PORTFOLIO UPDATE – Emerging Markets
April 2012

merging market equities declined 1.2% in April, though they are still up 12.8% for the year. Emerging markets valuations remain attractive historically and compared to the developed world. However, macroeconomic fears and the never-ending news flow from Europe weigh on investors. Despite fairly significant delinkages between emerging and developed market economies, financial markets have maintained a high degree of correlation.

Concerns about the health of the global economy had the greatest impact on materials (down 3.5%), industrials (down 3.3%) and energy (down 3.1%) sectors. Utility stocks, normally a safe haven, also declined significantly, especially in Russia and Indonesia. Consumer related and telecom stocks gained during the month.

The Chinese economy continues to slow, though we believe this slowdown is in keeping with expectations given the government’s policies on slower, but more sustainable growth. Despite what were considered negative headlines, Chinese stocks gained 3.6%. Its much maligned financial sector gained 5.1%. The impact of the Chinese economic slowdown can be seen in commodity stocks, and particularly in the Brazilian market (down 6.2%).

Since the beginning of the year, and especially in April, the Portfolio risk has been lowered. The allocation to Brazil has been decreased from 24.2% to 13.5%, with reductions in energy, materials (especially mining and steel) and financials. The Portfolio is now underweight Brazil. The nature of the economy and stock market make Brazil highly dependent on the global economy and particularly Asia. We reduced allocations in anticipation of the global slowdown.

Government policy in Brazil has also been a consideration. The government has been aggressive in pursuing tax claims against a number of mining and steel companies related to income earned offshore. While this issue has been in the legal system for years with no obvious end in sight, the likelihood of the government prevailing now seems more probable. Brazilian industrial production declined unexpectedly in March and the central bank is responding with more aggressive monetary easing. While this may be good policy for Brazil in the long run, near term it decreases the value of the real, a detriment for foreign investors.

The reduction in Brazil has been reallocated to a number of areas, including technology in Taiwan. While we have been concerned about the broader Taiwanese economy, many companies related to smartphones and associated consumer technology devices are located in Taiwan and are attractively valued. Technology investing is not monolithic. The nature of the industry has changed, and there are relatively few winners within any given segment. Companies that cannot maintain a leadership position can quickly fall into irrelevance, e.g. Yahoo! and Research in Motion. Our investments in technology companies, whether in Taiwan, India or China, are in companies that we believe can maintain a leadership position for the foreseeable future.

The biggest contributors to performance in April were:

• Korean industrial and materials stocks (we had an underweight position)
• Russian telecom stocks (we had an overweight position)
• Stock selection among Taiwanese technology companies

The biggest detractors to performance were:

• Brazilian financial and consumer stocks (we had an overweight position)
• Korean technology and consumer stocks (we had an underweight position)