SVM Asset Management

JPMorgan Russian Securities was formed in 1994 and still remains the sole pure Russian equity fund in the investment trust sector. Although we have a number of other Russian funds, this fund remains a core holding and recently, due to its superb performance, became the Fund’s largest holding.

Originally bought in 1999 for the princely sum of 66 pence per share, the price recently broke through the £8 barrier. The earliest purchase was made on a discount in excess of 40%, due principally to investor unease post the 1998 Russian debt crisis. The fund became an investment trust in 2003, from when the discount narrowed to high single figures.

It is our belief that Russia continues to remain one of the most attractive markets. Of the BRIC economies (Brazil, Russia, India and China), we believe that Russia has the most favourable dynamics and has become paradoxically one of the safest markets in the world. Unlike as in 1998, Russia now has a stable political background, large current account surplus, a growing economy and is a major exporter of much sought after commodities. In addition, there is a growing will to restructure some of its ancient infrastructure and banking system.

Unlike many emerging market funds, the fund does not attempt to track its benchmark, preferring to take a more bottom up approach. To this end, it focuses on domestic rather than international facing businesses and on the restructuring process that is underway in Russia. This should protect the fund from the pressures being experienced elsewhere.

This month we return to a favoured theme – private equity. The fund in focus this month is itself a fund of funds which gives exposure to a broad spread of interesting private companies across the globe. The fund has approximately 70 limited partnership investments that provide underlying exposure to in excess of 1,000 individual companies. The fund’s underlying exposure is highly diversified with investments in 34 countries, from 10 different vintage years and in all styles of private equity.

Their investment strategy is to invest alongside fund managers with proven track records, to buy only mature assets with embedded value and to maintain a diversified portfolio to mitigate risk. The fund was launched in June 2005 and has demonstrated a net asset value and share price return in excess of 20% subsequently. Unlike many private equity funds, where returns are heavily skewed towards the end of their lives, this fund books profits through distributions on an ongoing basis. These distributions allow for the re-cycling of capital into new funds.

This is particularly helpful in the current market where secondary assets are available at attractive levels from motivated or distressed sellers. The fund tends to concentrate on smaller deals where there is less competition. There are a number of large secondary players but relatively few smaller ones. In addition, the fund has a rare non-US bias, preferring to invest in Europe and Asia. Finally, the fund has an aggressive discount control mechanism, through bi-annual tender and the open market, to ensure a narrow discount.

In these days of extreme volatility, we thought that it might be interesting to spotlight a fund that has virtually no correlation to global stockmarkets although it is listed. Ceiba Investments was formed following the reconstruction of Beta Grande Carribe in 2003. It is currently the only listed fund investing in Cuba incidentally, it pays a dividend of approximately 6% per annum.

As most will know, there are heavy restrictions placed on Cuba by the United States and, in fact, US investors are prohibited from investing in Cuba and indeed the fund. Notwithstanding this, Cuba has continued to do business with the rest of the world for decades and Europe, in particular, appears to have been the principal beneficiary. The fund is one of the few conduits through which foreign exchange can be channelled into Cuba, principally for the tourism industry, and they are paid well for this facility.

The reasons that Ceiba Investments is interesting now are twofold. Firstly, their principal investment, which is a controlling interest in Monte Barreto (Havana’s leading office and commercial real estate complex), has recently been given government approval to develop an area triple its current size. To date, the initial phase has not been materially re-valued upwards and should be at the next valuation point. Secondly, and ultimately more important, Fidel Castro recently stood down as President to be replaced by his brother. With Fidel’s departure, there is likely to be a gradual thawing of the icy relations with the US, leading hopefully to the dropping of the embargo.

It is perhaps unsurprising that the new issue market has recently been flooded with funds that focus on agriculture. Soft commodities in particular have risen steeply in the last few months. The primary market is well known as a trailing indicator – issuing what is currently hot and sellable. In any event, the Fund has had exposure to agriculture for some time. Our two principal investments are Vostok Nafta Investments and Ceres Agriculture Fund – both have performed well in recent months. Vostok Nafta was covered in detail in the September 2007 factsheet.

