To the Potential For Active Small Cap Management

10Source: See Footnote 1

Hillsdale Canadian Small Cap Equity Strategy vs. S&P/TSX Small CapSince Inception, Jan 1996 – Mar 2016

1 – Annualized, based on daily returns.2 –Active Share represents the percent of portfolio holdings that differ from the benchmark index holdings. An index fund would have an active share of 0%. 3 - Sortino Ratio is a measure of downside risk and is calculated as the excess return (or risk premium) per unit of downside deviation. The excess return is measured over the return of a risk free asset (T-Bills) divided by the variability or standard deviation of negative returns. Calculated using an assumed risk free rate of 2.0%.4 – Capture ratios are calculated based on monthly return data. In a bear market, a capture ratio under 100% indicates outperformance vs. market; in a bull market, a capture ratio capture over 100% indicates outperformance vs. market.

Hillsdale Cdn Small Cap

S&P/TSX Small Cap TRI

Return 16.6% 5.6%Value-Added 11.0% -% Positive Quarterly Value Added 75.3% -Tracking Error vs. TSX SCI1 9.3% -Information Ratio vs. TSX SCI1 1.19 -Current Active Share2 76.9% -

Risk1 18.4% 18.2%Return to Risk 0.9 0.3Beta vs. TSX SCI1 0.88 1.00Sortino Ratio3 1.42 0.31Bull Market Capture4 132% -Bear Market Capture4 78% -

Active Management

Metrics

Return and Risk Metrics

11

Russell 2000 Index vs. S&P/TSX Small Cap Index, March 31 2016 - Sector Weights

US & Canadian Small Cap Stocks Are Complements

Data as of March 31, 2016

Source: See Footnote 1.

12.1%

10.7%

9.8%

3.7%

0.8%

0.6%

-0.4%

-2.0%

-8.2%

-8.4%

-20.0% -10.0% 0.0% 10.0% 20.0%S&P/TSX Small Cap

Russell 2000

5.3% 17.4%

5.4% 16.1%

14.5% 24.3%

10.7% 14.5%

0.0% 0.8%

12.2% 12.8%

3.6% 3.3%

5.0% 3.1%

12.2% 4.0%

12.2% 3.9%

Technology

Health Care

Financials

Discretionary

Telecom

Industrials

Utilities

Staples

Materials

Energy


Managing Liquidity and Capacity Is Critical

Average Monthly Valued Traded Past Year1 Year Ending April 30, 2016, $Millions

12

S&P/TSX Composite S&P/TSX SCI

Average $1,082 $159

Median $1,023 $177

Maximum $1,435 $188

Minimum $869 $52

13

Canadian Small Cap Market Outlook

Price to Book of TSX Small Cap Index vs. TSX Composite IndexMonthly, Sep 2004 – Mar 2016

14

Canadian Small Cap Valuations vs. Large Cap Have Improved But Remain Well Below Their Long-Term Average

Source: See Footnote 1. As of March 31, 2016

0.4

0.5

0.6

0.7

0.8

0.9

1

3/31/2003 3/31/2005 3/31/2007 3/31/2009 3/31/2011 3/31/2013 3/31/2015

Average

0.5

0.6

0.7

0.8

0.9

1.0

1.1

0.5

0.6

0.7

0.8

0.9

1.0

1.1

Dec

-71

Dec

-73

Dec

-75

Dec

-77

Dec

-79

Dec

-81

Dec

-83

Dec

-85

Dec

-87

Dec

-89

Dec

-91

Dec

-93

Dec

-95

Dec

-97

Dec

-99

Dec

-01

Dec

-03

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

CAD/USD Exchange RateMonthly, Jan 31, 1971 – Mar 31, 2016

Canadian Dollar Weakness Provides Support for Canadian Small Cap Earnings Cushioning the Effect of Lower Commodity Prices

15

CAD$ Appreciating

CAD$ Depreciating


The Price of Gold in Canadian Dollars is Near a Multi-Year High

16 Source: See Footnote 1. As of Apr 4, 2016.

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22012 2013 2014 2015 2016

1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

Gold Futures - Price (USD)Gold Futures - Price (CAD)

