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April Commentary

April has a reputation for being a bit dreary in temperate climates and many of us have experienced a rather gray month. However, we encourage you to look beyond the clouds. At Ballin Temple the daffodils have passed but bluebells are beginning to carpet the woods and rhodedendrons are blossoming. And we expect to begin to harvest spinach and other tasty vegetables soon. In this paradise it is easy to forget that there are real challenges around us, but pictures of war and stories of natural destruction arrive by radio wave or telephone line keep us aware.

Public Markets

The listed markets continue to show volatility. Short term trading strategies and derivative based strategies can be attractive in this environment, although it is not our policy to pursue these approaches. The markets seem to wish for direction, and that it be upward, but a number of issues are preventing momentum building. Interest rates are increasingly expected to rise, because prices are picking up, but employment has not yet followed the economic growth. Iraq is a worry and the likelihood of a continuing conservative government in the US is waning, and with it the benefits of investing with the establishment. Credit expansion is recognised to be fuelling growth and unprecedented levels of consumer debt are a worry. We continue to serve clients by selecting companies that we believe are priced reasonably, have decent management and balance sheets and will be able to weather a downturn. But a recent publication by John Maudlin describing his book Bull's Eye Investing suggests a very cautious approach to investing in listed companies. The article is linked below and here is an extract and a table that paints the picture: the bull market has now given way to the long term bear:

Since 1800, traditional analysis suggests there have been seven secular bull markets and seven secular bear markets. The average real [i.e., inflation-adjusted] return in a secular bear market is 0.3% (even in a falling market investors receive dividends). The average return during a bull market cycle is 13.2%. Not coincidentally, this averages out to the 6.7% the Ibbotson study (among many others) tells us that stock investments return over the long haul.... The average length of bear markets is almost 14 years, and for bull markets is almost 15 years. The average complete cycle of a combined secular bull and bear market is 28 years.

                 Starting  Ending  Cumulative
                       P/E*     P/E*    Return** 
1901-1920: BEAR     23        5        1.4%
1921-1928: BULL      5       22      316.7%
1929-1932: BEAR     28        8      -80.0%
1933-1936: BULL     11       19      200.0%
1937-1941: BEAR     19       12      -38.3%
1942-1965: BULL      9       23      773.0%
1966-1981: BEAR     21        9       -9.7%
1982-1999: BULL      7       42     1213.9%

*The P/E ratio is based on the S&P 500 as developed and presented by Robert Shiller in Irrational Exuberance.
** The returns reflect the Dow Jones Industrial Average at year-end.


Thanks to Matt Richley and The Motely Fool for the reference.

Venture Capital

Although a pick up in commitments to VC funds apeared to be dawning in the last quarter of 2003, but recent Q1 numbers for the US are disappointing. A number of funds are in the market but investors' preference to invest near year end is blamed for the deceptive uptick in Q4 2003. Other fund types – LBOs, fund of funds etc – seem to be faring better.

A significant recent phenomenon has been the launch of Business Development Companies (BDCs), which allow public fund raising for venturesome investment through a US SEC qualified type of holding company. A number of issues have been mooted: Private equity firms are doing this because they can, staffing levels and experience do not match the type of capital being raised and the implications for the incumbent players may be unattractive. (Similar to what appeared to happen in 1998/9 in Asia when big money rushed into Asia from Europe and US without due regard for the real value and risk profiles in those markets.)

Alongside this rush to BDCs, there has been recent attention on the ethics of the private equity industry in the US. This includes the conflicts faced by gatekeepers or consultants who pre-screen funds for public investors. The SEC is making investigations because these consultants receive fees from public pensions for evaluating funds, but they may also generate fees from the funds themselves for other advisory work. There are also increasing reports of inappropriate gifts being made. Principally this appears to be in the realm of public pension money, where resources may be lower than in private managers. It remains to be seen whether this will get the same kind of media play that other fiduciaries have been getting for the last couple of years.

This concern over transparency is also increasingly felt in Europe as attention is paid to accounting rules and reporting standards. While guidelines appear to be very good, there is some concern over the ability to see through what is disclosed to what performance or risk profiles are really there. This is not yet food for media and attention is being paid by EVCA which is concerned that IAS 27 and the requirement to consolidate accounts due to come into effect by January 2005 may obscure the picture. Investors too should ask for transparency in disclosure, not just complying with regulations, and should be aware that the risk profiles of private investment are very different from normal bond or stock market holdings. In fact, because successful companies often lose money early on, it may be difficult to become comfortable with the dynamic of venture capital investments.

A recent report from the Kauffman foundation highlighting the role of female managers in venture capital particularly struck us, because of our recognition of the benefits of varied perspective in screening and managing investments. The report indicates a decline in the role of female managers at VCs and investee companies. It only covers the period 1995 – 2000, but does not bode well for the quality of management. It is available here: http://www.kauffman.org/pdf/Diana_2004.pdf

Many thanks to Dan Primack and Private Equity Week for keeping us in the loop on a number of stories.

Geopolitics and Economics

The war in Iraq seems to be taking on a life of its own. In April more US soldiers were killed than in the “war proper”. Stories of US and UK soldiers torturing Iraqis are also emerging – another illustration of the danger, if not immorality, of pursuing a belligerent solution to Iraq's political and economic challenges. While developments in Iraq may be affecting the popularity of the US administration, it seems that there are other issues which will impact the Bush government succession in November which all relate to a general concern about the administration's ethics. This is ironic in light of the Republican indignation raised against Clinton's administration and its deep association with the Christian coalition and Bible belt. The initiative to force a transition government in Iraq by the end of June is worthwhile, but we must remember that Iraq is more than just an American problem. And requires a cooperative solution.

