Maxam Diversified Strategies Fund – Q2 2022

Taking advantage of the volatility, selectively.

Maxam Diversified Strategies Fund – Q2 2022 Commentary

Dear fellow investors,

The market environment continues to be dominated by high inflation, rising interest rates, fears of a recession and geopolitical tensions. Equity bellwether S&P 500 index just posted its worst six month start to a calendar year since the 1970s, and broad bond indices are down double digits.

June alone was a particularly cruel month for equity investors. North American equity indices declined between -9% and -15% during the month as additional high inflation readings led to more hawkishness from central banks and increased bearish sentiment. Correlations moved to ‘one’ across companies, sectors, and geographies – there was ‘nowhere to hide’, so to speak.

We believe that the significant market correction in 2022 is presenting us with compelling investment opportunities – fear-driven selling, growth companies at value prices, wide arbitrage spreads – and we are taking advantage, selectively.

The Maxam Diversified Strategies Fund1 declined -7.8% in June and -9.1% through the first six months of the year. Here is the tale of the tape for June and year-to-date:

What’s priced-in?

You’d be hard pressed to watch the news or check a stock quote today without seeing a headline that included: inflation, higher interest rates, recession, or bear market.

Bank of America’s Bull & Bear indicator, compiled from their regular survey of global fund managers, closed out June at “maximum bearish” for a third consecutive week2. The survey also noted that allocations to equities hit their lowest level since October 2008 and uninvested cash was the highest in more than two decades3. Investor sentiment is awful.

Glass half-full view: when EVERYONE is talking about all of the bad news and the challenges for the economy and markets, some of it is certainly already reflected in securities prices. While it is admittedly difficult to know how much bad news is already priced-in, we are seeing compelling investment opportunities in select companies that we are taking advantage of.

Exposures.

The fund remains well-diversified across sectors, strategies, and individual securities. As at the end of the quarter, the fund was invested across 10 industry sectors with no sector weight larger than 14% of net exposure (excluding arbitrage), and the top 10 holdings accounted for 25% of assets. The fund’s net allocation to arbitrage was ~25% on June 30, a high mark for the year. In addition to providing a stable return profile that is uncorrelated with the general market, the fund’s arbitrage allocation is also highly liquid and can be used to opportunistically take advantage of value + catalyst situations that become available in a volatile market.

Through the first five months of the year, the fund held in very well relative to the broad markets and our peers, down approximately -1.5%1. The fund’s arbitrage holdings held their value, and our shorter-duration, value-oriented names outperformed the more speculative growth companies that have been hardest hit in this sell-off (we discussed short vs long duration equities in our Q1 commentary). And then in June, as mentioned above, we saw correlations move to ‘one’ as investors indiscriminately sold securities, regardless of fundamentals or outlook in many cases.

So, we have very poor investor sentiment, equity markets that are already down – some in bear market territory – signs of capitulation and non-fundamentals-based selling. On top of that, some market prognosticators are saying the four most dangerous words in investing: “this time it’s different.”4

The Covid pandemic was something different, or at least more extreme that what investors have seen over the last 100 years or so. However, economies, companies and investors have dealt with recessions, inflation, higher interest rates and geopolitical turmoil many times before.

What we think is not different this time, is taking advantage of opportunities, selectively.

We’ve recently added to our position in H20 Innovation Inc., a water infrastructure and technology company whose shares were down -32% through the first six months of this year. We like this founder led business that has highly recurring revenues and is delivering strong organic and acquisitive growth.

Another existing holding that we’ve been opportunistically adding to is VitalHub Inc. – an enterprise software company providing solutions to the health care industry. VitalHub’s share price is about 20% lower than where it started the year, despite a strong balance sheet, healthy growth, and completing an accretive acquisition.

We have also begun initiating new positions in some companies that we’ve been following for years (including some that we used to own) that are now trading at prices we believe represent excellent reward-to-risk levels. We’ll plan to highlight some of these new positions in future commentaries.

Opportunity knocks.

To be clear, I am not calling a bottom for the equity markets (that’s realistically unknowable), but we are currently seeing security prices that we believe reflect compelling value and opportunity.

We’re taking action, selectively – not with an eye on where we will be next week or next month, but with a view on where values will be as the issues the market is grappling with begin to subside and as our holdings perform.

Instead of trotting out Warren Buffett’s famous “be greedy when others are fearful” quote, we’ll cite another that we think is equally wise today, from legendary investor, Shelby Davis:

‘You make most of your money in a bear market, you just don’t realize it at the time’.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA

President & Fund Manager

Maxam Capital Management Ltd.