Gold Price Used in Analyst Estimates is Significantly Lower Than Spot Price


2012 2013 2014 2015102010401060108011001120114011601180120012201240126012801300

1330

1360

1390

1420

1450

1480151015401570160016301660169017201750178018101840

1890

102010401060108011001120114011601180120012201240126012801300

1330

1360

1390

1420

1450

1480151015401570160016301660169017201750178018101840

1890

Gold - Spot Price (Log)Gold - 12M-Forward Consensus Estimate (Log)

Price of Oil Remains Weak in Both USD and CAD


Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22012 2013 2014 2015 2016

20

30

40

50

60

70

80

90

100

110

120

20

30

40

50

60

70

80

90

100

110

120

Crude Oil Futures - Price (USD)Crude Oil Futures - Price (CAD)

Oil Price Used in Analyst Estimates is Higher Than Spot Price


2012 2013 2014 2015252627

29

31

33

35

37

39

41434547495153

56

59

6265687174778084889296

100104108113

252627

29

31

33

35

37

39

41434547495153

56

59

6265687174778084889296100104108113

Crude Oil - Spot Price (Log)Crude Oil - 12M-Forward Consensus Estimate (Log)

20

Canadian Small Cap Outperformed Canadian Large Cap

Source: See Footnote 1. As of May 20, 2016

21

Hillsdale’s Competitive Advantages

Hillsdale’s Skills in Canadian, US and Global Small Cap

Asset Class Median Manager Annual Excess Return

Hillsdale Annualized Excess Return

Canadian Small Cap 7.9% 11.3%

U.S. Small Cap 2.0% 7.9%

Global Small Cap 1.1% 8.6%*

Emerging Markets 1.7% N/A

Canadian Equity 0.9% 2.9%

U.S. Equity 0.4% 5.5%

Canadian Fixed Income 0.0% N/A

Global Equity 1.9% N/A*Based on Back Test of Hillsdale’s Global Small Cap Equity Strategy.Source: Hillsdale Investment Management, eVestment Alliance. Returns are based on local currency. Median manager annual excess return is based on the median of the calendar year median manager excess returns vs. respective benchmarks. Hillsdale annualized excess returns are based on strategy inception date and are ending December 31, 2015. Inception date of Hillsdale’s Canadian Small Cap is Jan 1996. Inception date of Hillsdale’s US Small Cap is Mar 1996. Inception date of Hillsdale’s Back Test of Global Small Cap Strategy is Jan 2003. Inception date of Hillsdale’s Canadian Core Strategy is May 2009. Inception date of Hillsdale’s US 130/30 All Cap Strategy is Jul 2007. Cdn Fixed Income is represented by the Canadian Fixed Income universe.

22

Hillsdale Covers The Entire Canadian Small Cap Universe

“Total Small Cap Coverage” includes all small cap stocks with market capitalization less than or equal to $2 Billion. “Total Investable Universe” includes stocks within Total Small Cap Coverage with market cap greater than $25 million.

23 Source: See Footnote 1. As of December 31, 2013.

500

550

1050

2750

0 500 1000 1500 2000 2500 3000

Investable Small CapUniverse

Investable Micro CapUniverse

Total InvestableUniverse

Total Small CapCoverage

Number of Stocks

24

A Diversified & Prudent Approach

Hillsdale Canadian Equity Small Cap AllocationMarch 31, 2016

Source: See Footnote 1. Excludes cash allocation.

Canadian Core

Small Cap70%

CanadianMicro Cap

22%

9%US Small Cap

4

6

8

10

12

14

16

18

4

6

8

10

12

14

16

18

20

25

Performance Ranking

Source: eVestment Alliance, Dec 2015. Returns are gross of fees. Past performance is not indicative of future return.S&P/TSX Small Cap Index performance is represented by the TSE200 before Feb 2000.Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes.Russell® is a trademark of Russell Investment Group

20 Years Of Experience In Small Cap Stock Investing

Hillsdale US Small Cap

(Mar 1996 – Mar 2016)

Hillsdale

Russell 2000

US Small Cap Universe

Cdn Small Cap Universe

Hillsdale Cdn Small Cap

(Jan 1996 – Mar 2016)

Hillsdale

S&P/TSX Small Cap

26

In Pursuit of Best Execution

In 2015, Average Commission Costs Were 2.0 Cents/Share, Average Firm-Wide Slippage was 40bps.

