A combination of leaner companies, a more benign environment and reluctant investors still sitting on cash helped to stave off the widely expected market pullback against the backdrop of a continued trend in positive earnings surprises. An interesting development during the quarter was that emerging markets started moving more in line with developed markets. In previous reviews, we mentioned that part of the fund exposed to developed markets had grown despite the well documented growth prospects in emerging markets and headwinds in developed markets. This occurred because we found more value in developed markets during the period. We are already seeing this reversing as markets have rerated and rotated.

During the quarter, there were significant price moves in Las Vegas Sands, eBay, Hirco, Linta, Chesapeake, Cemex, Ingersoll Rand and several of the financial holdings. We switched a large portion of Liberty Media into its major underlying asset, Directv, because the discount had narrowed substantially. Other sales included Vivendi, Las Vegas Sands and Linta. We added US Bancorp, Barclays, Fedbank and Bank Rakyat. We also added Raffles and China Green. We ended the quarter with more financial shares in the fund, and these have tended to offer a good spread between countries such as Indonesia, India, the US and Europe. The US exposure of the fund declined as we started finding value elsewhere. The Fund's holdings in Asian consumer-related shares, such as Great Wall and Choada, lagged in the shorter term, but we are confident of their long-term potential for these and have used the opportunity to add to some of these holdings. The fund continues to reflect our best efforts to find value through bottom-up research with no allegiance to index or region.

While the six months to June were excellent, June itself was disappointing. A few of our largest holdings (Chesapeake, Liberty Interactive, Chaoda, Cemex and Vivendi) were sold down during the month. Chesapeake's decline was due to the sudden fall in the gas price. Fortunately Liberty Media, Dine Equity, Dell (7% holding) and Chinese Estates came to the rescue, the latter two with 19% price gains.

It is amazing how many good solid companies with good and long track records the team is uncovering. While it seems that markets have run hard, we are very excited about the valuation and growth of these recent investments. It is impossible to predict where markets will go over the next six to 12 months. We are convinced, however, that the portfolio we have built up will prove to be an excellent investment over the next few years.

Notwithstanding a renewed global market sell-off in January, the fund held up well largely as a result of its defensive positions in Chaoda Agriculture, Liberty Media, Chinese Estates and Chesapeake. Chesapeake continued to sell small portions of their gas fields at prices that showed how undervalued the sum of the parts had been.

Dell fell 7% in line with the continued macro deterioration. The immediate outlook for demand is not good but eventually the replacement cycle will catch up with corporates once the global economy turns. In the meantime, the company generated cash, enabling it to buy back shares at the current very attractive value, thus increasing value per share. TSKB (Turkey) fell 13% while Vivendi, DBA, e-Bay and Panin Life gave back some of their December gains. During the quarter, 43% of the fund was exposed to emerging markets and 16% to the financial sector.

In February, the markets were sold down aggressively in a repeat of the fourth quarter of 2008, where selling seemed to be unrelated to value but rather stemming from illiquidity and forced selling. A number of shares in the fund were sold down aggressively, namely Cemex, Chaoda, China Essence, Dell, e-Bay, Great Wall Motors, Pfizer, Phillips.

In many cases the selling doesn't make sense, for instance with Great Wall Motors where cash on balance sheet exceeds the market cap and Chaoda, a vegetable producer and distributor in China that is generating excellent results and on a very attractive valuation. The published financial results of companies the fund is invested in are satisfactory, although the market is "predicting" that 2009 will be considerably worse. We made minimal changes to the fund, as we believe the companies we are invested in are well placed and are incorrectly valued by the panic-stricken market. Hence, we will sit it out until the market comes to its senses The market turned positive in March, finally shrugging off its fear. Everything that was sold down during the "dark ages" was suddenly sought after, especially financials, small cap shares and emerging markets. Essentially everything with a "narrow doorway" was affected. Once the pushing and shoving to get out turned into a rush to enter back in, prices did the opposite.

Most of our small-cap holdings that were pushed down in previous months came back strongly (e.g. Great Wall Motor, Dine). However, a few disappointed and were pushed down further (e.g. China Essence and DBA). Most of our large-cap holdings performed well (Dell, E-Bay). It seems as if the plaque of fear has been blown away for a while. The market will now start focusing on those companies with aboveaverage growth prospects and valuations that are below the average. This will benefit the fund as it is filled with investments like these.

The fund remained defensively positioned; mainly invested in cashgenerative companies exposed to companies servicing consumer entertainment, staples and necessity products.

We've been stating for some time that generally the companies in which we are invested are doing fairly well under the circumstances and have simply been sold down by leveraged investors in their flight out of equities.
We had some confirmation during December that this has been the case. Once the selling pressure disappeared, a number of our shares shot up: PYI (65%), Chinese Estates (54%), Liberty Media (47%), Macao Success and Cemex (31%), Liberty Interactive (25%), and a number of others.
Only our two largest holdings (Chesapeake and Dell) were down, but once the oil price goes above $50 again Chesapeake will "fly" and Dell's forward PE of 8.5 times, (very conservative forecast) is very low for such a well-established brand generating cash with no debt.
The fund is well positioned for 2009 having maintained its small-cap holdings in China, India and Brazil. The remainder of the investments is mostly in defensive areas, such as health care, beer and food, which generally have cash on their balance sheets.
All our investments share the characteristic that they are undervalued and should re-rate once the global economy turns.