Manager’s Commentary

Equities continued to make progress in December. Mounting concerns over sovereign debt – triggered by Greece’s plight – threatened to undermine progress, but markets proved resilient, perhaps showing that valuations are still reasonable. Share prices have now recovered significantly from the March lows, reflecting the degree of economic stabilisation which has been achieved. The worst affected sectors such as banks, insurers, property companies and other operationally and financially geared companies have recovered strongly, but valuations are still very moderate and further progress in the return to normality should see multiples move closer to previous levels. The economic outlook does, however, remain unclear. It remains to be seen how global growth will cope with the coming withdrawal of fiscal and monetary stimulus. The authorities must balance the risks of recession and inflation quite finely - a difficult but not impossible task, particularly as emerging markets should continue to support global growth. Sterling continues to trade at a depressed level, particularly against the Euro, reflecting the economic and political uncertainties in the UK. However, on a purchasing power parity basis, Sterling is significantly under-valued. A substantial improvement in the current account can already be seen as exports are supported and imports suppressed. A clear Conservative win, which the Investment Manager sees as likely, would improve confidence that the fiscal position will be tackled.

As outlined in November’s report, the improvement in the markets has spawned a number of rights issues as companies have set about repairing their balance sheets. In December, rights were taken up in ING. During the month, the Investment Manager continued to buy Alliance Data Systems, the Texas-based technology and marketing company, which was discussed in detail in last month’s report, and made a new investment in Yum! Brands. Yum! Brands operates over 36,000 quick service restaurants in more than 100 countries. Its three largest brands are KFC, Pizza Hut and Taco Bell. The company is moderately valued with good exposure to emerging market growth. Its KFC chain is proving particularly popular in China where there are currently 2,700 outlets (compared with 1,000 MacDonalds). The company entered the Chinese market 10 years ago under the Pepsico umbrella. As a result, it benefits from a well-developed supply operation and a team of trained local managers. Outside China, other main growth areas are South Africa, Indonesia, France and Egypt. The company has also announced a major expansion in India in early 2010. Yum! Brands trades on a PE of 15x and a yield for 2010 of 2.6 per cent. The sale of Inpex, the Japanese state gas company was completed in December – for the reasons outlined last month – and the holding in Home Depot was sold following a recovery.