• Bush girds U.S. for war
• Consumer confidence sags
• Uncertainty about Iraq taking toll on economy
• Air Canada dips to 52-week low
• Grim year seen for U.S.
• Poor overseas results plague Celestica

This negative sentiment superimposed against the background of corporate malfeasance, accounting malpractice, contaminated brokerage reports, fraudulent CEOs and ineffective and conflicted boards of directors, has led to a total breakdown of trust and confidence by investors.

Paradoxically, for all of the above issues we are now being presented with a purged environment for investing: rogue CEOs are being jailed and replaced; accounting firms are being much more stringent and conservative; brokerage houses are separating their research departments from their investment banking departments; corporate governance is under heavy scrutiny and balance sheets are being scrubbed. We can therefore be a lot more confident today that what we see is what we get: a pre-condition for the rebuilding of trust and confidence.

This crisis of confidence and trust is presenting long-term investors with an attractive opportunity to buy some of the best businesses available at attractive prices. History is replete with lessons underscoring the wisdom of: being fully invested in the midst of crises; that being greedy when everybody is fearful will be profitable; that being excited when everybody is bored will pay off; that being optimistic when everybody is pessimistic will eventually be rewarding. For us, the portfolio management team at AIC, we are excited about the prospects for the companies that populate all our portfolios. We continuously comb through each and every business to make sure that they meet our high standards for continued inclusion in our portfolios. We continue to be fully cognizant of our responsibility to you, our unitholders, that you are looking to us to:

1. Preserve your capital;
2. Grow your capital at an above-average real rate; and
3. Minimize your taxes payable.

Given the low level of trust and confidence that is pervasive, our highest priority must be to reinforce your trust and confidence in us. In that regard, there are three qualities that we must demonstrate to you, our unitholders:

1. Transparency;
2. Consistency of behaviour; and that we,
3. "Walk the Talk."

The methodology practiced by both Mr. Buffett and Mr. Keynes is common to most successful businesspeople/investors, from the Forbes' 500 wealthiest individuals to the wealthiest person in your community. It is therefore the formula that has the best lineage of:

1. Preserving capital;
2. Getting a long-term real rate of return; and
3. Minimizing taxes.

It is for this reason that at AIC, we manage all your Funds using these principles. Our portfolio managers and analysts therefore spend their time assessing: (1) the long-term characteristics of each business; (2) the quality of the people in charge of running it; and (3) trying to buy into a few of the best operations at a sensible price. The result of our work is the collection of the best businesses in each AIC Fund. You be the judge (by reviewing our portfolios) in determining whether or not we have been successful at executing the success principles in our Funds. In conclusion, our philosophy makes us transparent.

June 30, 1990
The environment: "The first six months of 1990 could only be described as 'interesting.' The Canadian economy was buffeted by confusion over the proposed GST, Meech Lake, high interest rates, the Canadian dollar, recession fears, and most recently the Iraqi invasion of Kuwait and its expected effects on inflation. Needless to say, against the background of such uncertainties the stock market took it squarely on the chin."

Our behaviour: "History has shown that: the Contrarian attitude has always paid off over time. That being fully invested in the midst of crisis will pay off. That being optimistic and patient will eventually be rewarding. We are not about to defy History."

December 31, 1994
The environment: "Last year marked a difficult period for capital markets around the globe as the buoyant atmosphere of 1993 effectively ended on February 4, 1994 – the date of the first Federal Reserve Board interest rate increase. Over the course of 1994, we saw five more rate increases as the U.S. sought to control inflation and to strengthen the U.S. dollar. The results were felt in nearly all financial markets, including Canada. The international markets were not immune from the effects of U.S. monetary policy as gains made in early 1994 evaporated with the U.S. rate increases."

Our behaviour: "Long-term investment success is ultimately determined by the ability to ignore external 'noises' and concentrate on the issue of buying good businesses. All of the AIC Funds adhere to this fundamental principle and we view our portfolios as providing our investors with the benefit of ownership in a collection of great businesses. As business owners, our strategy does not vary with market conditions – our approach when faced with the volatile markets of the past year was identical to our approach in 1993 when markets were more favourable."

December 31, 1997
The environment: "I am now beginning to sound like a broken record. The year 1997 was again an exceptional year for unitholders of AIC Funds. Results were as follows: Advantage 43.3%; Advantage II 41.3%; Diversified Canada 32.1%; Value 37.3%; World Equity 21.4%; the American Advantage and the Income Equity have not been in existence for a year, hence there is not a one-year return. All of our Funds having a one-year record were first quartile performers for the calendar year in their classes according to BellCharts. In what has now become a tradition, we continue to implore unitholders to invest with us based on the quality of our underlying assets, which is the result of us dogmatically abiding by the tenets of our investment principles, and not based on our short-term performance. We are confident that our long-term performance will be superior if we (and we will) continue to adhere to our investment discipline."

Our behaviour: "Outstanding as 1997 was, it was against the backdrop of roaring North American stock markets, and any investor can realize large returns in a bull market. In fact, the more aggressive you are in a bull market, the more brilliant your results will be. This 'carnival atmosphere' made us nervous given our responsibilities to preserve capital, and then to grow it in a tax-efficient manner. In this regard, as I mentioned in our Semi-Annual Report (1997) we allowed our cash positions to build; rising to 40% in AIC Value Fund, and close to 30% in AIC Advantage Fund II.

Our huge cash reserves were not indicative of us trying to 'time' the market, but of our discomfort with the excessive prices that were prevailing. Our patience was rewarded during the fourth quarter of 1997, and the first month of 1998 when the 'Asian Flu' began to contaminate the global markets and investors/speculators began selling. During that period we were aggressively buying as prices came within our 'buy' range."