1 Maxam Diversified Strategies Fund, Series F, net of fees and expenses. Inception date June 30, 2009. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com

2https://ca.investing.com/news/stock-market-news/bofas-bull-and-bear-indicator-is-at-maximum-bearish-for-a-third-week-in-a-row-432SI-2713789

3 https://www.reuters.com/markets/europe/funds-full-capitulation-they-slash-stock-allocation-bofa-poll-2022-07-19/

4 According to famous investor Sir John Templeton, “The four most dangerous words in investing are, it’s different this time.”

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospect us, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685 0201 [email protected] www.maxamcm.com

Maxam Arbitrage Fund – Q2 2022

Stability for your portfolio.

Maxam Arbitrage Fund – Q2 2022 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund1 declined -0.6% in the second quarter of 2022, in what was a very challenging period for both equities and bonds.

The fund has held up very well during the market correction – demonstrating its value as an alternative source of returns and a portfolio diversifier. Over the last 12 months the fund gained +2.2% whereas the iShares Core CAD Universe Bond ETF declined -11.7%2.

Merger and SPAC arbitrage yields are attractive right now, presenting investors with an opportunity to earn returns from a strategy that is uncorrelated with traditional equities and bonds.

State of the arb market.

The overall market narrative continues to be dominated by high inflation, rising interest rates, fears of a recession and geopolitical tensions.

Arbitrage spreads widened during the quarter to levels not seen since the Covid crash in March-April 2020. In addition to tracking the broad risk-off environment, spreads were pressured by a more expensive and difficult market for high yield financings and leveraged loans.

In particular, yields on leveraged buyout transactions widened in early June when reputable private equity firm Thoma Bravo announced that they had renegotiated and reduced the price they had agreed to pay for Anaplan Inc. from $66.00 to $63.75 per share. This deal re-price remains a ‘one-off’ at time of writing with other notable leveraged buyout transactions recently closing on terms.

Also continuing to impact arbitrage spreads and deal timelines is the increased scrutiny that U.S. regulators are applying to mega-cap deals and companies in industries deemed more sensitive to competition issues. 

Despite a challenging market environment, new deal announcements continued to be plentiful during the second quarter, providing us with a robust opportunity set to take advantage of. However, while it is difficult to forecast future deal activity, we are mindful that the present risk-off nature of the markets coupled with rising interest rates and wider credit spreads may be a headwind.

Constructively, market volatility and lower valuations will lead to new opportunities for dealmakers as companies look to make strategic acquisitions and position themselves for future growth. And private equity firms have significant amounts of capital that needs to be deployed which may help temper any slowdown.

Nimble.

Being nimble is an advantage in terms of both seeking returns and managing risk. We enjoy the flexibility and advantage of investing across the capitalization spectrum, providing us with a larger opportunity set. While every merger deal is different, we look favourably on mid and smaller capitalization transactions in the current environment because regulatory risks are typically lower, and the deal timelines are shorter.

Regardless of deal size, we are always focused on transactions that we believe will reach successful completion.

The fund invested in 15 new deals during the quarter, had 14 successful deal closures and experienced no deal breaks (although we did own the Anaplan re-price). As of June 30, the fund held 35 merger arbitrage positions, diversified across market cap, deal type and industry.

Owned deals that successfully closed during the quarter included3: Cerner Corp; Ferro Corp; IntriCon Corporation; Intertape Polymer Group; Noront Resources; Anaplan Inc; Questex Gold & Copper Ltd; SOC Telemed Inc; Veoneer Inc; and Intersect ENT, Inc.

Some notable new positions initiated during the second quarter included3: Covetrus Inc; FAX Capital Corp; GTY Technology Holdings; Points International; Redline Communications; and Sailpoint Technologies.

SPAC yields rise.

Just as traditional IPOs are less likely to come to market during unfavourable market conditions, so too are SPACs. New SPAC issuance continued to slow during the second quarter with less than 20 new SPAC listings, a steep drop from the 54 seen in the first quarter of 20224 (and a far cry from the pace of more than 600 in calendar 2021).

In addition to the weaker market environment, the SEC’s proposed new, and more stringent, rules for SPACs (discussed in our Q1 commentary) are likely making it more difficult for SPAC sponsors to find and consummate deals. SPAC redemption rates, where investors elect to redeem their SPAC shares for the cash held in trust, continued to be high at approximately 80%, during the second quarter4.

