Quarter Ended 31 March 2011

Global Macro and Markets Overview
Equity and currency markets suffered significant volatility in the first quarter of 2011.  Initially the equity market benefited from better than expected earnings in Q1.  This combined with PMI and ISM figures showng a significant expansion in the service and manufacturing sectors provided impetus to the equity market.  Equities also benefited from on-going mergers and acquisition activity and improving employment figures.  However, in the latter half of the quarter equity markets suffered as a result of geopolitical volatility in North Africa and the Middle East and the natural disasters that struck Japan.  As a result of the problems in the Middle East and North Africa the price of a barrel of oil spiked to $115.  Inflationary pressures increased as a result of higher energy costs and food prices.  Higher food prices have proven to be the catalyst for the geopolitical concerns in the Middle East and North Africa. 

Risks associated with the Eurozone sovereign government debt continue to materialise with little impetus from the ECB or European Commission in implementing a practical medium to long term solution.  As a result of inflationary pressures the ECB has signaled to the market that it will begin the process of increasing interest rates.  This is a reflection of higher than expected inflation in the Eurozone and continued above par growth in core European countries.  The signposted increase in interest rates in the Eurozone has seen the Euro significantly strengthen versus the US Dollar. 

There remain significant risks with regard to the macro economic environment.  These include:  (1) the possibility of a hard landing in emerging markets; (2) continued currency volatility; (3) the difficulty in ultimately quantifying the issues surrounding Japan, North Africa and the Middle East; (4) continued weakness in the property market in the US and the effect that has on consumer spending; and (5) the possibility that QE2 (US quantitative easing, round 2) will cease at the end of June and the effects this might have on asset values.

Pfizer and Humana
Two US health related stocks common among our equity holdings, Pfizer and Humana, performed strongly in the first quarter.  Both companies have strong balance sheets and were lowly valued (at less than 10 times earnings) at end 2010, reinforcing our view that attractively valued companies, with sustainable business models and low financial risk provide attractive and sensible investment opportunities.

US pharma giant Pfizer rose 16% helped by two developments.  FIrstly, it raised its target for annual cost savings from the $68bn acquisition of Wyeth just a year earlier to $4bn, implying that the cost savings alone from this deal represent a return of 6% on the investment.  Secondly, Pfizer's management concede that it is sympathetic to the idea of possibly separating out the group's consumer products and pharmaceutical business which investors believe may allow each division to be better valued by the market.

Humana is a provider of healthcare services and other health insurance products in the US.  Its shares gained 28% in the first three months of 2011 as investors recognised that the various healthcare reforms championed by either political bloc in the US are likely to be favourable to its business.  Meanwhile it continues to successfully enroll new customers, highlighting the existing positive trends it is benefiting from.

Pat Kilduff 
Investment Manager
March 2011