Market Review
European banks fell sharply (about 15%) after the troika consisting of the IMF, ECB and European Commission changed the European banking landscape by "bailing-in" depositors of the Cypriot banks and stating that this could be standard procedure for future European bank crises. At the same time, the growth prospects for the Indian economy continued to deteriorate and the uncertainty regarding when the bad debts of Indian banks would peak continued to put downward pressure on the share prices of the banks. While the Fund has very low exposure to European banks (6%), it does have 15% exposure to Indian banks. In both cases, the valuations are very attractive but we continue to feel considerably safer with the exposure to Indian banks. The Indian economy is still growing at 4.5% and could rebound sharply, while the European economy is still contracting and unlikely to rebound soon. Fortunately, Indonesia and the share prices of a number of individual investments (Bank of Georgia, Kruk, TSKB, World Acceptance Corp and Resona in particular) did very well, overcoming the negative European and Indian price falls. The obvious question is: 'Why invest in European and Indian banks?" Whereas the supporting reasons differ, the main reasons are that we believe that the banks we're invested in are sound and history has taught us that when the valuations are at current levels, subsequent returns are excellent as investors have already priced in the current circumstances. Over the past 14 years our formula for investing in companies when the valuations are low has delivered very good results. Hence, while the short-term pain caused by the decline in Indian bank shares hurts, we are excited about the returns they should deliver over the next 12 months.