MARKET REVIEW
1st Quarter 2013

merging market equities declined 1.6% in the first quarter, as investors took some profits after a strong 2012. Most major markets in the asset class had much steeper losses; gains in smaller markets like the Philippines and Thailand masked declines in larger countries.

European debt concerns have migrated from relatively major countries like Greece and Spain to peripheral Cyprus. Although Cyprus is small and its global effect limited, the possibility of a country leaving the euro has reaffirmed the US dollar as a safe haven. The relative strength of the US dollar has had several negative impacts on emerging market returns. Returns are lower when translated from local currencies into the dollar. As stocks in the US and Japan rallied, global investors largely ignored the emerging markets.

Dollar strength has also been a negative for many commodity prices and stocks, which comprise a significant component of emerging markets. South Africa was down 8.9% as gold mining companies underperformed. Newgate remains largely uninvested there, with the exception of consumer companies. A sharp decline in materials and energy stocks also resulted in a 3.2% decline in the commodity-heavy Russian equity market. The latest economic reports from Russia were disappointing. We sold Russian telecoms and substantially reduced the allocation to materials. We retained our overallocation to Russian technology, which was positive for the Portfolio on both an absolute and an index relative basis.

Chinese stocks declined 4.5%. Better than expected economic figures and positive earnings surprises were overwhelmed by global issues, as well as concerns about government policy to reduce home prices. The new government has said all the right things, but substantive reforms have yet to be announced. We have reduced China exposure by exiting the gaming sector and trimming financials and real estate. Financial companies have long been maligned but still outperformed the MSCI China Index.

The Portfolio is holding more cash than usual, averaging about 4% during the quarter and ending at over 6%. This reflects a cautious view should the markets correct more. There has been relatively little reaction thus far to the North Korean situation, but the rhetoric continues to heat up. South Korean shares declined 3.2% and have underperformed in early April. Our 10.8% allocation represents a 400 basis point underweight.

The greatest contributors to performance this quarter were:

• Underweight South Africa, especially materials
• Overweight technology in China and Russia

The greatest detractors from performance this quarter were:

• Overweight materials, especially gold miners in Latin America
• Overweight India, especially automobiles stocks