A high rate of SPAC redemptions makes it very difficult for investors who bank merely on upside from well-received deal announcements, or for those who speculate on SPAC warrants – which will expire worthless if a deal is not completed. We continue to take a very conservative approach to SPAC warrants, routinely harvesting them post unit split, rather than hoping a deal the market likes will be completed.

From a SPAC arbitrage perspective, the risk-off environment and still well-supplied market with almost 600 SPACs currently seeking acquisitions5 provides us with a very attractive reward-to-risk set-up. SPACs are trading at unlevered annualized yields near 5% on average6 – a return that is backed by short-term government securities (i.e. T-bills) held in trust.

We also note the SPAC cliff on the horizon – almost 95% of listed SPACs are due to liquidate within the next 12 months7, presenting us with an attractive set-up for our systematic and quantitative approach to harvesting SPAC yields.

As of June 30, the fund was well-diversified across 158 SPACs, and we are currently deploying capital at attractive yields.

Looking ahead.

Merger and SPAC arbitrage yields are attractive right now, presenting investors with an opportunity to earn returns from a strategy that is uncorrelated with traditional equities and bonds.

Arbitrage is an attractive strategy for the long-term, and its unique characteristics make it a particularly attractive strategy in the current environment. Rising interest rates are a clear negative for bonds, however they can act as a tailwind for arbitrage because of the low duration nature of the strategy – deals typically complete in just a few months.

In addition to providing a compelling alternative to bonds as interest rates rise, arbitrage strategies also provide excellent diversification to traditional equity market exposure because returns are generated from the successful completion of specific and definitive corporate events. As arbitrageurs we expect to profit regardless of the behaviour and direction of the stock market.

Risk management is central to our quantitative, data-centric and disciplined investment process as we deploy capital into a robust and attractive opportunity set.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

1 Maxam Arbitrage Fund, Class F, net of fees and expenses. Inception date October 1, 2020. Please contact us regarding other series of fund units or visit our website www.maxamcm.com

2 iShares Core CAD Universe Bond ETF, ticker XBB.

3 Notable owned deals successfully closing during the quarter is not an exhaustive list. New positions initiated during the second quarter is not an exhaustive list.

4 SPAC statistics sourced from: Maxam internal database and https://icrinc.com/insights/icr-q2-2022-spac-market-update/

5 https://www.spacanalytics.com/

6 Maxam internal database and https://spacinsider.com/stats/

7 Maxam internal database

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospect us, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685 0201 [email protected] www.maxamcm.com

Maxam Diversified Strategies Fund – Q1 2022

The shift is on.

Maxam Diversified Strategies Fund – Q1 2022 Commentary

The Maxam Diversified Strategies Fund1 gained +2.0% in the first quarter of 2022.

Geopolitical tensions, rising interest rates and high inflation made for a challenging investment climate during the quarter. We expect these factors will continue to shape markets in the near-term.

Equities were volatile and broadly lower – the MSCI World, S&P 500, and NASDAQ declined -5.0%, -4.9% and -9.1% respectively. Canada’s heavy weighting in energy and materials companies, and its relatively low weight in technology, enabled the TSX to buck the trend with a +3.8% gain.

Faced with increasingly hawkish central banks, bonds did not fare any better than equities.  The U.S. focused Vanguard Total Bond Market ETF and the iShares Core Canadian Universe Bond Index ETF declined -5.8% and -7.3% respectively.

There were not many places to hide during the quarter and the volatility has continued into April.

Houston, we have a duration problem2.

Record low interest rates, money printing, supply chain problems, pent-up demand from the pandemic, Russia’s invasion of Ukraine… put that all in a blender and you have an inflation smoothie.

Statistics Canada reported that annual inflation rose to 6.7% in March – the highest reading since 1991. That doesn’t feel too smooth-y.

In our Q3 2021 commentary we wrote:

Duration is a term that has been co-opted from the world of fixed income into the equity market of late. Long-duration equities, companies whose earnings are expected to be generated in the more distant future (as opposed to short-duration equities who are expected to deliver in the short-term), are more sensitive to changes in interest rates.

As central banks reduced interest rates to near-zero levels and flooded the markets with liquidity in response to the Covid-19 pandemic, long-duration growth stocks outperformed by a wide margin. And more recently, as interest rate expectations have changed in response to higher inflation and bond yields have risen, short-duration and value stocks have outperformed.

Long-duration stocks were hit hard in Q1 while short-duration securities moved higher. The chart below of high growth ecommerce technology company Shopify, and diversified materials miner Teck Resources, typifies what has transpired.