This fund’s objective is capital appreciation through investing in a diversified actively managed portfolio of primarily exchange traded agricultural contracts. The portfolio is diversified through taking positions, both long and short, in Grains (such as corn, wheat, soy, oats and rice), Tropicals (such as cocoa, sugar, rubber and orange juice), Fibres (such as cotton, wool and silk) and Livestock (such as cattle and hogs).

The fund does not operate leverage; its volatility is low and is aiming to achieve at least a 12% annualised return. Due to the strength in markets, the returns are currently compounding at closer to 15%. Although the management group is relatively new (formed in 2004), its principals have on average over 15 years experience in trading commodities. In addition, their underlying traders have even greater experience, averaging 20 years. The beauty of this strategy is that each trader acts independently of each other in his defined commodity under strict risk parameters imposed by the managers.

In these times of market turbulence, we felt that it might be useful to spotlight a fund which has not been adversely affected by market volatility. Indeed, the fund's share price has risen over the month, albeit only by a small amount. On a passing note, it is strange that funds which promote themselves as absolute performance funds have - in line with markets - seen heavy falls in January 2008.

KGR is a fund of hedge funds with specific focus on Asia - unsurprising given its name - and is a multi strategy fund. Unlike some, it is not materially long biased and hence does not rely on positive markets to generate returns.

Although pan-Asian, it has purposely kept a low weighting in Japan which has been very beneficial. In addition, it is positioned to take advantage of the increased volatility in markets through a range of non-directional funds. The fund has a performance target of 12% plus per annum with volatility in single figures. This makes the fund a perfect addition to our portfolio. Incidentally, the fund returned an above trend 15% in 2007.

Unlike most hedge funds, the shares did trade on a small discount and our position was purchased on an average discount of 3%. Subsequently, this discount has been erased and the fund is currently trading around parity. The Managers believe that 2008 will be challenging, especially for countries with large deficits and the requirement to source finance. This does not apply to Asia as a whole.

This month, we spotlight a fund which until fairly recently had been largely ignored. However, it is now of a size (£150m) that permitted its promotion into the FTSE All-Share Index last month. This will require index buying which should provide a floor on the share price and discount. The fund started life following the restructuring of Aberdeen Latin American Investment Trust in 2003 and its asset value and share price progression has been impressive. SVM Global bought its original stake in August 2003 and has benefited in a near tripling of both asset value and share price.

The fund is branded as a high yield resources fund but it isn't. It is indeed a resources fund with in excess of 95% in resources but it does not enjoy a high yield - its current yield is only slightly in excess of 1%. This is less than both its larger rivals Merrill Lynch World Mining and Merrill Commodities Income Fund. However, we see City Natural as a natural complement to both as it has a different investment focus through investing in smaller more vibrant companies.

Its manager, Richard Lockwood, is well seasoned with many decades under his belt as a fund manager. Additionally, many of the fund's investments - approximately one third - are in the form of convertibles which allows a degree of downside protection in adverse times. The fund also has a substantial weighting in companies exposed to gold which has recently surged to all time highs.

Every so often, we like to update investors on the Fund’s largest investment, especially as it is arguably one of the less researched and consequently more misunderstood investments. The Fund purchased its holding in Eurovestech in March 2000 – towards the end of the ‘internet’ boom – at 5 pence per share and has subsequently more than quadrupled.

The last year has seen a material ‘proving up’ of value and our estimate of the underlying asset value is materially higher than both consensus estimates and the share price. Recent asset value performance has been driven both by long standing holdings Toluna (listed) and KSS (unlisted) but also by relatively new unlisted investments, Magenta and Mist. The mature holdings are both profitable and growing at high rates but are modestly valued in comparison to their peers.

However, the most interesting and potentially profitable investment is Mist Technologies. The company has developed the world’s first commercially available sound separation technology which gives users the ability to filter music into its component parts (ie guitar, drums, violin etc). The sound separated tracks can then be re-mastered into 5.1 surround sound quality in cinemas and for the creation of new versions of the original track. This has major attractions for both professional and consumer users. In addition and the icing on the cake, is that Mist appears close to having a technology that can sound separate voice. If successful, this would propel Mist on to an entirely different valuation level – p.s. Eurovestech owns 46% of Mist!!