Trading Costs

OpportunityCosts

ExecutionCosts

• Delay Costs• Bid/Ask Spreads • Market Volatility/Trend• Market Impact

• Costs of Non-Execution• Consideration of Alpha Forecast

• Broker/Dealer Commission• Transaction Fees

In Pursuit of Best Execution Hillsdale Trade Analysis Includes

2727

An Institutional Investment Boutique, Capacity Aware

Other is US Large Cap and Equity Minimum Risk

$1.2 Billion Assets Under Management as of May 2016


Small Cap (CPE, UPE, GPE)

50%

Return Premium (VMQ, QEI)

31%

Canadian Equities (Core, Cdn LC, CLS)

7%

[CATEGORY NAME]

[VALUE] Other (CMV, UMV)5%

0%

10%

20%

30%

40%

50%

60%

Small Cap (CPE,UPE, GPE)

Return Premium(VMQ, QEI)

Canadian Equities(Core, Cdn LC, CLS)

Absolute Return(HARS)

Other (CMV, UMV)

0%

10%

20%

30%

40%

50%

60%

0 to 1 1 to 2 2 to 4 4 to 6 6 to 8 8 to 10 10 +

28

Firm-Wide Canadian Stock Allocation by Average Days TradingAs of December 31, 2015


Purposely Aware of Liquidity and Market Impact in a Capacity Constrained Environment

29


1”Size Matters, If You Control Your Junk” by Cliff Asness, Andrea Frazzini and Ronen Israel, AQR Management, Jan 2015.


• Size Is A Major Differentiator in Canada

• Small Cap Breadth Creates Opportunities for Skillful Managers

• Neglect Effect Also Provides for Market Inefficiencies

• Provides Diversity In Fundamental Drivers

• U.S. and Canadian Small Cap Stocks Are Complements

• Capacity Aware and Liquidity Management Are Critical

• Market Outlook Favors Canadian Small Caps

30

Appendix

Hillsdale Canadian Micro Cap Equity Pg 34

The Small Cap Effect Pg 38

Why Small Cap Is Beautiful Pg 45

Footnotes and References Pg 48

31

Breadth Is Important For The Success of Active Management

Source: Active Portfolio Management, by R. Grinold & R. Kahn, McGraw Hill, New York, NY, 2000

Information Ratio = (Excess Return)/(Tracking Error) Tracking Error = Standard Deviation of Excess Return

The Magic Formula of Active Investment Management

The Fundamental Law of Active Management

Number of Independent Forecasts of E (R)

Information Ratio = Manager’s Skill × √ Breath

Relationship Between Forecasts and Actual Outcomes

Breadth

32

Skillful Managers Desire Breadth

Skill Breadth

33

34

Hillsdale Canadian Micro Cap Equity

35

Micro Cap “Private Equity” Attributes Are Very Attractive


Exposure vs. TSX Small CapCdn Micro Cap

S&P/TSX Small Cap

Fundamental Attributes

Enterprise Value to EBITDA 6.5 11.0

Enterprise Value to EBIT 9.5 33.8

Price to EBITDA 5.9 6.2

Price to EBIT 8.6 19.0

Enterprise Value to Cash Flow 7.9 14.4

Enterprise Value to Sales 0.9 2.0

Debt to Enterprise Value 16.5 28.1

Interest Coverage (EBIT/INT) 6.0 1.7

-1.00 -0.50 0.00 0.50 1.00

Ending March 31, 2016

36

Canadian Micro Cap Portfolio AttributesEnding March 31, 2016

Source: See Footnote 1*Exposure based on one-tailed distribution

Exposure vs. TSX SCI

Higher Earnings and Cash Flow Growth

Strong Reinvestment Rate and Lower Debt

Attractive Valuations

Better Accounting and Governance

Revisions and Price Momentum are Superior to the Benchmark.