And rising rates are a clear negative for bonds as well. The following chart of the Vanguard Total Bond Market ETF and the MSCI World Index in Q1 shows that balanced investors haven’t experienced much balance of late.

If your portfolio was all long-duration growth and speculative momo stocks, or heavy on traditional bond exposure, it has likely been a disappointing start to 2022.

Central banks are signalling that they will aggressively fight inflation, and current expectations are for several more interest rates hikes in Canada and the U.S. by the end of this year. With financial conditions already tightening significantly, and mounting calls that a recession is coming, it would seem to us that central banks will have the opportunity to soften their approach and even reverse course if circumstances warrant.

Exposures.

The Maxam Diversified Strategies Fund has weathered the market volatility well thus far, with a small decline in January followed by gains in both February and March. The fund’s shorter-duration holdings were, unsurprisingly, the fund’s best performing positions during the quarter. These companies were largely in the energy and materials sectors – significant beneficiaries of inflation. Modest short exposure was also a positive contributor to fund performance.

Technology has been the hardest hit sector year-to-date. The fund’s weight in technology was approximately 12% on March 31, excluding arbitrage positions. Our technology holdings, focused on where we see attractive value and catalysts – and avoiding companies we consider speculative and unjustifiably valued – have held in quite well relative to the overall downward move in the sector.

The fund’s short-duration exposure also includes its arbitrage strategy allocation, which was approximately 19% at the end of the quarter. Arbitrage was a modest positive contributor to performance in Q1, with the added benefit that this largely market neutral strategy preserved capital and reduced overall portfolio volatility. We continue to see low-risk and attractive arbitrage situations in the current environment that can reduce market risk and help diversify a portfolio, especially during a period of rising interest rates3.

Fund exposure remains well-diversified across sectors, strategies, and individual positions. As at the end of the quarter, the fund was invested across 10 industry sectors with no sector weight larger than 16% of net exposure (excluding arbitrage). The fund’s long exposure is in positions that we classify as compounders, event-driven and special situations.

The shift is on.

In recent fund commentaries, we have highlighted our belief that the market is in the early stages of

transitioning away from an environment that has favoured high-multiple, growth-at-any-price, speculative stocks – towards an environment where companies with current and tangible revenues and growing bottom lines will be increasingly rewarded.

We held these views prior to Russia’s invasion of Ukraine, the ramp in inflation and the now in-motion interest rate increases. We already owned companies where we saw value (and catalysts) – and perhaps more importantly over the last few months, we were not invested in the companies that have been, and are now, under the most significant pressure.

In our opinion, the shift, and its ramifications, is still in the early stages of playing out.

The brightside.

Macro-driven investing is not core to our approach at Maxam. We consume news and information and observe trends, but we won’t offer any unique commentary here on geopolitical events, inflation, or interest rate policies.

What is core to our investment approach is taking advantage of opportunities and a keen focus on risk and reward. An environment characterized by volatility and change has historically and repeatedly been where we have found compelling investment opportunities.

And the reasons for the volatility can lead to specific investments. For example, certain trends and themes appear likely to solidify and even accelerate, such as: food security, agriculture, energy security and infrastructure. Befitting those themes, we purchased shares in Nutrien a few months ago, one of the largest fertilizer producers and agriculture retailers in the world. We also made a similar investment in a smaller fertilizer company that we expect will generate significant free cash flow from higher product prices.

We’ve experienced more than a few market declines and events over the years. From the bursting of the tech bubble in 2000, the financial crisis in 2008-09, the sovereign debt and Eurozone crisis in 2010-11, the growth scare and trade wars in 2018, the Covid crash in early 2020, and more. Each of these market declines have presented substantial and unique investment opportunities.

Today’s concerns will eventually become yesterday’s opportunities. Supply chain backlogs will alleviate, inflation will slow, consumer and investor demand will return. The market loves a wall of worry on which to climb higher.

This is an attractive environment for our investment style and strategy in our opinion – one that will increasingly favour our value-oriented and active approach. We continue to look forward to some specific events and catalysts for several of our holdings throughout the balance of 2022.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

1 Maxam Diversified Strategies Fund, Series A, net of fees and expenses. Inception date June 30, 2009. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com

2 https://en.wikipedia.org/wiki/Houston,_we_have_a_problem

3 Arbitrage is a low-risk, consistent and absolute return-oriented strategy. We manage the Maxam Arbitrage Fund which focuses exclusively on arbitrage strategies.

Maxam Arbitrage Fund – Q1 2022

Attractive for the long-term. Uniquely attractive today.

