Market Review

September was a good month for equities globally, the rally driven by increasing certainty about both the case for continued low global interest rates and reduced risk of a double-dip recession in the US/Europe/UK. In that regard, we could have a subdued "Goldilocks" scenario where we have low but positive growth but interest rates remaining low as well. Emerging markets however are on a steroid Goldilocks version: very strong growth fuelled by the drug of low developed market interest rates.

A number of our holdings have suddenly caught the attention of international investors. Notably, some of our Chinese holdings have rebounded strongly, such as DBA, Xingda and Great Wall Motor Company (all up over 50% over the quarter). Some of the Indian Financials also showed strong gains, in excess of 40%, such as Bank of India and South Indian Bank. In the US, Pfizer and eBay added to performance with moves of over 20%. This is against the backdrop of the MSCI return of 13%.

During the quarter, significant changes in the portfolio included purchases of Microsoft, Deutsche Bank and JP Morgan, while Dell, Garanti and Bank of India were among the largest sales.

The most difficult decision we have to make is when to switch our emerging market investments into developed market shares. The "wall of money" is pushing emerging markets higher, almost on a daily basis. At the moment, the emerging market shares in the portfolio are still cheap, despite the rerating that has taken place in themore widely followed emerging market shares, and they are beneficiaries from the strong fundamentals in these economies. But, developed market shares are starting to offer value on a relative basis. At quarter end the fund still had close to 70% exposure to emerging markets.

Market review
Equity markets started the quarter off on a good note in April, only to retreat sharply in May. For the full quarter, the MSCIWorld index lost 13% in dollar terms, with emerging markets outperforming the broader index for the quarter and the year to date.

What SIM Global did
The largest trades in the portfolio included purchases of Net1, Saraiva, Daegu Bank, Indian Bank and Net Holdings. Sales included Renault, Industrial Bank of Korea, Itau in Brazil, Chesapeake and Cemex.

What added to - and detracted from - performance
Within the fund, Asian holdings featured on both the winners and losers list, with several Indian and Indonesian holdings performing well in excess of the index, with positive price moves of 10% to 20%. For instance, Indian Bank outperformed the MSCI Index by 40% during the quarter and leading Indian textile company, SKNL, by over 30%. The Asian stocks in the portfolio that fared worse than the market were Raffles and China Essence.

While we are cognisant of the general impact of regional macro issues on the stock market, we remain focussed on finding undervalued shares - even in those regions facing significant economic challenges. The biggest holding in the portfolio was, in fact, Chaoda, a Chinese agricultural company, and its share price declined a modest 7% during the quarter against a 22% drop in the Shanghai Index.

SIM Global strategy
It was a tough quarter, with erratic share price moves, and thus we are pleased the fund has remained resilient during this pullback in the market. We ended the quarter holding 5% cash within the fund. Generally we are fully invested and thus this should enable us to take advantage of the opportunities that we are sure to find during this challenging phase in the market.

Quarterly Comment

After a rocky start to the quarter, most equity indices moved up in March with some strong moves from individual shares. We used the valuation opportunities created by the price movements to add to holdings such as Halkbank, American Banknote Daegu Bank and Viacom, while lightening holdings in Valmont, Great Wall, IsBank and Barclays towards the end of the quarter.

Within the Best Ideas portfolio, we saw shares such as SKNL, Panin Life, Redecard, Garanti Bank and Great Wall Motor Company move up more than 20% in the past month! Over the quarter, some of our winners included Panin Life, Bank of Baroda, China Essence, China Green, Great Wall Motors and Barclays. Laggards included Chesapeake, Raffles and Cemex.

The team has been on a demanding traveling schedule and visited the UK, USA, Ireland, Korea, Brazil, China and Japan during the quarter. We plan on visiting India and Turkey before the middle of the year. Recent trips have confirmed our conviction in some of our existing holdings, and some of this is reflected in our portfolio trades. We also came back with a few new ideas which we hope to add to the portfolio once we have completed the first round of in-depth research.

Monthly/Quarterly Comment
During December the market continued its upward trend, albeit at a slower rate, putting gains in the MSCI World Index at 30.% for the year to date, with emerging markets returning an astonishing 79% over the same period. As is often the case, the market's muted return for the month belied some strong individual share moves. Among the top ten holdings in the fund, DirecTV, Golden Meditech and Chesapeake performed strongly, while several second half laggards showed some recovery. Now that corporate balance sheet issues have been addressed in many cases, costs have been slashed, operational efficiency has improved, and, not least of all, share prices have adjusted, with the recovery appearing to be underway, it is time to take a good look at what the market is pricing in for shares. In some cases we doubt that companies will be able to deliver on top-line and margins in the time that the market is expecting them to do so. In this light, we have continued to lighten positions in some of the shares held this year. Sales included Dell, DirecTv, Pioneer and China Green. The China Green holding was sold due to the company's departure from their core business into mining, which meant that in our assessment the investment premise has weakened. We also trimmed the fund's exposure to Chaoda after the share price moved up strongly. But it remains our largest holding as the valuation is still undemanding. We maintained the fund's overall financial exposure. Purchases in this segment of the portfolio included a Hana Financial (a Korean bank) and Isbank in Turkey, while we sold TCF and Alpha Bank. During the month, we also added to Carlsberg, Pfizer, Golden Meditech, Global Green Tech and Redecard. Changes in the portfolio based on bottom-up research has meant that more US exposure was reduced in favour of European and Asian shares, where we are currently finding good value and much better growth prospects, particularly in financial shares.

Annual Comment
During 2009, emerging markets took the lead early on, initially by proving more resilient during the sharp decline in the first quarter (falling half as much as developed markets) and then by providing annual returns of more than twice that of developed markets. However, for a substantial part of the year (notably in the first half) we found great value in US shares as they were sold down by investors fleeing to areas of higher growth. At some point the US exposure constituted half of the fund. By year end, however, we had taken some profits on some of these shares as we believed the market was getting ahead of itself in terms of the timing of the earnings recovery, and that the price adjustments had been sufficient given the headwinds they still face. So by the third quarter, we instituted two shifts in the fund's stance: we reduced the US exposure in favour of Asian, Latam and European exposure, and we significantly increased its exposure to financials. The most significant purchases during the year included Barclays, Raffles Education, Pfizer, Banco Itau and Golden Meditech. The switch out of Liberty Media into the main underlying holding, DirecTv, was also a large transaction. Other sales included Great Wall Motors, Las Vegas Sands, Linta, Chesapeake, Dell and Home Depot. Of note is that the strong performance that investors in the fund enjoyed last year was to a large extent due to holdings that were already present in the fund (where we also had the knowledge and conviction to add more when prices fell), but mostly due to persistently sticking to our investment philosophy and process, and our passion for finding undervalued shares from around the globe, frequently looking where others are either too pessimistic to do so, or could not be bothered to make the effort. In terms of visiting companies and regions in the search for investment ideas, 2009 was no exception and we maintain that it is essential to spend time meeting with management teams in person as often as is practically possible. We are confident that this approach will enable us to continue building on the five year track record of the fund in 2010 and beyond.