Best International Managers Fund

On average, BIM fund has returned 17.21% pro forma since 1997 in USD with a standard deviation of 6.45%, less than half of the MSCI world's volatility. The pro forma portfolio has shown the ability to capture the upside during good years of performance, and limit the downside during negative years, even delivering positive returns.

US Stocks

Last Friday, GE said that the company is planning their future without Honeywell, and foresees no more talks with European regulators over the $45 billion purchase. The company conceded that the European Commission (EC) wants so many concessions that it is not optimistic that it will complete the purchase. The commission, the regulatory agency of the 15-nation EU has until the 12th of July to rule on GE's proposal. If rejected, it would be the first time the commission has acted alone to kill a US transaction.

A lot of hedge funds were involved in a substitution trade by selling their GE and bought the equivalent amount of Honeywell. The arbitrageurs that put the trade on are way under water in their mark to market. For those who have not unwound the positions must be holding out (hoping) for the US government to step in.

The EC's demands seem too tough, and the logic behind it appears to be political. If it is Airbus they are trying to protect, then the EU would probably be ready to go to war over the deal, and ultimately if the deal really does fall apart, there will be repercussions from the US government. Perhaps a trade war should not be far behind.

Meanwhile, GE stocks should benefit from the unwinding of this trade as the arbs scramble to cover their positions. We have GE on our buy list, and the current level of $49.00 looks attractive.

Last week we have seen profit warnings from companies ranging from fast food, consumer staple, airlines to telecommunication equipment. This confirm our cautious stand on the market, as we believe the earnings recovery may be delayed to the 1Q or 2Q of next year. The rally in April was based on the optimistic outlook of the companies themselves, and the market was ahead of itself.

Europe

In our last three 'weeklies' we wrote about the markets' earnings expectations and investors' degree of denial still being too high, in particular in the technology sector. With this week's profit warning of high profile companies such as Nokia, STM, Philips, JDS Uniphase and Nortel, to mention just a few, it has become obvious that there is no recovery in sight for the next few quarters. Even though these warnings might imply that it is especially the communications hardware industry that is hit hard, we would question this and expect software and especially IT services companies to warn soon. The Europe STOXX Technology Index lost a whopping 19% in just one week!

Our main impression from attending a conference about European technology companies last week was that these companies probably know more about visibility than they were willing to communicate. It is pretty obvious that demand is simply absent due to massive capex reductions of companies. Even statements that inventory reductions are on track do not really sound convincing if JDSU's and Nortel's profit warnings are taken into account. We do not expect demand to come back anytime soon. So far the market expected earnings to recover later in the year as many companies postponed capex to the latter part of the year. We suspect that these delays might eventually result in an increasing rate of cancellation of orders. This let us conclude that earnings estimates, in particular for Q4 and eventually even for 2002, are still too high and will have to come down.

Should the economic situation continue to deteriorate we would argue that technology stocks are still far away from being cheap. Obviously, the key question at this point in time is what to do with existing holdings. We do advice long-term investors who are focused on industry leaders such as Nokia, STM, Philips etc. not to panic and sell aggressively unless big overweight positions are held. Technology companies are trading in cycles with the last cycle being the Internet cycle that started in 1995. We forecast that the next cycle will take some time to evolve but are convinced that it eventually will. Despite the currently negative sentiments towards 3G we believe that this could be the next cycle starting in two to three years. However, short-term investors and investors with holdings in second-tier companies are still advised to sell their positions as we do not see any improvement in the months ahead.

The fact that the European slowdown is gathering speed is not only reflected in last week's profit warnings but also in the increasing number of revisions of economic growth for this and next year. CSFB revised European 2001 growth down to 1.9% (from 2.3%) and to 2.3% (2.4%) for 2002. This had a negative impact on cyclicals as economic growth will be postponed. Despite last week's sharp decline in stocks like Pechiney (PEC FP; EUR 53.50) and Lafarge (LG FP; EUR 102) we believe that these stocks are still attractive in terms of valuations and business strategy. Pechiney lost 14% last week without any 'hard' fact. We mainly attribute the sell-off to profit taking due to the economic bad news rather than to the decline in US energy prices. For the time being we find that our call on aluminium remains intact and maintain our positive stance on the stock.

