CLOSER FISCAL HARMONISATION COMBINED WITH A HEALTHY CORPORATE SECTOR MAKE EUROPEAN EQUITIES COMPELLING

We outperformed the market in January. Despite the recent strong performance in markets, we remain very positive on the outlook for European equities. We believe that there is way through the Euro crisis. Bold action by the ECB coupled with varying degrees of austerity across the region and the beginnings of closer regulatory and fiscal harmonisation auger well for the European project. Combined with a healthy corporate sector and valuations that we haven’t seen for decades, European equities appear very compelling. Banks now comprise almost one quarter of the fund.

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EUROPEAN EQUITIES APPEAR VERY COMPELLING

We outperformed the market in November. We invested in the airline Air France-KLM. The group boasts the largest (13%) share of the long haul market out of Europe with a special focus on China, Latin America, Africa and the US. The company has embarked upon a dramatic restructuring of the business through the “Transform 2015” programme. Management aim to sharply reduce capex and capacity growth. Unit costs (ex fuel) are also planned to be cut by 10%. New, more flexible, labour agreements have now been struck with the pilots and ground staff. A deal with the cabin crew is expected early next year. Debt is to be reduced by some €2bn, aided by the sale of their stake in Amadeus. Current trends are very encouraging with revenues and operating profits up 5% and 39% respectively in the first nine months of the year.

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IMPROVED MACRO CONDITIONS COMBINED WITH A HEALTHY CORPORATE SECTOR MAKE EUROPEAN EQUITIES VERY COMPELLING

We outperformed the market in October. We purchased a new position in Novo, the world leading diabetes care group. The company boasts an extraordinary track record, having grown earnings by 20% per annum over the past 10 years. Novo also generates an impressive 36% operating margin and a 54% return on equity. The company, furthermore, holds net cash of DKK 13bn. The business should continue to manage over 10% per annum organic growth, in the future, driven by the increased incidence of obesity worldwide. In the short term, Novo are about to launch Tresiba, a long acting insulin, which should help boost revenue growth. Further out, Novo have a product Victoza, which could be approved to treat obesity from 2013.

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MARKET REMAINS COMPELLINGLY VALUED TRADING ON SOME TEN TIMES PROSPECTIVE EARNINGS

We underperformed the market in September. We purchased a new position in the Italian bank, Intesa SanPaola. Intesa is arguably the strongest Italian bank and amongst the best capitalised in Europe boasting a 10.7% tier 1 capital ratio and €40bn of excess liquidity. The balance sheet is, furthermore, relatively underleveraged having a loan to deposit ratio under one. The bank has also worked hard to cut costs announcing the closure of 500 branches and 6,000 layoffs. The share appears particularly compelling trading on under half book value and nine times prospective earnings.

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INTERNATIONALLY POSITIONED EUROPEAN COMPANIES PRESENT COMPELLING BUY

We underperformed the market in August. We purchased a new position in the contract caterer Sodexo. Despite facing a challenging environment in Europe, the group has been able to generate 6% organic growth, driven by the rapid development of their emerging markets businesses (+16%) and continued strong growth in motivational solutions (+9%). The operating margin of the group should also rise significantly as the more profitable motivational solutions business becomes a larger part of the group. The integration of recently acquired catering companies should also boost profitability. The business, furthermore, currently generates an 18% ROE and is moderately geared (6 times interest cover).

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EXTRAORDINARY OPPORTUNITIES TO BUY WORLD LEADERS AT COMPELLING VALUATIONS

We underperformed the market in July. We bought a new position in Rolls Royce. We feel that the market is underestimating the value that Rolls Royce gleans from its long-term “Total Care” service packages, which will drive future earnings surprises. The very supportive airframe build market also makes us feel confident in this new position. We funded the purchase with the sale of our investment in Sky Deutschland and the reduction of our holding in Altran.

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EURO DEBT CRISIS CREATES OPPORTUNITIES

Anxiety about sovereign debt problems in the euro area is creating an extraordinary opportunity to buy world-leading European equities at compelling valuations. The market is trading on eight times prospective earnings, which is the lowest in four decades and more than a 40% discounts to US equities. Notably, the corporate sector appears to be in good shape. At the 450 company meetings we have held over the past six months managers have often expressed surprise at how well their businesses are developing.

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ANXIETY CREATES BUYING OPPORTUNITIES

Anxiety over Europe’s debt problems has created an extraordinary opportunity to buy world-leading European companies at compelling valuations. European equities are trading on eight times prospective earnings—the lowest valuations in four decades—and at over a 40% discount to their US counterparts, which is the widest gap in living memory. Its corporate sector continues to perform better than might have been expected. After five challenging years for the world economy, levels of profitability and indebtedness have improved. Although conditions have deteriorated in Spain and Italy, the US is recovering and there is continued strong growth from the emerging markets.

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FOCUSED ON HIGH-QUALITY GROWTH FIRMS

Our mandates outperformed the market in April. We made a new investment in BiC, the leading manufacturer of stationery, lighters and shavers (see stock highlight below). The core of the strategy remains focused on the highest-quality growth companies from a broad range of sectors, including technology, consumer and industrials, as well as some of the more cyclical areas of the market.

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