This month, we feature a fund which, although listed on the London Stock Exchange, is largely ignored by both private investors and mainline analysts alike. Quite why is somewhat of a mystery as its absolute, relative and consistency of performance should make it an attractive holding. One problem may be its share price which is approximately £110 per share. This is being addressed at this year’s annual general meeting which will see a share split to lower the share price to 110 pence per share – slightly more user friendly.

The fund is managed by hedge fund managers Laxey Partners and is their flagship fund having launched in 2000. In our opinion, the beauty of this fund is that it is a ‘true’ hedge fund, not one of the disguised leveraged long only funds. Its annualised returns are around 16% per annum, at the top end of our target 12-15% returns that we wish for our absolute return funds. In addition, its net exposure to equity markets is low, being 8.3% at the end of September 2007, having been virtually flat running into the August correction. Although it does employ leverage, it is not excessive and its investments really do appear to be uncorrelated with each other and markets.

Laxey are arguably best known for forcing the restructuring of underperforming funds and companies and indeed they are not aversed to getting aggressively involved in funds / companies where they identify hidden value. This makes this fund an ideal non-correlated part of the portfolio.

This month we are spotlighting somewhat of an anomaly and as such misunderstood. Vostok Nafta Investment, a Swedish listed investment fund, invests principally in Russia in both listed and unlisted companies. Over the summer, the current Vostok Nafta Investment fund was de-merged from its much larger parent, confusingly also called Vostok Nafta Investment. The original fund had assets of slightly in excess of US$4 billion of which 90% was represented by a single investment – Gazprom.

The managers, following consultations with shareholders, believed that there was significant untapped value within the non-Gazprom part of the portfolio but was being dwarfed by the Gazprom holding. Incidentally, they believe that Gazprom, the world’s largest resource company and one of the world’s ten largest companies, is itself massively undervalued and is retained within the Vostok Gas fund. However, that is another story!

At the time of de-merger, there was another twist as investors were forced to either subscribe for new shares or have their entire holding cancelled for no value. As expected, there was a stampede for the door and we were able to pick up a holding on a 20% discount to its asset value. Subsequently the discount has narrowed markedly. The new fund has some extremely interesting holdings, few of which can be accessed in any other vehicle that we have come across. One holding in particular, Black Earth Farming, representing approximately 20% of the fund is IPOing later this year at a substantial uplift to current carrying value.

With investors / commentators panicking about property values and their financing, it may be odd that we continue to focus upon property funds. However, as always, investment is rarely black and white. We would concur with the view that property values in some parts of world are at unsustainable levels and over leveraged. However, in other areas, principally in ‘emerging’ markets, values are modest and increasing. The principal differentiator is the lack of substantial borrowings – much is financed through traditional equity.

China Real Estates Opportunities Trust is one such fund. China is generally recognised as offering very attractive risk reward characteristics and appears to be little correlated with other asset classes. In addition, property remains cheap; for example, Shanghai office space was valued at 60% discount to similar property in Hong Kong. Its economy continues to grow at above average rates and is funded to a large extent internally. Indeed until fairly recently, direct foreign investment in China was severely limited.

The fund was launched at the start of 2006 to invest principally in retail and office property in the major tourist and business zones – to date they have focused on Shanghai. There is a massive undersupply of suitable property with increasing demand, mainly from a migration to urban areas. The fund is now fully invested in a very concentrated portfolio of seven properties; however it retains approximately 5% in cash for contingencies. A similar size acreage close to its largest property was recently sold at an equivalent valuation of three times the current carrying value.

The Fund continues to retain holdings in a number of property funds globally. To date, we have resisted the ‘temptation’ to invest in the UK and US, preferring to concentrate in the less developed markets of Eastern Europe, Far East and Africa. The return characteristics of these regions are superior to those offered in the developed markets with quantifiable risks. Few of these markets are leveraged in the same way as the UK and US and are less susceptible to a credit crunch.

