The rally in equities, which began in the spring, continued to gather momentum during the third quarter. Improving economic data, the gradual return of credit markets to normality and a surplus of liquidity facilitated a remarkable stock market recovery. By the end of September, leading indices had risen very strongly from the March lows. The FTSE 100, for example, was up 46.2%, the S&P 500 had risen 56.3% and the MSCI Europe (in euros) had increased by 56.4%.

In spite of the recent strong performance, equity valuations still offer good medium-term value, with modest P/E ratios and dividend yields which are still competitive compared to government bonds. However, there are challenges ahead: some profit-taking is likely and governments will need to judge the withdrawal of fiscal and monetary stimuli very precisely in order to avoid either a return to recession or inflation.

During the quarter, the fund participated in a share issue in Hansteen Holdings, a property company with a portfolio of logistic and warehouse assets in northern Europe, and took up rights in Schibsted, the Norwegian newspaper and online group, which has since risen substantially. New investments were made in CairnEnergy, Rio Tintoand Unilever; and proceeds from the sale of China Unicomwere used to purchase shares in Singapore Telecom. Additions were also made to a number of holdings including Bunge, the world’s biggest oil seed processor; Medicover,the Eastern European health care provider; and St Joe Corporation, which owns a large block of development land in Florida. Each of these transactions was discussed in previous monthly reports.

In September, we added to the holding in Q-Cells, the world’s largest producer of photovoltaic solar cells, which had fallen to a compelling level; andtwo new investments were made: PICC Property & Casualtyand Sinopharm Group.

PICC Property & Casualty
We first purchased a reasonable holding of PICC in September 2006 at around HK$3 and sold it out up to its peak of around HK$15 in 2007. The shares are now down to HK$5.5 which puts them on about 2x NAV. The company is very out of favour and is the least loved of China H shares. The management is seen as ineffectual and the company is criticised for its investment performance. Last year they reported an underwriting loss caused by an earthquake and ice storms. However, even with these weather problems, the company’s combined ratio will probably only rise to 102. The company has stated that it will increasingly take quota share in the global reinsurance market on natural disasters and weather related risks -reinsurance of this nature has only recently been allowed in China. The investment book can now diversify through liberalisation of capital markets in China, especially through the opportunities in the new corporate bond market. Another way of thinking of this investment is that it is an easy way to hold a pool of Remnimbi, which we think is very under-valued.

Sinopharm Group
Sinopharm is China’s largest pharmaceutical drug wholesaler. It benefits from China’s growing aging population and the increase in diseases such as cancer and diabetes, which are triggered by a more western diet. It also benefits from the People’s Congress’ healthcare development programme, which includes building hospitals and smaller clinics. Sinopharm is one of only two national pharmaceutical distributors and is twice the size of its competitor, Jointown. Their combined marketshare is around 20%. The other smaller distributors are queuing up to be taken over by Sinopharm now that the IPO audit has been completed. The company’s valuation is very reasonable given its growth potential.
For the reasons outlined in earlier reports the holdings in Alcoa, and Mediceo Paltacwere sold and profits were taken from Human Genome. Towards the end of the period ABB Grainwas sold and we started to sell Alfresa Holdings, the Japanese drug distribution company; Bank of China, after a strong performance; andPortugal Telecom, on fears of competitive pressure.

Our long standing investment in Human Genomeproduced the highest return of the quarter, almost seven-folding. This was due to a positive result in a late stage clinical trial for the company’s Lupus medication, which is partnered with Glaxo. Although we trimmed the holding as indicated above, we feel that further progress is possible and we await final data for this drug, which is due in November. Elsewhere, the top performers were largely financial companies and include HSBC, ING, BNP, Swiss Re, Unicreditand the Australian insurer, QBE. The holding in Schibstedrecovered strongly and the contribution was increased by the Fund’s participation in the rights issue.

Given the impressive market performance, there is a lengthy list of strong contributors from many sectors, over the quarter. Indeed very few companies produced negative returns for the period -the worst performers were unchanged.

In contrast to the opening months of the year when markets were predominantly weak and volatile, the recovery which began in mid-March set an upbeat tone for the start of the second quarter. From this point, the impact of fiscal and monetary stimulus began to take hold and economic statistics started to look better as the inventory correction began to unwind. Markets responded enthusiastically and in April, equities worldwide surged. Further progress was made in May, following a positive response to the US government's stress tests for its largest banks. Commodities also performed strongly with some, including oil, doubling from the lows.

Performance during June, however, was more muted and equities gave back some of the earlier gains as investors became more circumspect. Looking ahead, we think that for the short term, markets may well be range bound until the global recovery is better established.

We anticipated a spate of rights issues and had allocated some liquidity for this purpose. During the quarter rights were taken up in HSBC, Premiere, Santosand Wolseley. Early in the period we also reduced liquidity by adding to existing holdings. New investments were made in Addax Petroleum, Bayer, Bunge, CVS Caremark, Niko Resources, Potash Corporation of Saskatchewanand Prudential, for the reasons outlined in the monthly reports.

