July - Summer Edition - CI Investments

Commentary
eBay and Wienerberger. Cash at the end of the quarter was
about 4% of the fund, compared to just over 2% at the end of
March and 5% at the beginning of the year.
Castlerock International Equity Fund
We have been selectively adding to our more cyclical holdings
as we had cut them back one year ago. We are finding new
investments in emerging markets and in technology. Our
holdings in companies like Adidas, Glanbia and Galp
Energia have done very well and our Japanese investments
snapped back in value once investors determined that the
tsunami would have little effect on their performance.
What is truly ironic is that the best-performing areas of the
world have been U.S. and European equities this year, proving
that investors overlook and overreact regularly to bad news.
One such area is Chinese equities. We have been looking
at Chinese companies for a very long time (since 1994), yet
we have just started to make commitments now. We seek out
market share-leading companies with sustainable competitive
advantages at reasonable prices that have established
management teams who work for the shareholders. To get
all of these characteristics in a Chinese company is tough.
We have long been very skeptical of the internal allocation of
capital within Chinese companies and also the accounting
for their activities. With recent high-profile compliance
problems, it is our judgment that the cleanup will be
effective. We never doubt the internal drive of the Chinese
business community to be world class in everything they do.
It is their driving force. So we have invested in a Chinese
clinical research company run by former executives from
GSK-Wuxi Pharmatech.
Castlerock Global Balanced Fund
Castlerock Global Balanced Fund performed in line with the
benchmark index for the six-month period. We experienced
a notable loss in one holding – Irish Life – in the quarter as
a desperate new government sought to distance itself from
the previous government and rewrite the regulatory rules
for banks and insurance holding companies. Although legal
actions are underway, the losses have been taken.
It is easy to feel despondent, but then we look at what is
happening with the businesses we own in our focused
international portfolio. Most are doing well, some exceedingly
so. At a valuation level below the long-term global average,
this should yield reasonably good equity results. But when,
we just do not know. The reverse seems to be true in the
fixed-income world. Investors seem to view risk in a binary
fashion. That is, they love the government debt of a country
and then they dump it in a lemming-like behaviour when
they no longer agree that country is credit worthy. To this
point, we have systematically lowered our fixed-income
exposure to government securities as they have risen in price
to the point where we see little long-term value. While it is
costly in total rates of return, we have shortened our exposure
to short-term government securities in wait for opportunities
to buy quality corporate exposures at higher yields.
It seems certain now that the pace of earnings growth will
slow down from recovery levels to normal 4% to 6% levels.
This slowdown has caught some investors off guard, most
notably in the cyclical investment areas like emerging
markets, commodities and cyclical stocks. We have felt
a limited pullback in our portfolio, notably in our smaller
Brazilian holdings and in our construction-oriented
companies and semiconductor holdings.
We have been selectively adding to our more cyclical holdings
as we had cut them back one year ago. We are finding new
investments in emerging markets and in technology. Our
holdings in companies like Adidas, GlaxoSmithKline,
Northrup Grumman, Glanbia, Affymetrix and Galp Energia
have done very well. Our Japanese investments have also
snapped back in value once investors determined that the
tsunami had little effect on these companies.
Director of Equities: Matias Galarce, Evelyn Huang
SUMMER 2011 PERSPECTIVE AS AT JUNE 30, 2011 31