G.I. Capital Corp.

Portfolio Report for January 2012

www.gicapital.ca

G.I. Capital Corp. January 31, 2012 Report Summary

2012 started out with a strong rally in global equity markets. Although there have been some positive developments regarding the European sovereign debt crisis, the situation there is far from being over, and we have not changed our defensive stance. As such, we continue to buy high yielding bonds, high yielding private mortgages and private debt in Canada, and distressed real estate opportunities in the US. Also in line with our previous positioning, we are keeping cash high and net equity exposure low. However, we are mindful that should we get another sharp correction, it is probably a buying opportunity in the equity markets. We continue to operate in a highly correlated market environment, and not surprisingly, as the markets gained traction, all of our strategies produced positive returns. Fixed Income was our best performing strategy with a 6.2% return for the month. It should be pointed out (if its not obvious) that our fixed income strategy is quite different from a typical bond fund. We have spoken repeatedly over the last year how the lowest risk bonds have had the best performance as investors pile into assets that are perceived to be risk free. However this is leading to, in our view, potentially one of the biggest asset bubbles. Rates are being kept artificially low to stimulate the economy, and with the inflation rates that we expect to see, we expect the nominal bond yields of 1-2% will be negative in real terms. This means that investors will eventually require much higher yields, which means that bond prices will need to go much lower than where they sit today. In summary, we have completely avoided these types of bonds, i.e., government bonds, bonds of banks and utilities, etc. Instead, we have focused on fixed income securities where we can achieve a positive real return, and where we can acquire them opportunistically.

Asset Allocation for Portfolio by Strategy

Portfolio Performance for Accredited Clients

On a related note, we continue to add to our distressed debt position in the US. These are debt securities that are trading on average at 50 cents on the dollar, and have a current yield of 15%. The yield to maturity is obviously much higher. We learned a lot about these securities in the Canadian market in early 2009, after the credit crisis, and were fortunate to have bought a lot distressed bonds at more or less the bottom of that cycle. One aspect we noted is that these debt securities can drop a long way from par value, as the markets are turning down. However, unlike a lot of stocks, there tends to be a floor price on the issues as even in default there is cont gener generally a tangible recovery value on these credits. Our estimate is that we have hit that floor, and so we see a situation where there appears to be limited downside, lots of upside, and in the mean time we are being paid handsomely to wait.
G.I. Capital Corp. is a wealth management firm specializing in developing customized investment solutions for its clients. We are a boutique firm focused on managing our clients portfolios, offering a high level of research and service to a limited number of clients. Our client base consists of professionals, executives and business owners.

Our other strategies also performed well: Long-Short equity was up 4.7%; High Yield Bonds up 3.7%; Hedge Funds up 3.0%; private debt up 1.2%; and private equity was flat other than a small currency loss. Our medium risk composite was up 2.45% in January. The composite return for the last 12 months is 7.28%, and the average 12 month rolling return over the last year is 2.51%. G.I. Capital Alternative Income Fund: Note: we have included the full monthly report for Alternative Income Fund at the end of this report. The fund was up 0.81%, bringing the 1 year return to 14.79% (net of all costs except management fees).

Market Review
We saw the S&P TSX start the year with a bang, moving up 4.16% to 12,452 in January. The US counterpart, the S&P 500, was up 4.36% finishing January at 1,312. The MSCI World was up 4.93% finishing the month at 1,241. The strong uptick for the markets could be attributed to a more accommodating rate policy by the Fed and central banks around the world. But the policy became even more accommodative in January as the central bank left its benchmark rate in the range of 0% to 0.25% and stated that the rates would be kept at exceptionally low levels until 2014.

Benchmark represented by: 40% i-Shares Scotia Capital Universe Bond Index, 20% TSX Composite Index, 40% MSCI World Index, in CDN$. Note: The composite portfolio includes all relevant medium risk portfolios that meet the composite guidelines. Composite returns include dividends and are net of all fees. Past performance is not indicative of future returns.

