Value of Small-Cap Investing

We believe that over time, value is created by picking promising established early stage growth companies, letting our winners run their growth course and then recycling the assets into new early stage growth companies.

CORPORATE LIFE CYCLE - CANADA    (as of march 31, 2008)

The corporate life cycle shows the market capitalization of various companies owned by VBA's clients and where they currently are situated in their corporate life cycle. VBA believes in purchasing early-established growth stocks that have already developed a strong track record of growth and have completed the "start-up" and "emerging growth" phases of their development as enterprises. By selecting stocks at the inflection point, at the time of substantial early growth, we hope to benefit from significant value appreciation.

As a company grows and becomes more dominant, its valuation moves up based on two factors.

1. The basic fact that the company's earnings have expanded makes it worth that much more.
2. Since the company is now a more dominant player in its industry, its perceived risk by the market in general has decreased and the valuation multiple assigned to it increases.

This is the classic double play and this is what small-cap investing is all about.

The skill required to invest in this asset class is to pick the winners and avoid the losers.

Much less emphasis is placed on timing the stock market and the economic cycle. These parameters are at best very difficult to predict.

For instance, an investment in Unican Security Systems Ltd. when the company was in its early-established growth phase would have proven to be wildly successful regardless of the status of the stock market.

The start-up and emerging growth segments offer some of the same attributes. However, the lack of significant track record and the relatively small size of the companies significantly increase the risk profile.

As an asset class, small-company stocks have historically proven to generate more wealth than large-company stocks and fixed income instruments.

For instance, $1 invested in U.S. small-company stocks in 1925 would have been worth $15,091.10 by the end of 2007. This compares to $3,246.39 for the large-company stocks category and represents an over-performance of small caps over large caps for that period of 365%.