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Charles de Vaulx: We have become net sellers of foreign stocks, and net buyers of U.S. stocks

July 23, 2006

Just a few weeks ago, the Market believed in a Goldilocks world, with synchronized global economic growth and low inflation. Today, the Market appears spooked by the prospect of stagflation, i.e. low economic growth combined with some inflation (particularly in the U.S.), a lethal combination for financial assets. We try to remain agnostic, although our focus on capital preservation forces us to worry about what can go wrong Charles de Vaulx instead of fantasizing about perpetual prosperity.

I would like to make three points:

1. After a huge run-up over the past three years, foreign stocks appear as expensive today as U.S. stocks. As a result, we have become net sellers of foreign stocks (in the Global and Overseas Funds), in places such as Europe, Japan and South Korea. Nonetheless, our quest for new investment ideas is ongoing and we have found a few securities to buy overseas including in the retail and telephony sectors. Conversely, we have become net buyers of U.S. stocks, including in the media, technology and food & beverage sectors. Still, we find the U.S. market pricey and the Global Fund has still more in foreign than in U.S. equities while the U.S. Value Fund struggles to put its cash “to work’’.

2. Corporate activity (takeovers, going private transactions, shareholder activism) has been vibrant around the world. I would not interpret this as a sign that stocks are under priced in the market place (trading well below their “intrinsic value’’), but rather a sign of over abundant liquidity, the result of years of ultra low interest rates and thcorresponding temptation for investors to reach out for yield.

3. Until a few weeks ago, every asset class had done well (stocks, emerging markets, commodities, real estate, collectibles, art), including gold. As a result, traditional asset allocation may not yield the diversification benefits that were sought after.

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