Lower Market Cap

QualityAccounting & Governance Score (4=Best)Earnings Variability (%)\

Capital EfficiencyCash Flow to DebtReinvestment Rate Est. (%)Debt/Equity

ValuationPrice/SalesPrice/Earnings Est.Price/Cash Flow Est.Price/BookEV/EBITDA (trl.)Dividend Yield (%)

GrowthQuarterly Sales Growth (%)Quarterly Earnings Growth (%)Quarterly Cash Flow Growth (%)

Consensus/MomentumQuarterly Earnings Surprise (%)Quarterly Estimate Revision (%)12 Month Price Change (%)

Size/Liquidity/RiskWeighted Average Market Cap ($ millions)Daily Trading Volume ($ millions)120 Standard Deviation

-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50

Cdn Micro Cap

S&P/TSX Small Cap

3.1 2.817.0 30.2

0.8 0.211.6 -0.80.3 0.6

0.8 1.110.4 53.56.4 6.91.5 1.26.5 11.02.1 2.6

2.7 -2.529.8 -49.216.3 -12.0

5.2 -0.313.3 -24.036.9 -13.1

205.9 1,011.40.6 4.946.5 49.5

37

Since Inception Return and Risk Metrics vs. TSX SCI


Hillsdale Canadian Micro Cap Equity FundSince Fund Inception, Dec 2013 – Mar 2016

1 – Annualized, based on monthly returns. Returns are based on Hillsdale Canadian Micro Cap Equity Fund. 2 –Active Share represents the percent of portfolio holdings that differ from the benchmark index holdings. An index fund would have an active share of 0%. 3 - Sortino Ratio is a measure of downside risk and is calculated as the excess return (or risk premium) per unit of downside deviation. The excess return is measured over the return of a risk free asset (T-Bills) divided by the variability or standard deviation of negative returns. Calculated using an assumed risk free rate of 2%.4 – Capture ratios are calculated based on quarterly return data. In a bear market, a capture ratio under 100% indicates outperformance vs. market; in a bull market, a capture ratio capture over 100% indicates outperformance vs. market.

Hillsdale Cdn Micro Cap

S&P/TSX Small Cap TRI

Return1 12.6% -2.5%Value-Added 15.0% -% Positive Quarterly Value Added 71.4% -Tracking Error vs. TSX SCI1 7.9% -Information Ratio vs. TSX SCI1 1.90 -Current Active Share2 98.2% -

Risk1 11.7% 15.6%Return to Risk 1.1 -0.2Beta vs. TSX SCI1 0.65 1.00Sortino Ratio3 0.30 -0.95Bull Market Capture4 114% -Bear Market Capture4 45% -

Active Management

Metrics

Return and Risk Metrics

The Small Cap Effect

38

“A Significant Size Premium Emerges, Which is Stable through Time, Robust to the Specification, More Consistent Across Seasons and Markets…”1

1”Size Matters, If You Control Your Junk” by Cliff Asness, Andrea Frazzini and Ronen Israel, AQR Management, Jan 2015.

US Small Caps Are An Excellent Complement to Canadian Small Caps

Hillsdale CdnSmall Cap

Hillsdale US Small Cap

Gold 20.1% 0.0%

Industrials 24.8% 14.1%


Materials X‐Gold 8.8% 6.0%


Energy 1.8% 0.6%

Utilities 3.0% 2.0%

Telecommunications 0.4% 4.0%




Sector WeightsHillsdale Canadian Small Cap vs. Hillsdale US Small Cap, March 31, 2016