We made an initial investment in Jupiter Adria in the summer of 2006 and topped up the position in June of this year. Jupiter Adria has the benefit of first mover advantage, already having sourced a mature property portfolio in Croatia. It is managed by the well respected Eastern European team headed up by Jupiter’s William Crewdson, a 15 year veteran in Eastern European private equity. Adria is different from a number of the region’s pure property plays as it offers not just the property but a full integrated leisure business including travel, entertainment and retail facilities. Historically, the Jupiter team have a strong track record in this area, delivering approximately 25% per annum compound returns over more than 15 years.

The Fund is currently private with an OTC quotation but has slated an AIM listing in the fourth quarter of 2007. It is likely that there will be a valuation uplift at that time as some of the properties are still being carried at 2006 values.

As regular readers of our factsheets will be aware, we are always on the lookout for mature private equity funds, especially when they are available on a discount to their asset values. Equest Balkans Investments is such an investment. The Fund started investing in April 2004 when it was a Dublin listed closed-end investment fund. It moved to AIM in December 2006 with its last fundraising at £12.10 per share. Subsequently the share price fell by in excess of 10% while its asset value progressed by 5%.

This is typical of funds where investors become disillusioned with perceived disappointing early asset value performance and wish to dispose of their holdings. We made our investment at an attractive 15% discount to a very conservative asset value. We believe that our entry point is at the bottom of this Fund’s J curve with plenty of value creating realisations in the pipeline. We understand that there is a single transaction planned for later in the year which could add approximately 25% to the asset value. Following the removal of the perceived stock overhang, the share price has subsequently rallied 5%.

As the name implies, the fund principally invests in the Balkan region – to date Romania and Bulgaria. These two countries were the most recent entrants (January 2007) into the European Union. Consequently, the political and economic background is favourable with lower non investment specific risk. The fund also has recently expanded into the other non EU accession Balkan states and appears to have first mover advantage in these countries with the resultant benefits of investing with little competition.

This month we focus on a fund which was one of the original AIM listed investment funds. Subsequently, this has become the structure of choice for esoteric closed end investment strategies. Trading Emissions was formed to invest in a range of emission assets principally Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs) created through projects which adhere to the Kyoto Protocol. In addition, it can invest in other EU carbon, US carbon and US sulphur credits.

Credits are awarded to companies that develop and deliver environmentally friendly projects. It is the Fund’s intention to build a portfolio that will deliver 65 million tonnes of carbon dioxide credits. Having raised £135m in April 2005, a further £175m was placed through a C share issue in April 2006 as the first tranche became fully committed. The Fund’s C shares are now virtually fully committed and the two classes will be merged. This is an important milestone as the two classes will be independently valued and risked.

Assuming the Fund has 65 million tonnes to deliver and with projects with a total pipeline of 90 million this is entirely feasible, total cash inflow should be in excess of £800m in addition to the return generated by the underlying projects. This assumes a price of approximately £11 per CER in 2008. They recently completed a small transaction to sell 250,000 CERs at £9.76 which equated to 90% of the 2008 price at the time.

The attraction of this asset is its non-correlation to equity markets and the ever increasing interest in ‘green’ investments.

This month we focus on a fund in which SVM has had a holding for some time, although the position was substantially increased at the turn of the year. Ecofin is managed by a well established management team with an excellent track record. The fund is a UK investment trust which invests in the global utilities industry, specifically in water, electric power and gas distribution. Its assets are concentrated in Europe, UK and the US.

Its investment universe is truly massive, approximately 900 companies capitalised at $2,300 billion with very large investment requirements going forward. For example, world electricity demand is forecast to double by 2030 with required investment in excess of $11,300 billion. The numbers for gas and water are similarly large. Being part of this investment will provide great opportunities going forward and Ecofin are well placed to be in the vanguard.

They mix large companies (International Power, E.ON and Severn Trent) with a number of smaller companies, some of which are unlisted. A particularly good example at present is the Irish private electricity company, Airtricity, which has recently increased its profile and is growing rapidly. This should materially add to asset value.