Nokia (NOK1V FH; EUR 26.05) reduced its sales and profit forecast despite recent confirmation of earlier guidance. The company now expects EPS to be at around EUR 0.15-0.17 (earlier: EUR 0.20) and sales to grow less than 10% compared to the previous 20% forecast. The number of total handsets sold will be little changed compared to 2001, which equals about 410 million (previous forecast: 450-500 million). Nokia cited a sudden halt to demand due to economic weakness as the main reason for the sudden change. The company will give further guidance on July 19, 2001, when final earnings are released. Despite the outstanding quality of Nokia, we expect the stock to remain depressed in the medium-term.

As mentioned in our last weekly Philips (PHIL NA; EUR 28.24) issued a profit warning due to the weakness of its semiconductor business. The company now expects a 2Q01 operating loss of EUR 175 million including a EUR 90 million one-time charge. We remain cautious on Philips in the medium-term but maintain our positive long-term stance.

STM (STM FP; EUR 37.30) cut its 2Q01 sales forecast to EUR 1.55-1.6bln from 1.65-1.8bln. STM expects margins to be below the low end of guidance due to the increasing price pressure and said that an aggressive cost cutting programme was set in place. We remain convinced that STM is one of the best players in this distressed sector. However, in the medium term we see not much room for improvement.

Lufthansa (LHA GY; EUR 20.10) issued a profit warning due to higher fuel prices and higher costs for the wage settlement. The company expects 2001 profit to be at around EUR 750 from EUR 1bln. Given the sharper than expected economic downturn in Europe we decided to take a 4.6% loss and sold the stock. Airline stocks are highly cyclical and we believe that a further deterioration of the economy is not fully priced here.


Alternative Investments

We'd like to highlight this new offering not because it's an in house product but because of the powerful combination of alternative managers under a single portfolio.

The positives are several: multi-managed, diversified portfolio of alternative managers, total return emphasis, low dollar entry for investors, daily liquidity.

We present some of the managers featured in this portfolio and let you be the judge over their performance.

A. Perry Partners International, Inc.

• Event driven investing, involving purchase and sale of securities of companies which are undergoing substantial changes.

• Established by Richard Perry in 1988 after leaving Goldman Sachs

• 5 year average annual return is 19.53%, standard deviation of 7%, sharpe ratio of 1.88

B. Zweig - DiMenna International Ltd

• Equity long short in the U.S. market. Uses traditional bottoms up stock selection

• Fund has at least 200 to 250 different stocks, actively traded

• One of the longest running fund of it's kind, established since '84.

• Never had a down year for the past decade

C. Maverick Levered Fund Ltd.

• Leveraged equity long / short fund.

• A true hedge fund ie: low net exposure to a region or industry that the fund invests in

• No emphasis on market direction

• Average annual return for five years is 24.51%, Sharpe ratio of 1.4, standard deviation of 13.70%

D. The Grossman Global Macro Fund, Ltd.

• Quantitative driven investments focused on finding discrepancies in asset valuation on a global scale.

• Investments are primarily through currency, futures, forwards, and stock index and bond futures

• 3 year average annual return of 21.49%, standard deviation of 16.06% and sharpe ratio of 1.03


E. AHL Alpha plc

• Quantitative driven, trend following derivatives portfolio, long short strategy

• Trades in the most liquid markets only (futures, interest rates, energies, metals and foreign exchange)

• Average annual return over 5 years is 23.39%, standard deviation of 15.30% and sharpe ratio of 1.19%

This is a sampling of five managers in the portfolio of 20 with varying styles and core competencies. On average, the fund has returned 17.21% pro forma since 1997 in USD with a standard deviation of 6.45%, less than half of the MSCI world's volatility. The pro forma portfolio has shown the ability to capture the upside during good years of performance, and limit the downside during negative years, even delivering positive returns.

We recommend incorporating this into qualified clients' portfolios with a 10% cap on total exposure to alternative investments.