In June, we continued to buy Bunge andNiko Resources and completed the purchases ofPotash Corporation and Prudential. No new investments were made.

At the end of the period we participated in a small placing to recapitalise Scandinavian Property Developmentswhich is developing the old Oslo airport site.

During the period, as discussed in the monthly commentaries, we continued to take profits from Newcrest Miningand the sale of Petro-Canadawas completed. Ping An,the Chinese insurer which had performed well was sold, and we continued to reduce the exposure to Japanese equities by completing the sale of Toray Industriesand continuing to sell Mediceo Paltac, the Japanese pharmaceutical wholesaler.

Having started to invest in Addax Petroleumas explained in May's report, the price ran away from us and we decided to sell the shares at a higher level.

Sterling was strong over the period under review and this dampened the absolute performance of non-sterling denominated holdings.

Notable positive contributions were earned mainly from financial and economically sensitive stocks which had previously fallen sharply. The best performer was Premiere, which completed a rights issue during the period and recovered from a low level. Schibsted,the newspaper and online group also staged a strong recovery. Among the financials, BNP, Bank of China, HSBC, Swiss Re,Unicredit, INGand Aegonall improved significantly. Property companies also performed well, with Eurazeoand St Joeup substantially.

On the negative side, Nintendo declined on fears of flagging momentum for the company's global hit, the Wii console. Potash Corporation of Saskatchewanweakened on concerns that the potash cartel was crumbling, but these fears have since been significantly allayed. France Telecomwas slightly weak as defensive stocks were in less demand. Similarly Vivendi, which has substantial interests in the telecom sector, declined a little. Newcrest Miningweakened on a lower gold price.

After attempting to rally at the beginning of the year, markets were volatile and weak during the first quarter. Until early March, fears over the severity of the recession, a constant barrage of bad news from the financial sector and some disappointment with President Obama's early actions continued to blight the markets, dragging indices down to fresh lows. Both the Bank of England and the European Central Bank responded with a further cut in interest rates. In addition, the Bank of England adopted a policy of quantitative easing, a move which was followed by the US Federal Reserve. These measures, coupled with some improvement in economic statistics and news that Citibank and others were trading profitably, boosted market sentiment, enabling equities to claw back some of the losses made earlier in the quarter.

Our strategy is to invest liquidity gradually in good quality stocks which will benefit when markets stabilize and sentiment improves. For example, in March rights were taken up and further shares were purchased in Land Securities, the largest UK property company. As a result of the downturn its shares have fallen from over £20 to £4.70, in spite of the company taking early evasive action. The company has secured its position with the rights issue and the shares are now trading at a 35% discount to the recent book value and the dividend yield is currently around 5.75%.

During the quarter a new investment was made in BP, the purchase of Nintendo was completed, rights were taken up in Premiere, and the holdings in Bank of China and Hutchison Whampoa were increased. Liquidity was also reduced by topping up existing holdings. These transactions were discussed in the previous monthly reports.

In March, the proceeds from a reduction in Portugal Telecom were invested in a new holding in Spain's Telefonica which is better value.

Telefonica is Spain's public telephone company which also owns significant fixed and mobile assets in South America, Eastern Europe and the O2 business in the UK and Germany. Concerns about the Spanish economy have depressed the rating of Telefonica over the last year, especially as this region was one of the weakest in Vodafone's results. Having met the company we feel that the rating now more than discounts price competition in domestic mobile and concerns about write-downs to the company's Venezuelan and Argentinian businesses (about 5% of total earnings). The stock trades on 9.5x this year's earnings and has a yield of 7.5%. The company has €44 billion of debt supported by €73 billion of equity and interest cover of 5x.

During the period, Carnival was sold after the shares recovered on lower oil prices and Hennes & Mauritz was sold following a strong rise. The sales of Kurita Water, Mitsubishi Heavy and Sekisui House were completed and having participated in a placing of Newcrest Mining the shares responded well to the higher gold price and we decided to take some profits. All these disposals were discussed in the monthly reports.

In March some profits were taken from Petro-Canada when the price rose in response to a takeover bid from Suncor; In line with the reduction in Japanese equities, which we discussed in the last quarterly report, the holding in Toray Industries was trimmed. We also sold the entire holding of Manulife, the Canadian life insurer which has been something of a disappointment as they had been a very conservatively managed company but the volatility in the market has meant that they have not been able to roll over some of their hedges in their guaranteed product and they have a need to raise new capital.

As a result of the Chinese recovery, Bank of China was the highest contributor over the quarter. Similarly, Ping An Insurance and China Merchant performed well. Petro-Canada benefited from the takeover bid discussed above, and Santos rose with the oil price. Rio Tinto made a good contribution as a result of the recovery in commodities; and Orkla, Carrefour and Williams Sonoma recovered from over-sold levels. Ludorum also performed well following the success of its Chuggington children's cartoon.