December 31, 1999
The environment: "The second phenomenon we are experiencing today is wanton speculation in a very narrow segment of the market. This situation in effect has masked the bear market occurring in the wider market and has skewed Investors' expectations. Of the total advance in the TSE 300 this past year, three companies (Nortel, BCE and JDS) accounted for 88% of the gain. The story is similar for the S&P 500 index. Nortel trades today at a P/E ratio of 80. This implies that it would take 80 years (at the current level of earnings) to recover one's initial investment. JDS with a P/E ratio of 200 would need 200 years to return one's initial investment. These lofty valuations require great faith in the continuation of a world with a perfectly blue sky every day for decades to come (no margin of safety). Remember the first rule in investing! Don't lose your principal."

Our behaviour: "In conclusion, investing is all about putting out money today to get more money back in the future. In today's environment we would rather put money into TD Bank trading at a P/E ratio of 14.5 implying that at today's level of earnings, we would get our money back in 14.5 years, versus JDS Uniphase with a P/E ratio of 200, implying it would take 200 years to get our initial investment back. We continue to be disciplined (despite the extremely high emotional atmosphere now prevailing in the market) and judicious in the application of our investment philosophy to ensure that we walk the straight and narrow. We are confident that over time owning businesses for the long run, purchased at reasonable prices and in strong industries, will reward Investors by:

1. Preserving their capital;
2. Giving them an above average rate of return; and
3. Minimizing their taxes payable."

In conclusion, our philosophy is the fuel for our consistent behaviour over time.

Walk the Talk
We have always said that our methodology is akin to that of an investor buying the whole business. In other words, to buy any business in its entirety, the prudent businessperson has to have a high degree of understanding of the business and its industry. Our research department is honed in understanding the businesses within our universe, and we are therefore willing to "put our money where our mouth is."

This was the case in September 1999 when we had the opportunity to buy additional shares of Mackenzie Financial. As we had already accumulated the permitted maximum 20% in the two Advantage Funds, we bought, for our own corporate account, an additional 5% of Mackenzie for approximately $100 million. In January 2001, when Investors Group made a take-over bid for Mackenzie, we tendered our shares, netting Advantage Fund unitholders nearly $400 million. The fact that we are prepared to invest our own money should give unitholders confidence in our capabilities. Our confidence in "walking the talk" is fueled by our Investment Philosophy.

1. Transparency;
2. Consistency of Behaviour; and
3. "Walking the Talk."

Thank you and best wishes in your investing.

Michael A. Lee-Chin
Chairman & Chief Executive Officer
AIC Limited

The first half of 2002 has been punctuated by declining profits, corporate scandals, accounting shenanigans, fraud and poor corporate governance resulting in a loss of confidence and trust by the investing public, and a stock market that seemingly has no bottom. Investors today need more than ever a middle C, a plumb line, a decision-making framework, a value system/philosophy so as to minimize chaotic behaviour and the destruction of their capital. In light of this environment, I thought it would be constructive to get the perspective of Mr. Warren Buffett, Chairman of Berkshire Hathaway and America's most successful investor. Here is an excerpt from the 2001 Berkshire Hathaway annual report:

Notwithstanding reporting a "loss in net worth during 2001" and the worst relative and absolute underperformance in Berkshire's history during 1999, Mr. Buffett is still resolute about holding his shares of Berkshire. Why? "We have as fine an array of operating managers as exists at any company. In large part, moreover they are running businesses with economic characteristics ranging from good to superb. The ability, energy and loyalty of these managers, are simply extraordinary."

Similarly, we at AIC are not about to abandon the Investment Principles that have guided us through previous uncertain periods of 1987, 1990, 1994 and 1998. Given that we have built our portfolios on a fine array of strong companies that are responding to current market conditions, we are confident that our investee companies will emerge even stronger from this temporary transition.

The technology bubble of the late 1990s reminds us that in a bloating market it is very difficult to differentiate and distinguish between good, bad, or indifferent. In fact, in that environment, reckless and heroic behaviour is often rewarded. The landscape is today littered with examples of CEOs confusing brilliance with a rising tide. Witness the likes of: Enron, WorldCom, Tyco, Global Crossing, Vivendi, etc. Conversely, when the tide goes out we see those who are naked (witness the above list) and those who are clothed.

Although painful to go through, this is the environment that permits strong businesses to truly distinguish themselves. An excerpt from Merrill Lynch's 2001 annual report will highlight this point:

This is the environment that permits great businesses to become Greater. This is also the environment that permits great investors to become Greater. This is certainly not the environment to be skittish and uncommitted.

This is a crisis environment that is giving AIC unitholders the opportunity to prosper over the long term.

1. Your capital will be preserved;
2. You will receive an above-average return; and,
3. You will minimize taxes.

At AIC, we are most proud of our record of being disciplined towards our Mantra and philosophy: Summarized in "Buy. Hold. And Prosper."™

We are also aware that unitholders who invested in AIC Funds over these past four years have not "prospered". My suggestion to all unitholders is the following: If you are confident in companies that underpin your Funds, then now is a great time to "dollar cost average", thereby lowering your average cost, and simultaneously capitalizing on the prevailing opportunity presented by this crisis. This is the right thing to do.

In summary, we continue to be resolute in our belief that wealth is created by owning a few great businesses (domiciled in strong industries), which we intend to hold for the long run. We continue to be judicious in owning businesses that fit our stringent criteria.

We continue to work assiduously to assure ourselves that management is being smart and creative, energetic, hands-on, prudent and honest thereby building companies that are Entrepreneurial, Competitive and Hardworking. We are confident that those unitholders who "stay the course" will over time be well rewarded; history proves that this has always happened.

All the best.

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