Difference

-30% -20% -10% 0% 10% 20% 30%

Technology

Health Care

Financials

Telecommunications

Utilities

Energy

Consumer Discretionary

Materials x-Gold

Consumer Staples

Industrials

Gold

Hillsdale Cdn Small Cap - Hillsdale US Small Cap

Small Cap Has Superior Attributes To Private Equity

Criteria Micro Cap Small Cap Private Equity

Liquidity Higher High Lower

Time and Resource Commitment Lower Low Higher

Valuation Market Market Estimated

Manager Universe Narrow Wide Narrow

Breadth Broad Broad Limited

Transparency High High Low

Fees Average Average High

40

Why There Is A Small Cap EffectSIZE, JANUARY, & DAY OF THE WEEK • Keim, D. 1987. "Daily returns & size-related premiums: One more time." Journal of Portfolio Management 13 (2): 41-47. • Keim, D.B. 1983. 'Size-Related Anomalies & Stock Return Seasonality: Further Empirical Evidence,' Journal of Financial Economics, March, 13-32. • Rogalski, R. 1984. "New findings regarding day-of-the-week returns over trading & non-trading periods: A note." Journal of Finance 39 (5): 1603-1614. SIZE & RETURN REVERSAL • Fama, E. & K. French. 1987. "Permanent & temporary components of stock prices." CRSP Working Paper #178, Center for Research in Security Prices, Un. of Chicago, February SIZE, JANUARY, & NEGLECT • Barry, C. & S. Brown. 1986. "Limited information as a source of risk." Journal of Portfolio Management 12 (2): 66-72. SIZE, JANUARY, & YIELD • Keim, D. 1983. "The interrelation between dividend yields, equity values & stock returns: Implications of abnormal January returns." Ph.D. dissertation, Un. of Chicago• Keim, D. 1985 "Dividend yields & stocks returns: Implications of abnormal January returns." Journal of Financial Economics 14: 473--489. • Keim, D. 1986 "Dividend yields & the January effect." Journal of Portfolio Management 12 (2): 54-60. SIZE, NEGLECT, & PRICE/EARNINGS RATIO • Dowen, R. & S. Bauman. 1986. "The relative importance of size, PIE, & neglect." Journal of Portfolio Management 12 (3): 30-34. SIZE, NEGLECT, PRICE/EARNINGS RATIO, & JANUARY • Arbel, A.1985. "Generic stocks: An old product in a new package." Journal of Portfolio Management 11 (4): 4-13. PRICE/EARNINGS RATIO & RESIDUAL RISK • Goodman, D. & J. Peavy. 1985. "The risk universal nature of the P IE effect." Journal of Portfolio Management 11 (4): 14-16. PRICE/EARNINGS RATIO, CONTROVERSY, & NEGLECT • Carvell, S. & P. Strebel. 1984. "A new beta incorporating analysts' forecasts." Journal of Portfolio Management 11 (1): 81-85. PRICE/EARNINGS RATIO & PRICE/SALES RATIO • Senchack, A. & J. Martin. 1987. "The relative performance of the PSR & PER investment strategies." Financial Analysts Journal 43 (2): 46-56. SIZE & TRANSACTION COSTS • Blume, M.E. & Stambaugh, R.F. (1983) 'Biases in Computed Returns: An Application to the Size Effect,' Journal of Financial Economics, November, 387-404. • Brown, P., Kleidon, A. W. & Marsh, T .A. (1983a) 'New Evidence on the Nature of Size-Related Anomalies in Stock Prices,' Journal of Financial Economics, June, 33-56.• Kato, K. & Schallheim, J.S. 1985. 'Seasonal & Size Anomalies in the Japanese Stock , Market,' Journal of Financial & Quantitative Analysis, 20, 107-18.• Reinganum, M.R. 1981. 'Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings Yields & Market Values,' Journal of Financial Economics, 19-46.SIZE & TAX LOSSES• Reinganum, M.R. 1983. 'The Anomalous Stock Market Behavior of Small Firms in January: Empirical Tests for Tax-Loss Selling Effects,' Journal of Fin. Economics, June, 89-104. SIZE & RISK• Roll, R. (1981) 'A Possible Explanation of the Small Firm Effect,' Journal of Finance, 36, : 879-88. • Roll, R. (1983a) 'Vas ist das? The Turn of the Year Effect & the Return Premium of Small Firms,' Journal of Portfolio Management, 9, 1, 18-28. • Roll, R. (1983b) 'On Computing Mean Returns & the Small Firm Premium,' Journal of Financial Economics, November, 371-86. • Stoll, H.R. & Whaley, R.E. (1983) “Transaction Costs & the Small Firm Effect,” Journal of Financial Economics, June, 57-70.