In addition, and what makes the fund of particular interest, is its hands-on approach to investment. It has been instrumental in the consolidation of part of the UK water sector with Northumbrian Water and Bristol Water being prime examples. They led buyouts and reconstruction of these companies, creating material value in the process.

This month we highlight a private equity fund. LMS Capital, formerly Leo Capital, was created in June 2006 by a de-merger from London Merchant Securities. The company, which is listed on AIM, was effectively set up 25 years ago as the investment division of London Merchant. The portfolio, which has assets in excess of £200 million, covers all conceivable bases in terms of investment stage (early venture, second round venture, development capital, buyouts and listed), geography (predominantly UK and US), and sectors (with a heavy leaning toward technology).

As a stand alone vehicle, the managers are now incentivised to manage and ultimately focus the portfolio towards a more presentable offering. The discount, which was over 30% at launch, has reduced to slightly under 20% through a series of tenders and buybacks. In fact, their most recent tender offer was undersubscribed. Management appear committed to reducing the discount further through continued stock retirement.

Unlike a number of its competitors, it is attractively placed on the J curve, with a nearly fully invested portfolio moving towards a realisation phase. As with a number of venture funds, the underlying investments appear to be conservatively valued. In addition, a number of their investments are slated for early disposal which should continue to drive asset value performance.

The only apparent weaknesses stem from the overweight position accumulated in technology companies, although the managers appear very confident of their positions, and from a large historic shareholder (Rayne family) who might be considered as a share overhang.

This month we highlight a fund which has been a particularly strong performer over the last year. Until fairly recently, Vietnam was seen as one of the least developed of the emerging markets and effectively only for the bravest. From a stockmarket stance, Vietnam has been a beneficiary not only from the increase in risk appetite among investors but also from the gradual opening up of the market. There has been a barrage of new issues seeking to take ‘advantage’ of this more open attitude. However, its managers Dragon Capital have been in place for more than 10 years.

What is arguably more interesting is the growth demonstrated by Vietnam and its relative lack of correlation to other markets. Much of what is taking place in Vietnam is domestically focused and less influenced by other countries. The country suffered from lack of investment and poor infrastructure for years. It did not participate in the ‘boom’ seen in other Asian economies in the nineties.

The attraction of Vietnam Growth as opposed to other funds is that it already has a mature portfolio in place trading on a discount to net asset value. Many competitor funds have few investments and trade on high premia. The discount is currently 15% - relatively high compared to its recent trading range. One reason for the discount is a perceived lack of visibility. It is not listed on AIM, it trades ‘over the counter’, and is much more a professional rather than a retail investor focused fund.

This month we are highlighting another fund with a rather complicated share structure. The Fund has income shares, capital shares, a zero dividend preference share held by a subsidiary, and warrants. The Fund has a rather wide investment remit and invests in a bewildering combination of UK listed companies, unquoted equities, specialist funds, and structured products. The portfolio requires to service the income shareholders with a flat 10% yield and zeroes with a 6.5% yield to redemption before capital shares earn their return.

Little of the above would warrant us looking any further. The capital shares have a challenging hurdle, although the performance of the UK listed section in particular has been exceptional over the last few years. What is of interest is the shares’ rating, the dynamics of the shareholder register, and the proximity of a wind-up vote. Incidentally, the company’s warrants expire this month and the take up is likely to be modest.

The capital shares trade on one of the largest discounts in the sector (25%) and the shareholder base is quite hawkish. The Fund was originally controlled by a number of Lloyds insurance funds but, over the last year, all bar a couple have sold out. The vote in 2008 requires 75% majority of the capital shares to vote for a continuation and this looks unlikely unless the rating changes dramatically. Therefore, the discount has to reduce one way or another. This together with the fund’s target LIBOR +3% return for capital shares makes this an interesting investment.

This month we are revisiting a fund reviewed in 2005 simply as it has changed markedly since then. The fund, which is categorised as a split capital property fund, is massively geared with bank debt, convertible loan stock, zero dividend preference shares and ordinary shares. Even though it got caught up in the split capital problems of 5 years ago, the underlying property portfolio has performed extremely well. The property portfolio has been centred around Dublin which has seen unprecedented growth and development. The managers, Treasury Holdings, who incidentally own over 50% of the ordinary shares themselves, have been very successful in obtaining planning permission for the development of a number of high profile retail developments around Dublin.