The negative contributors were again dominated by financial companies. The worst performance was produced by Swiss Re. Further revelations on its balance sheet and a dilutive deal from Mr Buffett caused the shares to decline sharply. Aegon was weak due to continuing doubts about its bond portfolio; Deutsche Post suffered from its global GDP link and through its relationship with Deutsche Postbank; ING continued to fall even after generous government support; and QBE, Manulife, UCBH and HSBC were also weak. Lagardere weakened on fears of a decline in advertising and EDF was affected by lower energy prices. Wolseley weakened due to its link to UK and US construction and housing and the need to strengthen the balance sheet. Following a successful rights issue the shares recovered significant ground. Takeda suffered because of the weak Japanese market and also because of disappointing drug news. Its new ulcer product has been disappointing and a new diabetes drug has been delayed making it more difficult to claim back business from rival products.

The fund is 94% invested in THS's global equity fund, 5% in rand cash and 1% in euros, sterling and dollars.

Stock markets world wide suffered record breaking losses during 2008. Equities were already under stress at the start of the year as a result of the credit squeeze triggered by the US sub-prime mortgage crisis. By the end of the first quarter, however, the extent of the liquidity shortage in the inter-bank market became increasingly apparent. Conditions continued to worsen and in the third quarter the collapse of Lehman Brothers sparked a wave of panic, as rescue operations were mounted to salvage financial institutions in the US and across Europe. As the banking system froze, the economic outlook deteriorated, making a serious recession seem inevitable.

During the fourth quarter, equities continued to experience a period of unparalleled turbulence as the financial crisis persisted and the outlook for the global economy darkened. Governments responded by taking unprecedented steps to restore stability, including a number of co-ordinated interest rate cuts. In December, the Federal Reserve slashed US interest rates to almost zero, and in Europe, the ECB made its biggest ever cut, reducing the main lending rate to 2.5%. Markets responded positively to these measures, and while the performance over the year was abysmal, all major indices recouped a portion of the losses (in the fourth quarter).

During December, we hedged some more of the Fund's foreign currency exposure. The euro exposure is now more than 50% hedged into sterling, and we sold about half of the yen exposure forward. In the short term, the euro hedge was slightly premature, but just as we bought the dollar when it was very out of favour, we feel sterling is now in over-sold territory, especially as the European economies are slowing fairly abruptly and the ECB is likely to continue to cut rates. Our approach has been consistently to use liquidity to invest very cautiously in high quality companies which have fallen to compelling levels. For example, during the quarter, new investments were made in Hennes & Mauritz, the Swedish high fashion retailer; Land Securities, which has a diversified UK commercial property portfolio and modest gearing; McKesson, the largest pharmaceutical distributor in the US, Canada and Mexico; and Nintendo, the world's largest video game console maker. The Fund also added to the holding in QBE, the best run of Australia's general insurers, by participating in a private placement; and increased its holding in Royal Bank of Scotland by purchasing shares in the open market at a better price than had been offered in the rights issue. The holding in HSBC was also topped up. Each of these transactions was discussed in detail in the monthly reports.

During the period the holding in Kamigumi, the Japanese port operator was switched into China Merchant, the more attractively valued Chinese port operator; and DirecTV, which has performed very well, was sold and the proceeds invested in News Corp. When the yen strengthened, we took the opportunity to reduce the fund's holdings in Japanese equities: NTT and Tokyu have been sold and Kurita Water, Mitsubishi Heavy and Sekisui House have been reduced. Anglo American and National Grid have also been sold and we sold the majority of Clearwire.

The nominal performance of the fund benefited during the quarter from the substantial weakness in sterling against the euro and other European currencies. Positive contributors included Newcrest Mining, which responded to the strong dollar and improved gold price. Telecom stocks such as Vivendi, France Telecom, Belgacom and Vodafone; and Japanese companies such as Kurita Water, Mitsubishi Heavy, Nintendo and Toray, all performed well.

On the negative side, banking and finance companies again dominated. Poor performers included BNP Paribas, ING, Royal Bank of Scotland, Manulife and HSBC. Alcoa and Rio Tinto suffered from a deteriorating outlook for aluminium; and Q-Cells declined with the oil price. Human Genome went down with the market.

The recovery at the end of 2008 and an encouraging start to the New Year, hopefully herald a calmer market in 2009. No doubt there will continue to be alarming headlines and the recession will begin to affect all corners of the economy. There will be a need to raise money to repair broken balance sheets and this may weigh heavily on the market. After such unprecedented turbulence and uncertainty, and with further unwinding by hedge funds to come, we may experience further periods of volatility.

On the positive side, commodity prices have fallen substantially, interest rates are likely to remain very low and governments will continue to spend to reduce the severity of the downturn. At the time of writing, it is clear that the funding and credit markets are responding to the efforts of the authorities to improve confidence, and both money market rates and credit spreads have declined substantially. In addition, a slow resumption of bond market issuance seems to be underway.