Maxam Arbitrage Fund – Q1 2022 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund1 gained +0.3% in the first quarter of 2022 and the fund’s annualized return since inception is +6.4%.

Geopolitical tensions, high inflation and rising interest rates dominated the market environment in the first quarter of 2022.

Equities were volatile and broadly lower – the MSCI World, S&P 500, and NASDAQ declined -5.0%, -4.9% and -9.1% respectively. Canada’s relatively heavy weighting in the Energy and Materials sectors enabled the TSX to buck the trend with a +3.8% gain.

Faced with increasingly hawkish central banks, notably the U.S. Federal Reserve, bonds did not fare much better in the quarter.  The U.S. focused Vanguard Total Bond Market ETF and the iShares Core Canadian Universe Bond Index ETF declined -5.8% and -7.3% respectively.

The Maxam Arbitrage Fund’s goal is to profit regardless of the behaviour of the stock market.

M&A activity continues to be healthy.

It was an active and robust period for arbitrage in Q1 despite global M&A deal value slowing somewhat from record levels in 2021. Deal value surpassed US $1 trillion which is still very healthy compared to pre-pandemic levels.

As is sometimes the case in a more volatile market environment, M&A arbitrage spreads trended a little wider and were somewhat more volatile themselves than in previous quarters.

The M&A landscape in the U.S., specifically for larger deals and companies in industries deemed more sensitive to competition issues, continues to be characterized by longer timelines and wider spreads due to increased scrutiny from regulators. These more sensitive transactions provide both opportunity and risk.

We enjoy the flexibility and advantage of investing across the capitalization spectrum. And while every deal is different, we look favourably on mid and smaller capitalization transactions in the current environment because regulatory and anti-trust risks remain much lower in this segment. Regardless of deal size, we are always focused on transactions that we believe will reach successful completion.

While it is difficult to predict future deal activity, we may see rising interest rates, inflation, and equity market volatility cool things down from what we’ve experienced in recent quarters. However, experience and history dictates that even slower periods of deal activity provide ample opportunity for arbitrageurs. Plus, a significant amount of private equity capital seeking targets may temper any slowdown.

The fund participated in 51 deals and experienced no deal breaks during the quarter. As of March 31, the fund held 28 merger arbitrage positions, diversified across market cap, deal type and industry.

Notable owned deals successfully closing during the quarter included2: Athene Holding Ltd; Apollo Healthcare; Rifco Inc; RR Donnelley & Sons Co; Cominar REIT; McAfee Corp; Nuance Communications Inc; Arena Pharmaceuticals Inc; CyrusOne Inc; and Forterra Inc.

New positions initiated during the first quarter included2: Exterran Corp; Citrix Systems Inc; SOC Telemed Inc; Macro Enterprises Inc; Moneygram International Inc; Meritor Inc; Intertape Polymer Group Inc; Anaplan Inc; Nielsen Holdings Plc; and Questex Gold and Copper Ltd.

Low-risk and attractive SPAC yields.

In contrast to the almost 300 SPACs that went public in the first quarter of 2021, less than 60 came to market in the first quarter of 20223. Despite the slower new issuance, the SPAC market is still very well supplied with over 600 SPACs currently seeking acquisitions.

While SPACs have been around for decades, the massive increase in SPAC IPOs over the last two years has prompted market regulators charged with protecting investors to take note and now action. The United States’ Securities and Exchange Commission (SEC) released a statement4 on March 30, 2022, proposing new rules for SPACs that will minimize some of the advantages that SPACs have over traditional IPOs. This may temper new issuance further and make it more difficult for existing SPACs to find a target.

These developments warrant our attention, however they do not cause us immediate concern because our core approach with SPACs is to purchase them at attractive discounts to trust value – thereby ensuring a positive return. We’re still exposed to the potentially material upside of a positive deal announcement, but we don’t rely on it. In contrast, investors who bank merely on upside from deal announcements, or who speculate on SPAC warrants, may want to take note. Finally, we will note that these changes may be a long-term positive for the future health and stability of the SPAC market.

An abundance of SPACs seeking targets, combined with geopolitical tensions, increased market volatility, higher interest rates and regulatory uncertainty has led to a broad widening of the discount to trust values that SPACs are trading at. This is a welcome development for us because we can deploy and cycle capital into SPACs with more attractive yields, and without incremental risk.

It is also worth noting that almost 90% of listed SPACs are due to liquidate within the next ~11 months, presenting us with an attractive set-up for our systematic and quantitative approach to harvesting SPAC yields.

As of March 31, the fund was well-diversified across 216 SPACs with a gross yield to redemption value of 2.9% (unlevered) and we are currently deploying capital at higher yields.