Although this is all very interesting, what makes the Fund of ‘real’ interest is a couple of transactions that were announced in December. The first has been missed by virtually everyone and involves their first foray into China through their London listed subsidiary, China Real Estates Opportunities. The second, which is more material and newsworthy, was the purchase of Battersea Power Station and surrounding land. Although this is a large project requiring a large capital outlay, it is no bigger than some of their existing Dublin based properties which have required little internal funding. We believe that REO will unlock substantial value from this property.

The holding was originally purchased in early 2005 and has more than doubled since then and we believe that there is much further to go.

Again this month, we are focusing on a new issue, albeit a fund which listed without the usual fanfare normally attached to a new issue. For some time, SVM have been searching for a fund that invests in small and mid sized Russian companies. To date, most of the gains in Russia have been concentrated on the larger companies which now appear to be fully valued. We have invested with Prosperity, who specialise in this area, through their offshore funds and requested, along with a number of interested parties earlier in the year, a fund which would have more visibility.

The result is the Voskhod fund, which means ‘sunrise’ in Russian. The fund was launched at the end of September in partly paid form (the balance of 50% is due in January) and was one of the last AIM quoted companies to be allowed in partly paid form. As at the end of November it had invested 90% of its first tranche and has already committed to invest approximately 75% of the fully paid amount.

Its principal investment focus is on small and mid sized listed companies that will benefit from the expected restructuring and consolidation of Russian and former CIS economies. It will have a concentrated portfolio, one of Prosperity’s strengths. They are value investors by nature and typically take a hands-on approach.

The fund has started well and is currently trading on an approximate 10% premium at the time of writing.

Again this month, we are focusing on a new issue, albeit a fund which listed without the usual fanfare normally attached to a new issue. For some time, SVM have been searching for a fund that invests in small and mid sized Russian companies. To date, most of the gains in Russia have been concentrated on the larger companies which now appear to be fully valued. We have invested with Prosperity, who specialise in this area, through their offshore funds and requested, along with a number of interested parties earlier in the year, a fund which would have more visibility.

The result is the Voskhod fund, which means ‘sunrise’ in Russian. The fund was launched at the end of September in partly paid form (the balance of 50% is due in January) and was one of the last AIM quoted companies to be allowed in partly paid form. As at the end of November it had invested 90% of its first tranche and has already committed to invest approximately 75% of the fully paid amount.

Its principal investment focus is on small and mid sized listed companies that will benefit from the expected restructuring and consolidation of Russian and former CIS economies. It will have a concentrated portfolio, one of Prosperity’s strengths. They are value investors by nature and typically take a hands-on approach.

The fund has started well and is currently trading on an approximate 10% premium at the time of writing.

This month, we are focussing on a new issue. Generally, we are reluctant to invest in new issues, preferring the comfort of a visible and mature portfolio, track record and hopefully a discount. However, every so often, an idea appears which makes it interesting to consider an investment day one. We believe that Low Carbon Accelerator is such a fund. The timing appears most opportune as almost daily there are news stories concerning climate change and carbon emissions. A number of countries are already some way down this path - there are 48 countries that have policies to promote low carbon energy - but many, especially China, India, Russia and the US, have been reluctant to take a stance to date. This month is particularly interesting given the mid-term elections in the States. Any shift towards the Democrats should aid acceptance of what we believe is a growing consensus - man is destroying this planet.

Prior to listing, the fund had already sourced investments equivalent to half the funds raised and believe that they would be fully invested well within the year. To date, this is the only fund targeting fast growing unlisted low carbon companies. It appears that there are few competitors and fills the gap between government incubators and pre IPO / IPO funding. The fund reduces risk by investing only in companies with proven technology - it does not invest in 'blue sky' companies or in carbon trading. The managers have extensive experience in this area and are concentrating on UK, Scandinavia, Germany and California, where low carbon emissions are a priority.

