Market Review
Despite a very poor and deteriorating global macro environment, markets and the Fund performed very well, with the Fund generating a positive 12% return for the past six months. This again proves the point that valuation is a more important determinant of investment returns than the macro environment. Thanks to our investment stance of preferring the certainty of companies generating good returns on capital in stable environments rather than higher risk shares that seem undervalued, we had very few investments that recorded negative price moves during the first half of this year. Indeed, most reported good results and increased their dividends. Turkish and Indian banks recorded very strong price gains after being sold down in 2011. At the same time, we generally avoided Chinese, Brazilian and European banks that had a poor six months. While Brazilian banks have been sold down to levels where they are attractive investments again, we remain wary of European banks as we cannot predict the outcome of the current sovereign debt problems with any certainty yet. Japanese, Irish and British banks have similar valuations with similarly poor growth outlooks, but have balance sheets that are both stronger and have less risk, and hence are more attractive. We are benefitting a bit from the volatility in the markets, having sold most of our Barclays exposure during the month and buying it back again at the end of the month after the 16% price fall. While we don't like investment banks, we feel that at 165p Barclays is mispriced and thus bought shares back when they collapsed on the last trading day of the period. We also bought more Bank of Ireland during the month on days when the market sold it down. Most of the companies we are invested in trade on dividend yields of more than 5%. This highlights the extreme risk aversion of investors and the degree to which equities as an asset class, and financial shares as a sector, are mispriced.

It has been a very volatile month, during which investors battled with the fear that the market had "run too far" and data that consistently kept surprising to the upside.

This is exactly what we warned investors about in December (and again in January and February): that they were focusing too much on the bad news and ignoring the valuations and the possibility that "this is as bad as it gets".

The Fund underperformed marginally in March after its very strong January and February due to the strong performance of the US banks (where we have an 8% exposure via JPM and Capital One) but where World Acceptance Corp and Berkshire Hathaway underperformed. Similarly Amlin, Catlin and Scor's share prices declined marginally. The above companies all have excellent long-term track records and thus one month's performance is irrelevant.

What did hurt the Fund in March was the strong US dollar, which exacerbated the depreciation in the Brazilian real (-8%) and Indian rupee (-5%). This was disappointing but to be expected as both currencies had done well year to date. Investments, outside the US banks, that performed well were Tisco (Thailand) and Bank of Georgia and Vakif Bank in Turkey. Decliners were Banco do Brasil and January and February's strong risers Indiabulls and Power Finance Corporation. As markets rallied, we reduced our holding in both of these companies, which will enable us to re-invest again at a lower price.

Pleasingly, the companies in which the Fund is invested reported satisfactory results and, with an average ROE of 15%, the net asset value of the companies in the Fund's portfolio grew by 1.25% during the month (almost the amount developed market banks are paying on a one-year savings deposit).

During March, we met with most of the management of the insurers in the Fund and these meetings confirmed our belief that this industry is mispriced. Interviews with Bank of Georgia and others confirmed this too. Hence, we made very few changes to the portfolio besides reducing Indiabulls and Power Finance Corporation (mentioned above) and adding to our Tisco, TSKB and Bank of Georgia positions.

Our process has highlighted a number of very interesting investments within the smaller financial sector. At the same time, we are monitoring the European and UK banks. If you combine these opportunities offered by the undervalued insurers, we are spoilt for choice.

Market Review
There are few financial services companies in the world that showed positive share price moves in 2011. The few that did were Malayan, Philippine, Thai and Indonesian banks, and then of course many of the global re-insurers. The Fund was exposed to about 80% of those shares that did put in a positive performance: BFI Finance (+42%) and Adira Dinamika (+11%) in Indonesia, Redecard in Brazil (+39%), World Acceptance Corp (+39%), Renaissance Re (+17%) and WR Berkeley (+25%) and US Bancorp. Unfortunately, the strong dollar saw the Turkish lira, Indian rupee and Brazilian real all depreciate by 25%, 18% and 13% respectively. Hence the fund lost about 6% during the year due to the strength in the greenback. The remaining damage was caused by the holdings in India (-40%), Turkey (-30%), Korea (- 20%) and Japan (-14%). It is very important to understand this: while the share prices fell, the banks reported growth in net asset value per share of 20% over the year. Despite being quite conservative in our forecasts (poor growth and increasing bad debts), we forecast that the net asset values should increase by 20% again during 2012. Yet, these shares have been sold down to where they are now trading between 0.6x-0.9x price/net asset value. This highlights how the price falls do not reflect fundamentals but were largely driven by "flows" and fear. The market is expecting big write-offs, but even if our 2012 forecasts are wrong by 50%, these shares would still be veryundervalued. Hence we are likely to increase rather than decrease our exposure to India and Brazil during the year, whereas in Turkey and Korea we are first standing back to see how the macro situation in Europe plays out. Regarding the currencies, these could remain weak until the Euro crisis is resolved (hopefully by the end of the first quarter of 2012), but the better fundamentals in terms of growth, and debt/GDP and higher interest rates should ensure that these currencies end the year stronger.

Changes in portfolio
During the year (and again in December), we increased the Fund's exposure (18%) to catastrophe re-insurers where we expect substantial year-on-year earnings growth as premiums have been raised post the highest year of payouts ever. Geographical exposure is highest in the US (16%) and India (15%) and thereafter Japan and Indonesia with 10% each. We continue to have zero banking exposure to Europe due to the risk of further write-downs and resultant recapitalisations.

Outlook
Three factors will drive performance in 2012:
Ÿ NAV growth from an average ROE of 15%
Ÿ Rerating from the exceptionally low p/nav's in global emerging market (GEM) banks.
Ÿ GEM currency strengthening

Even if we get no rerating this year, the Fund's value should grow by 15% in 2012 unless the GEM currencies weaken further. If they strengthen, the value should grow by more than the 15% they strengthen, the value should grow by more than the 15% NAV growth. We believe that the next few months will give an investment opportunity that has potential to generate substantial gains over the next few years. For a full review of 2011 and 2012 strategy please read our Market Review on our website (should be available late January).