Looking ahead.

Geopolitical tensions, rising interest rates and high inflation made for a challenging investment climate in the first quarter, and we expect these factors will continue to shape markets in the near-term.

Arbitrage is an attractive strategy for the long-term, and its unique characteristics make it a particularly attractive strategy in the current environment. Rising interest rates are a clear negative for bonds, however they can act as a tailwind for arbitrage because of the low duration nature of the strategy – deals typically complete in just a few months.

In addition to providing a compelling alternative to bonds as interest rates rise, arbitrage strategies also provide excellent diversification to traditional equity market exposure because returns are generated from the successful completion of specific and definitive corporate events. An arbitrageur expects to profit regardless of the behaviour and direction of the stock market.

Risk management is central to our disciplined investment process as we deploy capital into a robust and attractive opportunity set.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

1 Maxam Arbitrage Fund, Class F, net of fees and expenses. Inception date October 1, 2020. Please contact us regarding other series of fund units or visit our website www.maxamcm.com

2 Notable owned deals successfully closing during the quarter is not an exhaustive list. New positions initiated during the first quarter is not an exhaustive list.

3 SPAC statistics sourced from: Maxam internal database; https://www.boardroomalpha.com/spac-market-review-march-2022/; https://www.jdsupra.com/legalnews/spac-2021-year-end-review-and-2022-6792705/

4 SEC Statement on the SPACs Proposal https://www.sec.gov/news/statement/crenshaw-spac-20220330

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospect us, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685 0201 [email protected] www.maxamcm.com

Maxam Arbitrage Fund – Q4 2021

Resiliency for your portfolio.

Maxam Arbitrage Fund – Q4 2021 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund1 gained +1.7% in the fourth quarter and +5.5% for the calendar 2021 year. The fund’s annualized return since inception is +7.4%.

M&A

Mergers and acquisitions volumes topped over US$5 trillion in 2021 – a record year for deal making. Factors fueling the robust dealmaking included increased executive confidence, rising company valuations, low interest rates and significant amounts of private equity capital seeking targets. Plentiful dealmaking led to a large opportunity set to deploy capital into.

A notable development during the year has been the less precedent-oriented approach that the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) are taking towards mergers in certain industries. The seemingly increased willingness of the FTC and DOJ to challenge certain mergers led to a widening of some merger arbitrage spreads as the year progressed, especially in larger cap transactions. This was especially notable in June when the DOJ sued to block AON’s acquisition of Willis Towers Watson, successfully scuttling the deal.

A byproduct of the less-formulaic stance taken by some US regulatory bodies has meant spreads have not only widened in some of the larger transactions, but they have remained relatively wide right up until close, sometimes only really tightening during the last few days before deal consummation.

The Maxam Arbitrage Fund’s flexibility and our investment process, which has a significant focus on risk management, helped us avoid some of the carnage from the notable deal breaks during the year, which included Willis Towers Watson, PNM Resources and Sportsman’s Warehouse.

The fund participated in 136 deals during 2021. Heading into 2022 the fund held 29 merger arbitrage positions with an average gross spread of 2.2% and average months to expected close of 1.9 – this represents an implied annualized return of approximately 13%2.

SPACs

The 2021 year was notable not only for the record amount of M&A activity, but also for record SPAC3 initial public offerings. Over 600 SPAC IPOs hit the market in 2021 raising approximately US$160 billion – more than twice as many IPOs, raising almost twice as much capital than in 2020 (which was itself a record year).

Half of the record 2021 SPAC issuance came in the first quarter, leading to a very well-supplied market. The large supply increase coincided with some of the speculative fervor coming out of the SPAC market, leading to the SPACs that were seeking transactions to trade at wider discounts to their trust values. This was an opportunistic set-up for us as we were able to selectively purchase issues that were trading at incrementally attractive IRRs.

We continue to approach SPACs purely from an arbitrage perspective – rather than speculation. There are currently almost 600 SPACs seeking acquisitions and the median discount to trust value was 2.5% at year end. These discounts have widened somewhat during January’s overall market volatility – our fund’s flexibility, and active approach, has allowed us to take advantage.

As of December 31, the fund was well-diversified across 183 SPACs with a gross yield to redemption of over 2.5%. Time to redemption for our SPAC portfolio is just over eight months, whereas the universe is approximately 1.2 years. A lower remaining duration provides us with attractive IRRs while also leaving us exposed to asymmetric upside return potential if the SPAC finds an acquisition that the market gets excited about.

