Focus on investment in companies offering “essential” products

CIO Insights 3Q2005

Judging by the strong upward direction in a great many stocks so far this year, the market obviously expects the good times to last. Naturally, as contrarians we assume a more cautious position in such ebullient times. It looks to us that what we have been witnessing this year has primarily been a liquidity-driven rather than an earnings-driven market for equities, particularly in Continental Europe and certain emerging economies. Unfortunately, a liquidity boom is eventually prone to turning into a liquidity bust without giving investors enough time to adjust in orderly fashion, bearing destabilizing consequences for the financial markets and the global economy as a whole.

Against this backdrop, how are we positioning the Fund in order to preserve capital? First, with the exception of a few particular situations, we tend to avoid equities in industry groups which we think would suffer disproportionately from sudden big, so called “discontinuous” events such as major macroeconomic shocks and natural or manmade disasters: those include financials, travel and leisure and “non-essentials” such as luxury goods and high-tech gadgetry, among others. Second, since we believe that our portfolio selections have substantial margins of safety embedded in them, we are comfortable going into uncertain times with them even though they will inevitably get dragged down on a temporary basis by the market as a whole. Third, we like stable and growing dividend yields, something that provides a crucial stabilizing factor in equity valuation. Fourth, we prefer to invest in companies with ready access to affordable financing – be it from internal or external sources – even in difficult times. And fifth, within our universe of equities we deem to be significantly undervalued, for the Fund we try to put together a complementary portfolio of businesses not as is usually done simply with respect to geography, currency, sector and market cap but in terms of an array of more subtle features such as: ownership structure; relations with, and characteristics of, customers and suppliers; management and leadership style; and product, marketing and financing strategy.

Sincerely,