This month, we spotlight a fund which is a real special situations fund and is a natural complement to two other funds (Principal Capital Holdings and Strategic Equity Capital) held within the portfolio. Its investment objective is to produce capital growth (income is definitely secondary) from a portfolio of equity and equity-related investments in predominantly UK medium and small companies. The majority of the holdings are in companies that are considered to be valued at a substantial discount to their intrinsic valuations and the managers have a history of extracting value from portfolio investments. Although predominantly a portfolio of listed investments, there are a number of private companies which in time should be realised either through IPO’s or trade sales. The mix of holdings makes the fund both defensive and also relatively uncorrelated to the general market.

Oryx is managed by Christopher Mills of JO Hambro, who is also a major shareholder in the fund. Recently Oryx, which was a relatively small fund at £30 million, took over Baltimore (c£15m), which itself had taken over Acquisitor Holdings earlier in the year. To make things even more complicated Oryx is merging with another fund, American Opportunities Trust (c£20m). At the end, Oryx will be capitalised at approximately £65 million. The Fund bought ‘C’ shares which arose from the Baltimore takeover. We believe that these were bought on a near 15% discount. Both Oryx and its sister fund, North American Smaller Companies, operate an aggressive share buyback program in order to increase asset value and keep discounts narrow. The current valuation looks anomalous.

This month, we are highlighting a relatively new investment and a split capital fund at that. Normally, as regular readers will recall, we tend to shy away from splits unless they are demonstrably the wrong price.We believe Equity Partnership to be such a fund. The fund has a relatively defensive ‘balanced’ portfolio and invests predominantly in the UK in a combination of quoted and unquoted equities, bonds and investment funds. It has a full range of share classes with zeros, income shares, capital shares and warrants. Until fairly recently, the fund was largely ignored by investors and brokers alike with the majority of the underlying shareholders being the original placees, principally Lloyds insurance companies. However last month, the majority of these holders sold with their holdings being placed out at a substantial (20%+) discount to asset value.

With the good asset value performance, the discount should not be languishing at current levels.We believe that this together with the impending warrant expiry to be the catalysts to unlock the value within the fund.The warrants expire towards the end of this year and are currently out of the money.The managers are therefore incentivised to try and get the share price of the capital shares well above the warrant strike price or the warrantholders will not exercise. Finally, the valuation policy of the unlisted investments appear very conservative and it is not inconceivable that there is hidden value there to be unlocked. Others 14.2% % ML Japan Enhanced Performance 3.7 ML Latin American IT 2.5 Jupiter European Opportunities Trust 2.2 Equity Partnership 1.8 Investec Asian Equity Fund 1.7 Others 2.3

This month, we are re-visiting a fund first highlighted in 2003. At the time of the original investment in 2001, Baring Vostok was a real rarity - a private equity fund investing in Russia and a successful one at that. Since launch, it has already returned cash to investors in excess of 50% of the original investment with the remaining portfolio investments being valued at 4 times cost. This clearly demonstrates the attractions of investing in private equity at the right time of the cycle in an attractive market.

At the time of the original investment, its manager, Mike Calvey, had already demonstrated his ability with his previous fund, First NIS Regional Fund, in which, incidentally, SVG also made excellent returns. A further investment in his new fund was therefore a relatively easy decision. The eventual portfolio proved to be relatively concentrated with around 20 investments.

Although the speed of realisations has increased in the last year or so, there still remains substantial value within the portfolio with approximately 14 investments still to be realised. In particular, two investments account for approximately half of the portfolio.The largest holding, StoryFirst, recently listed on NASDAQ at a material uplift to carrying value and is being sold as and when market restrictions allow. The second largest holding is in Yandex, the Russian equivalent of Google, and is valued at a substantial discount to perceived value.

As a departure to the norm, this month we are focusing on a small company rather than a fund. The holding in ToLuna was spun out of the holding that the Fund has in Eurovestech. As previously reported, Eurovestech has three major investments, KSS,ToLuna and Magenta, of which ToLuna is the only one that is currently listed.