Onto 2022

Risk management is central to our disciplined investment process, and we are mindful of the increased scrutiny that regulators are applying in their review of transactions. Regulatory approval risks are typically more prevalent with large and mega-cap combinations, and in situations where competition and market dominance are of concern.

Our fund’s flexibility affords us with advantages from a liquidity perspective with respect to both managing risks and seeking returns. We enjoy the flexibility of deploying capital in mid-cap, and some small cap, deals where the regulatory risks are much less burdensome (if present at all) and spreads are as attractive (if not more so) than in their larger cap brethren.

With many of the factors that drove record deal activity in 2021 remaining in place today, we expect healthy deal activity in 2022 – providing us with attractive opportunities to deploy capital.

In addition to the attractive spreads available to us today in both traditional merger arbitrage and SPAC arbitrage, the prospect for rising interest rates should reinforce returns. Arbitrage is a low duration strategy that has historically exhibited improving returns as interest rates have risen.

The Maxam Arbitrage Fund is well-suited to the current environment. The strategy’s low-risk and consistent return profile, plus its low correlation with traditional equity and fixed income strategies, make it an attractive solution for both diversification and returns.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

1 Maxam Arbitrage Fund, Class F , net of fees and expenses. Inception date October 1 , 2020 . Please contact us regarding other series of fund units or visit our website www.maxamcm.com

2 The annualized rate of return calculation assumes no deal breaks , no timeline changes, or any price amendments ( positive or negative.

3 Special Purpose Acquisition Company

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospect us, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685 0201 [email protected] www.maxamcm.com

Maxam Diversified Strategies Fund – Q4 2021

With great volatility comes great opportunity.

Maxam Diversified Strategies Fund – Q4 2021 Commentary

The Maxam Diversified Strategies Fund1 gained +18.6% for the 2021 calendar year. We are pleased with the fund’s performance, especially on a risk-adjusted basis. Here is a snapshot of the fund’s absolute and relative returns presented on a risk-adjusted basis since fund inception in 20092.

The fund’s gross exposure to arbitrage3 strategies averaged a little under 20% for the year. Recall that arbitrage is a low-risk and consistent return strategy that exhibits low correlation to equities and other traditional strategies. This strategy’s value will be most apparent when risks are elevated, and equity markets are volatile.

The majority of the Maxam Diversified Strategies Fund’s exposure, the core of the strategy, was in long positions that we broadly categorize as follows:

  1. Compounders that we believe will generate very attractive returns for several years. These are great businesses, that are growing nicely, trade at attractive valuations and are run by excellent management teams with skin in the game (i.e., they own a meaningful personal stake in the company). We aim to identify and invest in these businesses early and at attractive levels, ideally before they are well-known to the broader investment community.

  2. Event-driven and special situation opportunities where we believe we have identified an asymmetric reward-to-risk opportunity. These investments can sometimes arise unexpectedly and range from short to medium-term in duration. Targeted situations may include corporate events, financings, strategic reviews, clean-up trades, spin-offs, insider activity and more. The attractive nature of these investments is that they can work in all market environments.

Some notable successes4.

Notable significant successes during the calendar year included two of our top 10 holdings being acquired at material premiums.

In Q2, long-time holding Photon Control Inc. announced that it had agreed to be acquired by MKS Instruments for $3.60 per share – a nice price relative to our initial purchases near $1.00. And in mid-September Spire Global announced it was acquiring exactEarth Ltd. at a material premium – we wrote extensively on this in our Q3 commentary. And towards the end of the year, Fully Managed, one of our few private holdings (and not a top 10 position), announced they were being acquired by Telus.

We love searching beneath the surface and finding great businesses and compelling opportunities to invest in. The objective, of course, is to be rewarded with a higher share price than what we paid, whether that comes from strong fundamental performance being rewarded by the market, or by way of an acquisition at a premium – or sometimes both. We believe we have more than a few holdings in the fund today that will play out in a similar manner.

Our short exposure was low to negligible throughout 2021. We have written about how difficult (unprofitable) short selling has been over the past few years, and certainly since the March 2020 coronavirus crash. While it is never easy, shorting securities in market environments driven by positive momentum, record liquidity, and very strong risk-appetite, is close to futile.

In our Q1 2021 commentary we wrote:


Although our short exposure is not significant today, we believe that we will begin to see more opportunity to profit from short positions as certain segments of this market inevitably turn. Our attention in this regard is focused on pockets of speculation and highly valued mania or momentum stocks – companies that have experienced dramatic stock price appreciation and, in our view, where valuations are well beyond even the most bullish of realistic scenarios.

