Fund Overview
This Fund seeks to achieve long-term capital appreciation primarily through investment in equity securities of US and non-US companies. The Fund employs a process that combines a bottom-up approach to individual security selection with a strategic asset allocation process. Security selection will be based upon an analysis of a company's valuations relative to earnings forecasts or other valuation criteria, earnings growth prospects of a company, the quality of a company's management and the unique competitive advantages of a company. The Fund is managed by Manraj Sekhon.
Quarterly Commentary
The last part of the quarter was as shocking as it was memorable. Within the space of a few days there were questions about whether markets were about to enter a financial abyss as a number of prestigious Wall Street firms were closed for business. Lehman Brothers, AIG, Washington Mutual and Wachovia all succumbed to either bankruptcy or some form of government encouraged rehabilitation. Europe too had its financial scares; five banks bailed out in seven European countries over five days. Japan came through relatively unscathed. For stock markets, volatility was extreme and there were falls in equity markets around the world.
The ratification of a financial package in the US, while welcome, may mask deeper problems which may now beset the economy. Credit expansion has been one of the fortitudes of economic success in the US and one must consider how pronounced the impact might be on the level of overall activity were the credit cycle to be constrained going forward. Theoutlook for growth may therefore cloud further. Nevertheless, while the past few weeks have been turbulent for stocks, the immediate problems in the US financial system appear to have been addressed. Hopefully the same can be said of Europe. Japan, which has habitually been closely associated with financial crises in the past, has been remarkably quiet on this front, even bucking the trend by taking stakes in prestigious Wall Street names such as Morgan Stanley.
Fund performance
It was a difficult quarter, and the Fund underperformed the benchmark, the MSCI World Index. The largest negative impact to the Fund came from the holdings in resources-related stocks, primarily due to the sharp decline in commodity prices.
Currency hedging* in British sterling (which fell to its lowest rate against the US dollar in over two years) and the euro werepositive over the period as the dollar rallied throughout the quarter. We expect the weakness of sterling relative to the dollar to continue, however we are less certain about the euro. The euro got close to the initial target 1.30-1.35. For the moment the momentum remains with the US, and we believe the dollar may strengthen further in the short-term. The managers are not keen on the dollar on a long-term basis.
Investment activity
We increased the Fund's allocation to the US over the quarter. Positions were initiated in names such as: Genentech, Lazard, Rohn & Haas and Constellation Energy.
We are starting to see some good value in Asia. While there is much talk of China slowing, it has been slowing moderately compared with the rest of the developed world. We have not yet initiated a new allocation to this area as we believe there may be moreselling pressure from the hedge funds and other emerging markets fund in a bout of forced selling to meet redemptions. We anticipate in the coming months Asia may become a more compelling story. One company that we recently purchased is China Mobile. There is potential for growth in this company's end markets, also the valuation is quite cheap.
Outlook
Going forward we believe that, in general, earnings expectations have been too high and need to come down. We also expect interest rates to start dropping and that the catalysts needed may be employment. If the employment number is negative enough it may convince central banks in the UK and Europe that the slowing economy is more of a risk than inflation, and they could start dropping interest rates as a result.
Equity markets are likely to remain volatile in the short-term and could fall even farther on forced selling and fears about theFinancial sector and the global economic outlook. However, we believe by the second half of next year, assuming the outlook for 2010 is brighter, equities may be staging a sustainable recovery.
*Currency hedging: a hedge is an investment made to reduce the risk of adverse price movements in a security by taking an off-setting position in a related security or in this case, a related currency.