G.I. Capital Corp. Portfolio Report for January 2012

www.gicapital.ca
Market Performance

Benchmark Month End 1-m onth YTD 2011 1,051,099 1.79% 1.79% -0.53%

S&P TSX 12,452 4.16% 4.16% -11.07%

S&P 500* 1,312 4.36% 4.36% 0.00%

MSCI World 1,241 4.93% 4.93% -7.61%

Gold 1,693 11.40% 11.40% 9.57%

Oil-WTI 98.4 -0.81% -0.81% 8.49%

USD/CAD Cdn Bond Dedicated Convertible Exchange Rate** ishare (XBB) Distressed Short Arbitrage 1.003 2.46% 2.46% -2.38% 31.50 0.38% 0.38% 9.12% 591 -1.20% -4.19% -4.24% 50 -0.17% 2.17% 3.85% 375 -0.60% 0.50% 1.13%

* The returns are calculated in the currency of the holding; **Monthly average exchange rate of USD to CAD; Source: Globefund, CSFB/Tremont

Not surprisingly the markets which performed the worst in 2011 were the best performing markets in January. The emerging markets led the rally with the India Sensex and MSCI Emerging markets both finishing up 11.2% for the month. Europe, another underperformer in 2011, had a very strong month. The German Dax and French CAC led the way, finishing up 9.5% and 4.4% respectively. Asia had a very strong month with the Honk Kong Hang Seng, and Taiwan Weighted finishing up 10.6% and 6.3% respectively. The TSX had a broad rally with underperforming sectors from last year outperforming in January. Materials, Info Technology and Energy performed the best appreciating by 10.3%, 6.4% and 3.5% respectively. In contrast, defensive sectors which are less economically sensitive performed poorly. The telecom and utility sectors fell 2.5% and 1.2% respectively. The rally in the growth sectors was based on the renewed hopes that the global economic recovery would not falter. An improvement in risk appetite pushed commodity based currencies such as the Canadian dollar and Australian dollar higher versus the USD. The Canadian dollar was up 2.46%, while the Australian dollar was up 3.7% versus the USD respectively. Another reason for good market performance was economic numbers from China. China's headline GDP growth for Q4/11 was 8.9% yearover-year (YoY). This was stronger than the 8.7% consensus forecast, although the pace has slowed from the 9.1% YoY growth in Q3/11. Nominal retail sales growth was 18.1% YoY in December (13.8% YoY in real terms), up from Novembers 17.3% YoY. Dong Tao, Credit Suisses Chief Economist for Non-Japan Asia, says this set of data surprised everyone, including policy makers, on the upside. The key measure was retail sales, an area that Toa has long argued as the force preventing China's hard landing. Toa warns against taking this months sales data at face value, as this years Chinese New Year takes place earlier than usual, thereby boosting December and January sales figures. He goes on to say that the rise in industrial production growth is probably due largely to inventory rebuilding, as suggested in the PMI data. The statement from the Fed that it will keep rates low until 2014 cheered the markets. However, there are some negative connotations to this decision. First, the Fed indicated it does not expect a recovery of any significance during that time. Second, it tells businesses and individuals that there is no reason to hurry out and borrow money to lock in lower rates. Instead, borrowers can take a wait and see attitude. The result is that it creates very little support for growth for the economy. US GDP growth in the 4th quarter of 2011 came at 2.8%. This is a strong number, given that the US economy only grew by 1.6% for 2011. However, when we examine the GDP growth of the last few

years, we see that the fourth quarter has always been better than the other quarters. The 2.8% growth is made up of 1.9% inventory buildup. This paints a much different picture from the apparent positive headlines. The difference is pure seasonality, inventory build-out in the fourth quarter which balances a drawdown in the third quarter. It is hard to imagine significant GDP growth in the US, as the country transitions from a 25 year borrowing and spending binge to a nation of savers. A structurally predominant growth model is moving into a savings model with inherently higher unemployment and lower borrowing capacity. The Fed expects the unemployment rate for 2012-2014 to be between 8.2% and 8.5%. This is structurally the highest level of unemployment we have seen since 1980 when the rate was above 10%. As a result, while we continue to see attractive opportunities in specific areas, we are reluctant to declare a bull market, as we feel the economy still faces these serious headwinds.

Portfolio Changes
We added to our high yield strategy in January, buying a position in Pinetree debentures. The securities have an 8% coupon, and given that we bought them at a discount to par, the yield to maturity is just shy of 11%/annum (maturing in 2016). Debentures are generally unsecured, and so they are issued based on the companies going concern value, as opposed to their liquidation value or value of their tangible assets which is usually much lower. In the case of Pinetree, the company is a merchant bank, specializing in financing resource companies. So although the active business of merchant banking is important, much more relevant to us as debenture holders is their tangible asset base of (mostly) publically traded resource companies. The $75 million in debentures is the companies only debt, and is supported by assets of ~$410 million of assets as of Dec 31st 2011. Of course these assets are made up of junior resource companies which are highly volatile, but we would assert that much of that volatility has already happened (the portfolio was valued at ~$800 million at the beginning of 2011. We feel that there is ample coverage for the debentures and the 11% yield more than justifies the risk.