In fact our greater concern is an increasing tension between America and the rest of the world. This extract from Die Welt may be exaggerated but illustrates a common perception, which we must avoid.

The worldview of the average German in 2004 in seven sentences: Bush is stupid and evil. Iraq is the new Vietnam. America is doing virtually everything wrong. Sharon has himself to blame for the Palestinian terror. Israel has gotten us into this whole quagmire. Germany has thank God stayed out of it. Now we just have to be careful that our nice democracy isn't turned into a police state by unnecessary security fears.

You think I'm exaggerating? A little! But when you listen in on the conversations at the watering holes of the leftist establishment - and much worse still - at the salons of the so-called bourgeois camp, you will rediscover these elements.

The original (in German) is here: http://www.welt.de/data/2004/04/21/267596.html

We know, however, that America is not a culprit but a victim of the times in which we live and exacerbating tension with virulent rhetoric does not help. Certainly we need to reduce terrorism, but as with other problems like poverty and disease, conflict and belligerence do not help while cooperation and education does. That is why we do not commit capital to military endeavour, but rather invest in education. We are wary that polarisation of opinion can be dangerous, but are hopeful that the tension will encourage more sustainable solutions to global problems. We encourage a peaceful and thoughtful approach by business and thought leaders - “do to others what you would have them do to you”.

Turning to trade, an interesting and relevant milestone has occurred with the WTO upholding Brazil's complaint over US subsidies for cotton producers. This particular item has been a reference point for many since the collapse of Cancun and if the judgement of wrongdoing is upheld in June, it will be a great advance for global trade, poverty alleviation and the maturing of the US economy. The US administration is expected to appeal especially since it is an election year and much political funding comes from US agricultural conglomerates. However, we can conjecture that this ruling will accelerate the move to more sustainable practices in global agriculture and food distribution.

In Europe the big news is the expansion of members states from 15 to 25. While the impact will be gradual and the transition long we expect an improvement in the competitive tension in Europe, particularly in food and agriculture. Eight of the ten accession countries are from “Eastern Europe” and will bring in to the work force a considerable population of productive labour at competitive wage scales. These countries' economies are weighted more heavily to agriculture than incumbents' and often this is undertaken in a clean and/or more sustainable way. The ability of these countries to produce premium product to feed European consumers demanding quality food is already in place. Lithuania for example is now a hub of the meat testing and processing industry.

The new members will receive significant grant aid for infrastructure improvement and we expect significant growth and opportunities in these states, especially those economically closest to the current 15 (eg Lithuania) and those expecting greatest concessions (eg Malta). We do however regret the inevitable passing of traditional systems, especially smallholder agriculture. Poland now supports numerous sustainable rural units, but, regrettably, we can expect these to be wiped out in a matter of years.

The investment environment in these countries will be improved overnight as certain categories of FDI risk are brought into a more standard framework. This additional economic power in Europe will aid in a counterweight to US supply and demand and generally tend to improve global trade tensions. However, the political administration of the new European Union will be more challenging. This combined with the ongoing negotiation of the European constitutional treaty will demand increased compromises, particularly from incumbent states.

In Asia concerns over the increasing impact of China continue to mount. We have seen increasing attention paid to the volatile growth of the economy and recent statements by the Chinese administration indicate that they too have increased the priority to moderate growth and corruption. This will directly impact the risk profiles of financial investors in China who are often concerned with relatively short term investment horizons.


On the IT front Lindows Inc filed for an IPO. Lindows has pioneered a userfriendly desktop linux installation which retails for about $ 50 (including OS and applications). It was forced to change its trade name by Microsoft suits outside the US (although in the US Lindows won the cases) and now trades as Linspire. We have tested this software successfully although now we use a standard linux distribution.

GRI Equity Resources

The inaugural meeting of the UK chapter of the World Future Society offered valuable ideas relevant to strategic development and organisation planning. Notes on an excellent presentation by Dr Michael Maynagh are here and an extract from the Tomorrow Project site describing future planning is here.

We have recently enlarged our bibliography. For those of you interested in investment, ethics/philosophy and sustainability we recommend a visit. Additional volumes are noted/reviewed on our sister site's bibliography here, and include a wider spectrum of LOHAS reading which is particularly relevant for those interested in child development and adopting balanced lifestyles (which has been mentioned to us by many recently).


This report has been prepared for information purposes and is not an offer, or an invitation or solicitation to make an offer to buy or sell any securities. This report has not been made with regard to the specific investment objectives, financial situation or the particular needs of any specific persons who may receive this report. It does not purport to be a complete description of the securities, markets or developments or any other material referred to herein. The information on which this report is based, has been obtained from publicly available sources and private sources which may have vested interests in the material referred to herein. Although GRI Equity and the distributors have no specific reasons for believing such information to be false, neither GRI Equity nor the distributors have independently verified such information and no representation or warranty is given that it is up-to-date, accurate and complete. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates and/or their directors, officers and employees may from time to time have a position in the securities mentioned in this report and may buy or sell securities described or recommended in this report. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates may provide investment banking services, or other services, for any company and/or affiliates or subsidiaries of such company whose securities are described or recommended in this report. Neither GRI Equity nor the distributors nor any of their affiliates and/or directors, officers and employees shall in any way be responsible or liable for any losses or damages whatsoever which any person may suffer or incur as a result of acting or otherwise relying upon anything stated or inferred in or omitted from this report.

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