41

Why There Is A Small Cap EffectSIZE & PRICE/EARNINGS RATIO • Banz, R. & W. Breen. 1986. "Sample-dependent results using accounting & market data: Some evidence," Journal of Finance 41 (4): 779-793. • Basu, S. 1983. "The relationship between earnings yield, market value & return for NYSE common stocks: Further evidence." Journal of Financial Economics 12 (1): 129-156. • Cook, T. & M. Rozeff. 1984. "Size & earnings/price ratio anomalies: One effect or two?" Journal of Financial & Quantitative Analysis 19 (4): 449-466. • Goodman, D. & J. Peavy. 1986. "The interaction of firm size & price-earnings ratio on portfolio performance." Financial Analysts Journal 42 (1): 9-12. • Peavy, J. & D. Goodman. 1982. "A further inquiry into the market value & earnings yield anomalies." Southern Methodist University Working Paper #82-114, Dallas.• Reinganum, M. 1981. "Misspecification of capital asset pricing: Empirical anomalies based on earnings' yields & market values." Journal of Financial Economics 9 (1): 19-46. SIZE & NEGLECT• Arbel, A., S. Carvell, & P. Strebel. 1983. "Giraffes, institutions & neglected firms." Financial Analysts Journal 39 (3): 57-62. Arbel, A. & P. Strebel. 1982. “Pay attention to

neglected firms”. Journal of Portfolio Management 9 (2): 37-42SIZE & JANUARY • Blume, M. & R. Stambaugh. 1983. "Biases in computed returns: An application to the size effect." Journal of Financial Economics 12 (3): 387-404. • Constantinides, G. 1984. "Optimal stock trading with personal taxes: Implications for prices & the abnormal January returns." Journal of Financial Economics 13 (1): 65-90. • Givoly, O. & A. Ovadia. 1983. "Year-end tax-induced sales & stock market seasonality." Journal of Finance 38 (1): 171-185. Keirn, 0.1983. "Size-related anomalies & stock

return seasonality: Further empirical evidence." Journal of Financial Economics 12 (1): 13-32. ' • Keim o. & R. Stambaugh. 1986. "Predicting returns in the stock & bond markets." Journal of Financial Economics 17 (2): 357-390. • Lakonishok, J. & S. Smidt. 1984. "Volume & turn-of-the-year behavior." Journal of Financial Economics 13 (3): 435-455. • Lakonishok, J. & S. Smidt. 1986. "Trading bargains in small firms at year-end." Journal of Portfolio Management 12 (3): 24-29. • Reinganum, M. 1983. "The anomalous stock market behavior of small firms in January: Empirical tests for tax-loss selling effects." Journal of Financial Economics 12 (1): 89-

104. • Rogalski, R. & S. Tinic. 1986. "The January size effect: Anomaly or risk mismeasurement?" Financial Analysts Journal 42 (6): 63-70. • Roll, R. 1983. "Vas ist das? The turn of the year effect & the return premia of small firms." Journal of Portfolio Management 9 (2): 18-28.• Schultz, P. 1985. "Personal income taxes & the January effect: Small firm stock returns before the War Revenue Act of 1917: A note." Journal of Finance 40 (1): 333-343. SIZE & RESIDUAL RISK • Basu, S. & S. Cheung. 1982. "Residual risk, firm size, & returns for NYSE common stocks: Some empirical evidence." McMaster University Working Paper, Montreal, January. • Lakonishok, J. & A. Shapiro. 1984. "Stock returns, beta, variance & size: An empirical analysis." Financial Analysts Journal 40 (4): 36-41. • Reinganum, M.R. (1982) 'A Direct Test of Roll's Conjecture on the Firm Size Effect,' Journal of Finance, 37, 27-35. • Tinic, S. & R.. West. 1986. "Risk, return & equilibrium: A revisit." Journal of Political Economy 94 (1): 127-147. SIZE & EARNINGS SURPRISE • Foster, G., C. Olsen, & T. Shevlin. 1984. "Earnings releases, anomalies & the behavior of security returns." The Accounting Review 59 (4):574-603. • Freeman, R. 1986. "The association between accounting earnings & security returns for large & small firms." CRSP Working Paper #192, Center for Research in Security Prices,

University of Chicago, October. • Rendleman, R., C. Jones, & H. Latane.1986. "Further insight into the S.U.E. anomaly: Size & serial correlation effects." University of North Carolina at Chapel Hill Working

Paper, April. SIZE, YIELD, & CO-SKEWNESS • Cook, T. & M. Rozeff. 1982. "Size, dividend yield & co- skewness effects on stock returns: Some empirical tests." University of Iowa Working Paper #82-20, Ames.

