Market Review

The Fund had a very poor month and quarter due to its 50% exposure to emerging markets. Most of the damage was done by the currency falls (average 6%, while the Brazilian real and Indian rupee declined almost 10%). On top of this, the Indonesian, Thai, Russian, Korean and Indian bank shares the Fund owns declined by 10%-20%.

This blow was reduced by the Fund's developed market investments, where most investments were flat or gained up to 10%.

At times like this I wonder whether I should invest in emerging markets but then when I think unemotionally I realise: 1) The price moves generally don't reflect reality, they reflect fear; 2) The companies are doing well and are generally not affected. With a 24% ROE they grow their net asset value at 2% a month; 3) The companies have outperformed over many decades despite the temporary market setbacks. The important point is always to invest when the sentiment is negative.

Unless we have a repeat of an emerging market crisis like 1997, the price moves seem overdone. Whilst forecast emerging market growth rates are not as strong as they have been over the past five years, we believe that a repeat of 1997 collapse is unlikely and hence we remain invested in the majority of our holdings except for tactical switches and a complete disinvestment from our Chinese bank holdings (please read our July Market Review for more detail).

The cash generated from the sales was invested into US insurers (undervalued and expected to benefit from higher US interest rates), US Bancorp and selected emerging market banks where share prices have fallen too much (in our opinion).

This does highlight that we do back our research and convictions but, for the investor, it is important to bear in mind that this does make the Fund a high risk investment. The risk is that a negative fear-induced cycle continues for longer, depressing prices much further.

As said, this is countered by a 50%+ developed market exposure. On the other hand, when sentiment turns the companies we own should rerate sharply.