20th January 2009

Commentary on our 2008 performance

Although undoubtedly a very tough year in absolute terms, let’s look back at the contributors to the strong relative performance of our funds in 2008.

The first thing to say is we had more time. Working in a boutique like Thames River really does mean you can spend all of your time focusing on the job at hand, and that for us is managing our funds with little by way of distraction. Business management meetings are kept to a minimum, they are focused and relevant and we are therefore able to channel all our energies into portfolio management as well as communicating with our clients about our funds and our stock market views.

There are five key reasons why we consider we did very well relatively in 2008:

First of all an early appreciation that sterling was going to be a weak currency led us to cut both early and aggressively our exposure to the UK equity market in all five of our funds relative to peer group and that really paid dividends. The beneficiaries were overseas assets, particularly Japan and the US. In the early part of the year Japan looked like a very cheap market on a relative basis and we caught some good currency appreciation as well as we had added to this area quite early in the year. With the US equity market we adopted a first in, first out principle and we took the view that US assets would also be a relatively good place to invest money which proved timely. Having added quite well to the US and additionally benefitted from strength in the US Dollar, we pared back some of this additional allocation towards year end.

The second reason was to have virtually no exposure to smaller companies. As we know, small companies were significant under performers throughout most of 2008 given economic difficulties, which seem destined to continue for a little while yet. We also avoided direct exposure to property and commodities which also worked extremely well versus some of our competitors, as did an early reduction in emerging markets allocation. On the other hand we did increase both the allocation and number of holdings in the UCITS III absolute return segment of the market, which certainly insulated part of our portfolios against the significant drawdown in the equity market. The absolute return area should not be confused with alternative assets where we had no allocation, where returns were heavily correlated with equities on the downside and did not bring the diversification benefits they were expected to.

Third, in the more balanced funds we came out of all high yield investments comparatively early on given the economic difficulties and this helped us avoid the very poor performance period suffered in this sector during the autumn. In the corporate bond sector, for similar reasons, we cut back our investment grade corporate bond exposure and again this stood the funds in good stead, albeit we are starting to add back some exposure following a period of negative returns.

Fourth, and an additional factor behind our strong relative out performance, was to accept that 2008 was going to be a year when macro factors really did influence portfolio performance more so than normal. The corresponding recognition that absolute portfolio diversification would also be less helpful than is usually the case was also an important portfolio performance contributor. The portfolio impact was to accept that it was just not enough to put together a good range of high quality investment funds, although that helped of course, but that beta management of the funds would be crucial in 2008.

Aside from the four specifics, the final thing to say is we did not get sucked into dangerous investment fads and fashions. Our team has never chased such short term momentum ideas as it simply does not pay off in the long term in our view. In our near thirteen years together we have always been fundamental investors and try not to deviate from our core investment principle of sticking to the people we can trust to deliver performance. We stuck to and indeed intend sticking with plain high quality vanilla ice cream; in other words buying high quality investment management talent in our portfolios that should help us build further on our strong and consistent performance track record that thankfully was continued last year.