Founded in 2000, ToLuna has substantial experience in conducting online research, setting up and running online panels and providing solutions for information gathering and panel management. Formerly known as Cjudge, based in Paris and London, it successfully listing on the London Stock Exchange in May 2005 and its share price has more than doubled subsequently. Compared to traditional research tools, internet-based surveys are quicker, more efficient and highly focused and therefore more valuable to clients. In the US, online surveying has grown rapidly from approximately 9% of the survey research market in 2000 to an estimated 29% in 2005. Europe is some way behind the States, at less than 5% currently and is expected to follow this trend.

ToLuna has a low cost base, profitable and extremely cash generative. In addition it trades at a material discount to its piers. It is probable that it will be bought out by one of the larger businesses in this area who wish to get access to online clients. ToLuna's extensive client list includes France Telecom, Ikea, KPMG, Dior, Mercedes-Benz,AOL and ING Direct.

A small position was taken, at launch, in this fund of hedge funds. The fund's investment objective is to seek long term capital appreciation through investment in a diversified multi-manager, multi-strategy portfolio of hedge funds investing principally in Asia, including Japan. The fund is targeted to achieve a sterling net annualised return of in excess of 12% with a volatility of less than 10%. Typically this will be achieved through a portfolio of 25 - 35 underlying funds with a low correlation to market returns of the broad equity and fixed income markets. We were attracted to this fund as it is necessarily not long biased at all time; a number of fund of funds have a tendency to generate a proportion of their returns through market exposure rather than alpha generation. Although KGR have been operating for only three years in its current form, the principals - Messrs Knox, George and Rampton - each have more than 25 years of experience in the region in a variety of investment strategies.

As volatility has been at historic low levels, many hedge funds are finding it difficult to generate the return characteristics without substantially increasing the risk profile. Due to the nature of these underlying investment strategies, KGR should be able to generate the returns that we require without increasing the risks. To date, the fund has started well with positive returns in each of the first four months. Obviously, the quality of their fund picking will be tested in adverse markets.

Investors will no doubt have been bombarded with new fund issues of late; many of these are property funds investing in weird and wonderful places (India, Macau and Vietnam to name but a few). Our view is that these funds, which are in the second wave of new property issues, may become interesting in the future but really not at issue. However, there are a number of specialised property funds already in existence, with strong management teams and credible track records. DCI is such a fund. It is listed on the junior AIM market and managed by a team that was for a number of years worked for George Soros's European real estate fund.

DCI is one of the first and largest real estate fund dedicated to south east Europe, principally Greece. It is currently more than 50% invested with the balance being committed much earlier than originally planned. These countries are beginning to become popular with buyers of holiday houses as the existing stock in Spain, Portugal and the Balearic Isles have become overpriced. Underlying house prices, which have been at extremely low levels, have started to rise as interest has increased. In response, there has been a flurry of new builds. DCI have focused in the high-end area of the market. The first formal revaluation of their property book is due to be announced in June and we believe that this will only increase the interest in the fund. Since launch, the fund's share price has risen 40%.

This month, we are looking at a fund in which SVG has had a holding for a couple of years but in which additions have recently been made. The fund, whose remit is to invest in natural resources, is a sister fund to Resources Investment Trust and was launched, as a number were in 2001, as a stock swap. Companies requiring capital would swap their equity for equity in Ocean. Thereafter, they would raise the cash that they required to finance their operating activities by selling their Ocean equity in the secondary market. However, the one glaring flaw in this is the resulting Ocean shareholders tended to be "value" investors who did not have a long term investment view. Indeed, more than half of the shares in issue a controlled by four investors - three of which can be loosely categorised as arbitrageurs. Resources IT has been particularly successful in proving up value with its portfolio and its share price has been strong. Ocean, on the other hand, inherited a much less mature portfolio and it has taken a longer time to season its investments. However, our belief is that now is the opportunity for material share price performance as it has a maturing portfolio in an attractive asset class, a sizeable discount, a hawkish shareholder register and a 2007 wind-up date. In particular, management are highly incentivised to create shareholder value through a remuneration package which is heavily skewed towards incentive rather than annual management