Review
The underperformance of emerging markets, which has been affecting the performance of the Fund since the beginning of the year, continued during the month. In particular, the more than 10% divergence in performance between the Indian and US markets during the first quarter was the reason for most of the Fund's underperformance. Our positioning favours India over the US because we believe that that market is currently discounting an overly pessimistic view of the prospects of the Indian economy and that shares there are consequently undervalued. This is especially true for the financial sector, where most of our exposure resides. Notably poor performance was delivered during the quarter by Indian shares Bharat Heavy Electricals (-22%), Andrha (-20%), DENA (-22%) and Punjab National Bank (-18%), while large holdings in DBA Telecommunications (-10%) and Esprit (-13%) also disappointed. After month end, DBA reported a 34% increase in earnings, which has resulted in some recovery in its share price. During the quarter, good performance was forthcoming from Hewlett Packard (+67%), Bank Bukopin (+45%), Bank Rakyat (+28%), IG Group (+19%), Ahold (+18%), Daegu Bank (+15%), Medtronic (+14%) and Tesco (+13%). Unfortunately most of these holdings were too small to offset the effect of the poor performers. Independent analysis of our Fund confirms that it displays the expected characteristics of trading at a discount to the benchmark, while incorporating superior expected growth and return on equity. These characteristics are consistent with our stated investment philosophy and are a result of our bottom-up share selection. We are confident that these valuation factors will unwind in our favour in the medium term.