Price movements are currently driven by panic selling and fund flows. The fund's performance has also been negatively affected by the large depreciation of almost every currency against the USD. We reiterate our previous comments that the fund has had no exposure to any companies that have destroyed value. To date, financial results of the companies in which we are invested have been in line with or have exceeded our expectations. However, we must point out that the growth outlook has changed dramatically. This seems to be reflected in valuations. Except for our financial sector exposures, the companies in which we are invested generally have little or no debt and generate cash.

The higher oil price significantly reduced global growth prospects and increased the risk of significantly higher interest rates. This increased risk aversion and pushed markets down considerably. The Dow Jones was down 10% during June and the majority of our shares fell by as much or more, with Chesapeake (a natural gas company) the only exception.

Our contacts with managements of the companies in which we're invested show their operating environments are not deteriorating at the rate market prices are suggesting.

Especially smaller market cap Chinese companies listed in Hong Kong are being sold down to ridiculous levels. In addition, our team is finding an increasing number of very exciting investment opportunities in the USA. In both cases it seems companies with excellent track records are being sold down by market participants who do not understand or care about valuations. Their actions seem to be driven either by fear or debt.

Indian banks (Allahabad -27%, Syndicate Bank -19%), Chinese small caps (PYI -25%, Great Wall Motors -18%, China Essence -12%), US (CIT -48%) and Turkey (TSKB -22%) were sold down aggressively during the month (and quarter).

To date, all the companies above have reported excellent operational results (especially Great Wall and TSKB), while those that still have to report have indicated that results will be satisfactory.

With the exception of CIT (which has good operating divisions but is facing funding problems), the aboe shares have been sold down largely due to outflows from Chinese, Indian and also small cap funds, thus putting pressure on those portfolio managers to sell regardless of price or valuation.

Once again, with the exception of CIT (where we took the view that at a 45% discount to TNAV the risk of default is more than priced in, and the position is only 1.4% of the fund), indications from management are that, while almost everybody is affected by the slowdown in global growth, for most of the companies we are invested in:

o the effect is either not material, or
o management has taken action and the bad news is (in our opinion) already reflected in the valuation.

The "forced sell-down" is creating excellent investment opportunities. Now, more than ever, a stock-picking approach is vital. Many companies with surplus capital and good management and strong business models have been sold down to very attractive valuations and high dividend yields.

It is impossible to predict the behaviour of other investors and to what extent fear will cause further outflows and selling. However, history and our own experience have taught us that at current valuations patient investors are assured of good longer-term returns.

November and December were disappointing in that a few of our investments recorded large price falls. Despite this, the fund ended the year 15% positive. This was disappointing as we had hoped to do better, yet, when viewed in terms of the events of 2007 and large losses suffered by many of our competitors, this is a good return.

The shares that caused the negative December performance were the same culprits as in November: Dell, Global Green Tech, SCI and Accident Exchange. We still think the price falls have been overdone.

The remainder of the shares in our portfolio held up well in a weak market and we remain very positive about their prospects. This is one of the advantages of an unconstrained global fund - there are always good investment opportunities to be found somewhere in the world. Having said that, financial shares in the USA (and also UK and Europe) are falling sharply on fears of further large mortgage- and derivativerelated write-downs. Fear is now ruling the markets and our models are highlighting some extremely good value situations. We are focusing on consumer and financial companies whose managements have avoided exposure to sub-prime debt, are on the front foot and able to capitalise on the weak position of their opponents.

We cannot predict how long the negative sentiment will prevail, but can state that we are very positive about the earnings prospects of the investments in our fund.

The objective of the portfolio is to provide above average long-term capital growth by investing in global equities the investment manager has identified as being undervalued and as offering above average growth potential.