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Why There Is A Small Cap Effect

• Neglect• Reversals• Value • Earnings Surprise• Residual Risk• January Effect• Transactions Costs• Risk• Irrational Investor Behavior

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A Behavioral Approach

Irrational Investor Behavior

Biased Decision Making

Overconfidence

Overreaction

“A Psychologist Is A Man Who Watches Everyone Else When A Beautiful Girl Enters the Room.”

Why A Small Cap Effect (Premium?)

44

Why Small Cap Is Beautiful

There Has Been Significant Alpha (Excess Return) In Active Investment Management of Small Cap

There is Still A Compelling Case for the Persistence of This Alpha

There is Enormous Breadth (i.e. Choice) in the Small Cap Stock Universe

Canadian and US Markets Are Good Offsets At the Sector Level

Small Cap Managers Compliment Large Cap Managers Diversifying Your Sources of Excess Returns

Very Attractive Valuations

Source: Why Small Is Still Beautiful, by Harry Marmer, Defined Benefits Monitor, Feb 200545

Sector Weight Comparison: Canadian Small Cap vs Composite

Sector Weights vs. TSX SCI

46Investments in the Hillsdale US Performance Equity Fund and the Hillsdale Cdn Micro Cap are accounted for by allocating their individual stock holdings on a weighted basis.Source: See Footnote 1.

Sector Weights vs. Index, March 31, 2016

13.9%

8.2%

2.0%

1.4%

0.4%

-0.2%

-1.6%

-3.0%

-4.4%

-6.1%

-14.2%

-20.0% -10.0% 0.0% 10.0% 20.0%Cdn Small Cap TSX SCI

Industrials 24.8% 10.9%

Materials ex. Gold 12.1% 3.9%



Telecommunication 0.4% 0.0%


Utilities 3.0% 4.6%


Gold 20.1% 24.5%


Energy 1.8% 15.9%

Lessons Learned

• The Small Cap Effect: Small Capitalized Stocks Perform Differently Then Large Capitalized Stocks Over A Market Cycle

• The Small Cap Return Premium: Smaller Companies Have on Average Higher Returns Adjusted for Risk Relative to Larger Companies

• Compelling Case For Excess Returns or Alpha

• Broader and Complimentary Opportunity Set

• Small Cap Managers Compliment Large Cap Managers Diversifying Your Sources of Excess Returns

• Persuasive Reasons for Alpha Potential to Persist

• As Good, If Not Better, Than Private Equity

• Attractive Market Outlook

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Footnotes and ReferencesFootnote 1All data presented is from Hillsdale’s proprietary database unless indicated otherwise. This database consolidates information from over 30 vendors to support Hillsdale’s research, portfolio management and reporting activities.

Footnote 2Performance and other data in this presentation are shown for illustrative purposes only. Back tested returns are based on a quantitative testing where stocks are selected based on Hillsdale’s proprietary stock selection systems. All back test returns are shown gross of fees and are calculated in Canadian or US dollars as indicated. No representations are being made that the investment process will achieve similar returns on a going forward basis. Investors should not consider the data included in the presentation as an indication, assurance, estimate or forecast of future results. Actual returns may differ materially from the returns shown for reasons including, but not limited to, investment restrictions and guidelines, fees and other expenses, cash holdings, timing of trade execution and fluctuations in the market.

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Institutional Investment ServicesHarry Marmer, BBA, MBA, CFA, Executive Vice President and Partner, joined Hillsdale Investment Management in 2008. Prior to joining Hillsdale, Mr. Marmer led the Canadian institutional investment business of Franklin Templeton Investments and before that the institutional business of the Russell Investment Group. He was also a principal and co-head of Mercer's Canadian Investment Consulting Practice. Mr. Marmer is a frequent conference speaker and has authored more than 47 articles. His book, Perspectives in Investment Management, was published in September 2002. He has served on a number of professional and industry boards and was past president of the Toronto CFA Society. Mr. Marmer received the Volunteer of Distinction Award from the Toronto CFA Society and was awarded the Society’s Research Award. He has an MBA and a BBA, finance and investments, York University.

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Why Canadian Small Cap Is Beautiful June 22 2016 · Canadian Small Cap Potential Is Evident From Active Manager Results Asset Class Median Manager Annual Excess Return Canadian Small