Fund Overview
This Fund seeks to achieve long-term capital appreciation primarily through investment in equities of non-US companies. Fund performance will be primarily derived from stock selection. A strategic asset allocation process will be a secondary contributor to the investment process. The Fund is managed by a team of portfolio managers. The Asset Allocation Strategists, Iain Clark and Bill McQuaker, oversee the management of the Fund and the allocation of the Fund’s assets among countries, regions and sectors. Individual members of the team manage the Fund’s investment in specific countries, regions and sectors.
Quarterly Commentary
Volatility for all risk assets remained high in the third quarter, driven by newsflow surrounding the global financial crisis. Credit markets continue to be very tight, with inter-bank lending rates at historically high levels and the Treasury Bill (T-Bill) rate at one point dropping close to zero, reflecting banks' unwillingness to lend to each other. Authorities have sought to alleviate the credit crisis through liquidity injections, restrictions on short-selling and most recently, and most significantly, the US Treasury's proposed bail-out program to purchase toxic assets from the nation's failing financial institutions. Clearly, this is a very difficult environment for equity markets, which have been sold off aggressively by investors as risk appetites have collapsed. Asian and Emerging Markets have been particularly vulnerable due to forced selling from hedge funds to cover redemptions.
Fund performance
Over the period the Fund underperformed the benchmark MSCI EAFE Index. Stock picking in the Japan sleeve of the Fund was disappointing. The single largest negative contributor was Japanese housing company Leopalace21, partly due to a change to the new Building Standards Law in Japan and partly because of a trend towards a longer completion of construction orders.
Energy holdings also hurt the performance of the Fund withRussian natural gas producer Gazprom suffering from geopolitical issues in Russia and general risk aversion.
The Fund's currency hedging* positions have proven to bepositive of late. The US dollar rallied and Sterling fell to its lowest rate against the dollar in over two years.
Investment activity
In early September we cut back on our Technology weighting by 2%. Technology had a strong run since February and we expected short-term results to be poor. We also believed that these results may not have been fully discounted by the markets. We also cut back our exposure to the European small-mid cap sleeve (Europe 2). This money was re-allocated toContinental Europe (Europe 1) as we recognized that there was some attractive value in the companies we held in that list. We will need to be patient to see the potential fruits of this change.
Belgian Bank Fortis was sold over the period as we had doubts over the strength of the company's balance sheet. Those concerns were subsequently confirmed with management announcing a poorly received capital raising plan.
The Fund made some significant changes to the Global Technology sub-portfolio. Adobe, Ericsson, Priceline andTrimble Navigation were sold and new positions were initiated in Hewlett Packard, Marvell and Vestas Wind Systems.Danish company Vestas, develops, manufacturers and markets wind turbines.
The Japanese sub-portfolio also added Disco Corporation. The company makes cutting machines for the semiconductor industry and also makes machines for producing LED lights. We believe LED lights will take over from incandescent bulbs in the next five years as they last ten times longer and use 85% less electricity.
Outlook
Policymakers globally appear to have grasped the severity of the current economic crisis and are now reacting accordingly. This is a key step on the road to recovery, and we believe we may be close to a bottom in equity markets. However, markets are likely to remain volatile while investors digest the impact of various rescue packages and recapitalizations. In addition there remains substantial forced selling of equities as mutual funds sufferredemptions and hedge funds de-leverage. We therefore remain cautious on international equity markets in the near term but will look to take advantage of volatility that creates attractive entry points and we will continue to focus on quality companies, with little leverage and clean balance sheets.