The Bank of England's good intentions (of not aiding banks that had been involved in "reckless" lending) came unstuck when investors panicked and withdrew deposits from Northern Rock, forcing another dimension onto the liquidity crisis. However, the sum total of the above uncertainty, and a bit of panic in certain quarters, the continuation of falling house prices in the USA and the tightening of credit standards could not depress equity markets.

The Dow Jones ended positively both for the month and the quarter, while emerging markets continued their strong upward trend. This suggests that markets are focusing on the effect of lower interest rates in the developed markets and growth of emerging markets at the same time.

Our Indian shares performed particularly well, followed by Turkey. Individual shares were driven by different factors. Fresh Del Monte and Cisco did well, while Deutsche Post and Cemex disappointed, being down 20% for the quarter.

Some of our Chinese smaller holdings such as Macau Success and Great Wall Motors rebounded strongly, while SCI Entertainment (a recent addition to the fund) shot up by 28% due to its being the target of a sudden takeover war.

Our financial sector shares held up very well, partly due to our Indian and Turkish holdings but also due to our low exposure to Europe and the investment and mortgage banking sectors in the USA, Germany, Spain and the UK.

However, our view is that the valuations of some of the names in these sectors have been totally oversold and now present excellent value, and we have in fact started the process of building up exposure to selected shares in these sectors. 22 Portfolio Manager's comment

Increasing concerns about sub-prime debt in the USA and its effect on future pricing of risk and the building sector caused the US financials to fall sharply. Our only exposure (besides indirect exposure via Cemex, which was down 5%) was via Redwood Trust, down almost 10%. In addition, Chaoda (one of our largest holdings) declined 11% when the auditors resigned. This is always a very worrying signal; however, our contacts with management and the auditors indicate that it was indeed a difference over the future cost of the audit. The fact that Grant Thornton (a global auditing firm) signed as new auditors seems to confirm the fact.

A number of other shares made up for the above negatives, namely Global Green Tech (Hong Kong), Panin Life (Indonesia), Kiatnakin Finance (Thailand), Taiwan Mobile, Great Wall Motors (China), Renault and Dell.

In fact, the above list shows that June was quite a strong month ending off an excellent six months.

There were a few large changes in the portfolio. We reduced our holdings in Chaoda and Cemex (both before their respective prices fall), as well as Rossi Residential in Brazil. The cash generated Lloyds TSB, Turkcell, Woori Financial (in Korea), Great Wall Motors and Dell.

Needless to say, the investments were made because the shares are trading at a very large discount to our calculated value.

Despite the volatility during the quarter the fund performed well. Fortunately our China, Asian and Turkey exposures made up for our USA and Indian losses. Indian banks were hard hit when the Reserve Bank of India raised interest rates again and increased the reserve requirements of the banks. This is a short-term negative, but longer term a positive such as this should reduce the risk of the economy overheating. We maintain our stance that Indian banks are excellent value despite the short-term negative outlook. Unfortunately the same cannot be said for all our US exposures.

Our two small "toe-in-the-water" homebuilder exposures cost the fund 1% in performance during Q1 due to the excessively large price falls. In many cases it transpired that sub-prime lenders had misled clients and, which was worse, that managements had lied to investors about the size of the "with-recourse" securitisations. Novae (ex-SVB Holdings - a UK Lloyds re-insurer) is an example where we remained invested when the share underperformed because management had been open and honest - we always felt that we knew where we stood. During 2007 our patience has been rewarded with a 13% increase in the price of Novae.

However, the same cannot be said about our interviews with Technical Olympic, hence we have little confidence in our forecasts. Besides, the outlook for the homebuilders is still uncertain, so despite the very attractive valuation we've taken the loss and cut the position. Chaoda and Cemex each fell by 3% during the month, but we are very positive about the growth prospects of these companies and their valuations.

We have been building up a portfolio of very interesting exposures in China. Once we have completed our investment programme we will share the detail with investors.