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Strategic Value Fund Investment Report

December 2009

After the authorities’ massive bailouts of the economy and the financial system through unprecedented monetary and fiscal policy, the spotlight is moving slowly but inexorably towards governments’ finances. The concerns about Dubai World’s ability to continue to pay its debts and Fitch’s cutting of Greece’s credit rating are but the first examples of this. Governments underwrote the entire financial system, from deposit banks to money market funds, putting at stake their balance sheets and credibility. The world is now waking up to the fact that this was a huge gamble, and that we might not walk away scot-free.

The real test of the economy, and asset prices, will be when governments remove the extra-ordinary stimulus of their fiscal and monetary policies, and start putting their fiscal houses in order. This might be done at a time of their choosing, or, frighteningly, they might be forced into it by the movements of markets. The time when almost all assets were moving in one direction (i.e. up) is over and we will start to see winners separated from losers.

The goal of our style, as ever, is to protect and to grow the long term buying power of our clients’ capital. One advantage of our style (and it is a big one) is that we do not have to try to predict the short term movements of markets. Firstly, we search continuously for undervalued stocks. Secondly, we do as much as possible to achieve true diversification in our portfolio. Lastly, we must be patient; the market will recognize undervalued assets in its own time. It never fails to fascinate us how difficult the third part of the process is.

Stock of Interest – Lerado

Lerado Group designs, manufactures and distributes a wide range of infant and pre-school products including baby strollers, beds, high chairs, bouncers, car seats and boosters. For the most part, they manufacture products for leading brands in the USA and Europe (accounting for 70% of their revenue), but they have recently developed their own-brand of products under the name “Angel” to be sold in mainland China.

We first bought shares in Lerado for the Strategic Value Fund in April 2009 at HK$0.48. Unloved in a nervous market, the company was then trading at exceptional valuations (at less than half of the tangible book value, on less than 6x trailing earnings and with a dividend yield in excess of 10%). Whilst this is not a huge growth business (revenues and profits have been reasonably stable for the last ten years), we were confident that the valuations did not reflect a good quality company operating in a fairly defensive sector (spending on infants tends to be more robust than other consumer sectors in challenging economies).

Since April, the price has run up to over HK$1.00, but we feel this still represents excellent value, and are very happy holding this company as a circa 5% position.

Performance Commentary

The Fund has underperformed global stock markets since inception in April 2009. This has not been especially surprising to us when one considers the speed of the move of the markets and the stocks that have been driving that move.

Over the course of the cycle, we remain confident that the Fund will outperform and deliver good absolute returns as our stocks benefit from recovering earnings and a re-rating by the market.

The Fund is denominated in sterling, but the exposure of the Fund remains truly international. We continue to believe that the right strategy is to ensure that the Fund is not overcommitted to any one currency.

Performance in Pounds Sterling

Fund data as at 31 December 2009

Top 8 Stocks

Unit Price

As at December 31 2009: 79.28p (unit price at inception, 30th April 2009: 70.08 pence)

If you have any questions on KAM or the Strategic Value Fund please contact Peter Boyle on +44 (0) 7912 760 033 or email us at enquiries@kennoxam.co.uk.

Our website is www.kennoxam.co.uk.

This document has been issued by KAM, which is authorised and regulated by the Financial Services Authority. It is important that you read this information before proceeding, as the distribution of the information contained in this document in certain countries may be restricted by law and persons who access it are required to inform themselves of and to comply with any such restrictions.

The information in this document does not constitute, or form part of, any offer to sell or issue, or any offer to purchase or subscribe for shares, nor shall this document or any part of it or the fact of its distribution form the basis of or be relied on in connection with any contract. Interests in any investment funds managed by KAM will be offered and sold only pursuant to the prospectus relating to such funds. An investment in the Fund carries a degree of risk and is not suitable for retail investors. KAM has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and no assurance can be given that the stated investment objectives will be achieved. Investors in the Fund will not benefit from the rules and regulations made under the Act for the protections of investors, or from the UK Financial Services Compensation Scheme.

KAM may, to the extent permitted by law, act upon or use the information or opinions presented herein, or the research or analysis on which it is based, before the material is published. KAM and its personnel may have, or have had, investments in these securities.
The information contained in this document has been taken from sources considered by KAM to be reliable but no representation, warrant or undertaking is given as to its accuracy or completeness.

The law may restrict distribution of this document in certain jurisdictions, therefore, persons into whose possession this document comes should inform themselves about and observe any such restrictions

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