Dear Fellow Unitholders,

Global equity markets continued their recovery during the first quarter of 2010 and the Multi Strategy Fund and Value Fund delivered positive returns over this period. A great deal of the damage inflicted on global markets during 2008 and 2009 has been mitigated and the outlook is far more positive than 12 months ago. The table below highlights our performance for the first quarter of 2010, our performance for the year ended 31 March 2010 and the net inflows/outflows for each Fund.

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During the quarter a large majority of our portfolio companies generated improved operating performance as the global economy began to stabilize and corporate cost containment measures took effect. Because I do not believe I have a competitive advantage in predicting short term market or economic conditions, I continue to focus on a bottom up investment approach which results in the Fund’s focusing on companies / industries and sectors that are not frequently “en vogue”. It is important however to reiterate that an improving New Zealand economy should greatly assist both Funds’ performance in the near term. In the long term however, investment selection rather than macroeconomics or stock market direction will continue to be the principal determinant of our performance, as the substantial majority of our historic (and anticipated) profits have come from the narrowing valuation discrepancies between the price we have paid for our investments and fair value.

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There were several changes to the portfolio during the first quarter – mostly in the form of investment realisations:

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At present for the Multi Strategy Fund new investments remain small for primarily two reasons:

  1. I am firmly focused on “harvesting” from our existing portfolio of names when / if opportunities present themselves. For example, subsequent to the end of the first quarter we have had another positive development in the portfolio – Global Masters Fund (GFL) listed on the ASX – (which I will discuss in more detail at the upcoming unitholder meeting on May 12, 2010) – has announced an equal access buy-back at the 30 April 2010 NAV less 5%. For those that recall our recent letter to the Board of GFL (which can be found at: www.elevationcapital.co.nz/latestnews/letters) we had suggested the company look to return capital or distribute its holding of Berkshire Hathaway shares and cash to its shareholders. The Board of GFL responded positively to our (and other shareholder) suggestions. At every stage of the process to date (since we wrote to them in February 2010), the GFL Board have acted honourably and in their shareholders interests, this is despite the presence of a ~54% shareholder who could have blocked our proposals. Should we receive a cash payment in June 2010, as has been announced to the ASX, this will be a another positive result for the Fund and a clear example of the difference in corporate governance between a small cap Australian company and of our experience with small cap companies in New Zealand.

    At present, I hear this constant cry that there is no liquidity and limited international investor interest in the New Zealand capital markets. In my opinion, the primary reason for this is the continued poor governance and lack of capital management skills across companies in New Zealand which only serves to promote underperformance (in terms of returns on equity/assets), shareholder malaise and widespread investor apathy towards our capital markets. You can expect to see us pushing harder for tangible outcomes on a number of portfolio companies over the next 8 months.

  2. Despite a cash balance of almost 10%, the Multi Strategy Fund has limited capacity to make new investments. We have decided to keep a level of cash on hand so that we will not be selling stocks at inopportune times should markets decline and investors wish to redeem units. As we raise new funds, we intend to action some new investments that I have been researching and continue to build our cash buffer. As counter-cyclical value investors, we will often hold stocks which are not popular or that many investors are not interested in, but our strategy is to buy what is cheap and to sell what is more fully valued. It seems reasonable to expect that our New Zealand holdings will continue to, or undergo, a re-rating as/when confidence slowly returns to the New Zealand capital markets.


The Value Fund saw no positions reduced or exited during the first quarter reflecting its long term “bottom up” value approach. I have been researching a number of new investment opportunities and the current market weakness may present an opportunity to execute on some of these ideas in the near term. The Value Fund remains extremely well positioned with a robust cash balance as at 31 March 2010 of 31.20% and small but reasonably consistent inflows. In keeping with past letters where we describe important holdings in our portfolio, I would like to discuss our investments in Jardine Matheson Holdings Limited and Jardine Strategic Holdings Limited collectively referred to as “the Jardines”.

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Founded as a trading company in China in 1832, today Jardine Matheson is a diversified business group focused principally on Asia. Its businesses comprise a combination of cash generating activities and long-term property assets. The Group’s interests include Jardine Pacific, Jardine Motors, Jardine Lloyd Thompson, Hongkong Land, Dairy Farm, Mandarin Oriental, Jardine Cycle & Carriage and Astra International. These companies are leaders in the fields of engineering and construction, transport services, insurance broking, property investment and development, retailing, restaurants, luxury hotels, motor vehicles and related activities, financial services, heavy equipment, mining and agribusiness. The Group also has a minority investment in Rothschilds Continuation, the merchant banking house. Incorporated in Bermuda, Jardine Matheson Holdings Limited has its primary share listing in London, with secondary listings in Bermuda and Singapore. Jardine Matheson Limited operates from Hong Kong and provides management services to Group companies.

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Why have we invested in “the Jardines”?

  1. A growing portfolio of businesses that are focused on the Asian consumer;

  2. Extremely well financed holding companies, management that is value focused and actively manage their capital. For example, Jardine Strategic recently undertook a tender offer for ~1.3% of its shares at a higher level than the share price at the time (the Value Fund did not accept the tender offer because it was still below asset value);

  3. Strong alignment of interest with the Keswick family and management owning ~16% of the Group. Additionally, Jardine Matheson owns 81% of Jardine Strategic and Jardine Strategic in turn owns 54% of Jardine Matheson so collapsing the structure will make sense at some point in time which will serve to reduce the discount to the underlying asset value;

  4. Both stocks are trading at significant discounts to “look through” Net Asset Value (NAV), based on the market price basis of the underlying listed holdings, and on an intrinsic value basis.

Closing Remarks

It seems reasonable to expect heightened volatility in the months ahead due to sovereign debt issues in Europe and banking sector regulation (including vilification) in the US. While I can provide little additional insights I believe this will prove to again be a period where we should seek to capitalize on the nervousness of others in the markets. In terms of the Multi Strategy and Value Fund portfolios I remain focused on both “harvesting” from the current portfolios (when/if catalytic events occur) and seeking out new investment opportunities. However, while I continue to believe the general direction of the markets is likely to be up, investors will still require an abundance of patience over the next few years. We own some wonderful global and domestic franchises – the Fund’s own fractional interest in these businesses - sometimes the best thing to do is just sit with such companies for long periods of time and allow the power of compounding to work for us.

I remain optimistic about our chances for earning reasonable rates of returns in the current environment.

Thank you to all of our investors for your continued support and interest.

Yours Sincerely,

Christopher Swasbrook
Elevation Capital Management Limited