Risk reduction on the menu

We have moved to being aggressive sellers of cyclical companies this quarter.

Many of the cyclical positions we have reduced or sold entirely were bought as asset plays. As they have approached our estimates of their net physical assets we have sold, rather than wait for the earnings component of the investment to kick in.

The truth is we remain deeply concerned about:-

1. The valuation of equity markets in most of the world (developed and emerging)
2. The weakness of consumers and governments due to their large debt burdens

Though the S&P 500 has reached a valuation we theoritically would be happy to short, we are nervous to do so. I cannot rationalise this statement other than to make explicit my lack of conviction on how external factors beyond basic economics (i.e. government intervention) can affect the valuation of risk assets. As a result we are starting to accumulate a rather large bucket of cash in different currencies.

We are extremely pleased on how our asset plays have performed, and are also upset to sell a number of them. Inflationary pressures are receiving greater media attention and simple inflation srategies continue to perform well. However, I cannot fight the discipline within me - we sell when our original story gets achieved unless we have a strong investment case(rather than a momentum play) the company is worth more. A few asset plays for this reason have been held, many have been sold.

With regards to our second point above mentioned, some clients dont even listen to me any more. "The debt crisis is over Alex, you will have to get over it at one point". I hope they are right, but I can assure you I am not managing portfolios assuming that is the case. This is quite likely to lead to an underperform of our portfolios relative to market indices in the short term, and quite possibly, the medium term. My mind however believes this will not be the case in the long term. when faced with such dilemmas over different time periods, we always chose the option where we have long term confidence.



Yours sincerely,

Long Term Investment Management