Benchmark represented by: 40% i-Shares Scotia Capital Universe Bond Index, 20% TSX Composite Index, 40% MSCI World Index, in CDN$. Note: The composite portfolio includes all relevant medium risk portfolios that meet the composite guidelines. Composite returns include dividends and are net of all fees. Past performance is not indicative of future returns.

G.I. Alternative Income Strategy January 2012

GI CAPITAL

G.I. Alternative Income Strategy

The Alternative Income Strategy is an alternative to traditional bond funds, which although carry very low credit risk, currently have minimal return; and to equity funds that exhibit high volatility. The Alternative Income Strategy seeks to invest in alternative income strategies like private mortgages and asset backed loans that offer higher returns, while still providing reasonable security to cover the loans. The strategys objectives are to preserve capital, minimize volatility, have a low or zero correlation with stock and bond markets, and achieve an annualized return of 8-10% net of all fees.

Portfolio Performance for Alternative Income Strategy

Ye a r 2010 2011 2012 0.63% 0.81% 0.68% 1.33% 0.91% 0.72% 1.91% Jan Fe b Mar A pr May J un J ul 0.84% 1.26% A ug 0.78% 0.93% Sep 0.87% 0.90% Oc t 0.80% 1.11% N ov 0.83% 0.83% Dec 0.54% 2.50% Tot a l 4.75% 14 . 5 9 % 0 . 8 1%

Property by Classification 3% 20% 31% 33% 13% Residential Hospitality Retail Mixed Use Self Storage
*Note: The property classifications only apply to real estate holdings.

Portfolio Breakdown by Allocation

Loan To Value Ratio 66% 64% 71% N.A 47% N.A N.A 65% Average Expected Maturity (Months) 31 37 24 40 1 11 0 25 Average Expected Yield 14% 12% 11% 10% 11% 14% 0% 9.2%

Security Type First Mortgage Subordinated First Second Mortgage Real Estate Equity Asset Backed Loans Distressed Debt Cash

Percentage Weighting 2% 34% 22% 14% 7% 7% 15% 100%

Property by Location 27% 17% 10% 36% 10% AB BC ON QC USA

*Note: The property locations only apply to real estate holdings.

Total/Weighted AVG

FEATURE INVESTMENT
Subordinated First Mortgage: Hotels, Western Canada
This is a pool of first mortgages purchased at a discount to par value, on a group of hotel properties owned by a publically traded REIT. The mortgages were previously owned by a US based investment bank, that for strategic reasons had decided to wind down its Canadian operations. The mortgages were purchased at ~70% of par value, which resulted in a ~60% loan to value ratio. This purchase was financed with a senior debt tranche up to ~31% loan to value, which resulted in the subordinated tranche that we own, having a projected IRR of between 14-25% depending on how quickly the loans were paid off (i.e. if held to maturity, the IRR would be 14%). The hotel properties had suffered from declining performance after the financial crisis of 2008, and the resulting slow down in the oil patch in Western Canada. However, at the time of our investment, there was reasonable evidence that the decline was bottoming out, and economic activity was picking up. The exit strategy is to either hold to maturity (2017) or arrange to have the mortgages refinanced at slightly less than par (eg 90%) at an earlier date, which would result in an increased IRR.

Service Providers
Custodian (for Fund) Administrator Legal Auditor Custodian (for Managed Accounts)

G.I. CAPITAL CORP.

3625 Dufferin St. Suite 340 Toronto, Ontario M3K 1Z2

Mark Irwin, CFA 647-260-3388*223 [email protected]

Jim Goren, CFA 647-260-3388*222 [email protected] Bill Hallman, CFA 905-510-0963 [email protected] G.I. Capital Corp. (GI) is a wealth management firm specializing in developing customized investment solutions for its clients. We are a boutique firm focused on managing our clients portfolios, offering a high level of research and service to a limited number of clients. Our client base consists of professionals, executives and business owners. Visit us at www.gicapital.ca
This monthly update does not constitute or purport to constitute a complete description of the G.I. Capital Corp. Alternative Investment Strategy and is in all respects subject to the more detailed provisions found in the fund's declaration of trust. The Alternative Income Strategy is only available to GI clients who have engaged GI to manage their account under the alternative income mandate as outlined in their investment policy statement. The returns above are net of all fees, other than management fees. The references to the target rates of return are provided for illustrative purposes only and there can be no assurance that the fund will be able to achieve the targeted rates of return.