We won’t try to pick a top, nor try to be heroes on the short side. Instead, we will observe and wait patiently for opportunities where disappointment has begun to ensue, and it is apparent that nothing more than a (formerly) strong narrative was supporting the stock price. Discipline and timing are a key focus for us here.

Many of these high-fliers went further than we imagined, however disappointment has certainly begun to ensue. We perceive that the market landscape is shifting away from ‘story stocks’ and towards companies with more tangible near-term revenues and earnings. With cracks appearing in the narrative supporting some of the companies trading at extremely high multiples, we have initiated some modest short positions.

The fund continues to be well-diversified across individual holdings and sectors. As at the end of Q4, fund net exposure was approximately 17% in arbitrage with the balance predominantly in long positions that we classify as compounders, event-driven and special situations. The fund was invested across all 11 sectors with no sector weight larger than 18% of net exposure. The fund’s top 10 holdings accounted for approximately 28% of assets at the end of the quarter.

Wall of worry.

2020 finished and 2021 began with a great deal of uncertainty. At the end of 2020 there was still much uncertainty with respect to the path of the Covid-19 pandemic, the economic recovery was uneven, record amounts of stimulus and liquidity were being injected into the system, and the Trump administration was set to hand over the reins to the Biden administration.

During 2021 we saw Covid-19 vaccines rolled-out, the rise and fall of meme stonks5, new Covid-19 variants, various pandemic lockdowns came and went (and came back), commodity prices ramped, and inflation went from being transitory to… not transitory?

And into 2022… much uncertainty exists! Recognize a pattern here? The Fed and other central banks are expected to raise interest rates, geopolitical tensions abound (Ukraine, Russia, China), inflation is present, and the economic recovery is uneven.

With hindsight, investors now perceive last year’s risks as comparatively low – “of course they were worth taking!” Conversely, the risks and uncertainty that investors collectively see today is being reflected in the capital markets via price volatility. An old adage is that the market needs a ‘wall or worry’ on which to climb higher.

With great volatility comes great opportunity.

When investors are fearful that security prices will move lower, they tend to sell with little regard for company-specific value and fundamentals. This creates opportunity because price volatility is generally much greater than the volatility of intrinsic value.

Security prices in the short-term can be heavily impacted by sentiment and emotion. Hence the “buy fear / sell greed” advice we typically hear during swift market declines. While it is hard to do in the moment, we agree with the approach – grounded with a focus on value.

As mentioned above, Photon Control and exactEarth were very profitable investments for the fund. Both were initially purchased during periods of uncertainty and volatility, when the risks seemed elevated, they were, of course, well worth taking.

Shifting times.

We believe the market environment is in the early stages of transitioning away from one that has favoured the high-multiple, growth-at-any-price, speculative stocks – towards an environment where companies with more tangible revenues and growing bottom lines will be increasingly rewarded. The former group is where we perceive risks, and the latter is where we see value and opportunity.

Our modus operandi is to balance patience and opportunism. We understand the value of what we own in the fund today and we are uncovering new opportunities as a by-product of the market volatility.

This is an attractive environment for our investment style and strategy – one that will increasingly favour our value-oriented and active approach. We are looking forward to some specific events and catalysts for several of our holdings through 2022.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

1 Maxam Diversified Strategies Fund, Series A, net of fees and expenses. Inception date June 30, 2009. Please contact us regarding other series of fund units or visit our website www.maxamcm.com

2 You want to be in the top left quadrant: higher return, lower risk. Maxam Diversified Strategies Fund Series A annualized return since inception on June 30, 2009. Beta is presented relative to the S&P/TSX Total Return Composite. TSX Small is the S&P/TSX Small Cap Index and Scotia Cdn Hedge is the Scotia Canadian Hedge Fund Index (Equal Weighted). Scotia’s returns are as of November 30, 2021nbecause December 31, 2021 data was unavailable at time of printing.

3 Arbitrage is a low-risk, consistent and absolute return-oriented strategy. We manage the Maxam Arbitrage Fund which focuses exclusively on arbitrage strategies.

4 We refer to these as “2021 successes” but in reality their genesis began years prior at the time the opportunity was identified.

5 Yes, we meant to write “stonks”. From the authorities at Merriam-Webster: “Stonk, a deliberate misspelling of stock (meaning “a share of the value of a company which can be bought, sold, or traded as an investment”), was coined in a 2017 meme. The word is often used humorously on the internet to imply a vague understanding of financial transactions or poor financial decisions.”