UK Alpha Fund

Newsletter - July 2010 - Half Year Review

“Like going deer hunting without your accordion”

General Norman Schwarzkopf (on going to war without France)

Performance

By way of variety, the table below details 6 months, 12 months and “lifetime” (Sept 2007)
performance against benchmark and peer group. Sad to say, we failed to defy gravity in June so
NAV has dropped below 100p again and the year-to-date return slipped into negative territory.

Peer
UK Alpha FTSE ASI Relative Group Rank Quartile Relative

YTD (to 30/6/10) -2.57% -6.15% 3.58% -4.31% 76/305 Q1 1.74%

12 Months 23.93% 21.14% 2.79% 19.75% 49/301 Q1 4.18%

Since Inception -1.82% -14.73% 12.91% -15.92% 20/284 Q1 14.10%

Past performance is not an indication of future performance Source: Capita, FTSE & Lipper

Commentary

The UK market has traded between 4900 and 5825 over the six months – roughly 9% either side of
the mid point – finishing very much at the bottom end of that range. (But for the specific problems
of BP, the index would mathematically be roughly 200 points higher). Our beginning of the year
prediction of a 12 month outturn marginally above the starting level of 5412 now looks almost
hopelessly optimistic – yet we stick with it.

Our central working assumption since the financial crisis has been the “muddle through” scenario
globally, with economic growth muted by the standards of the last 20 years and the heavily
indebted countries – such as the UK – contributing disproportionately to the muting process.

We were as uncomfortable with the euphoria over economic recovery prospects that peaked in
April as we are doubtful of the impending doom that currently engulfs sentiment – though it must
be said that the latter probably carries a great risk of self-fulfilling prophecy than the former.

Although the problems of the Eurozone are substantial (and in the case of one or two constituents,
intractable without real pain), the fact that this is now well recognised and that some of the
necessary steps are being implemented, gives grounds for cautious optimism; much worse is
pretending the problems don’t exist.

As important as our “muddle though” hypothesis, has been and remains our positive view on the
financial health and valuation of many large, well-established businesses. Generally, corporate
balance sheets and cash generation are strong, pricing is resilient because investment has been
limited (combination of internal discipline and external unwillingness to finance) whilst costs have
been rigorously controlled. Hence margins, returns on capital employed and thus free-cashflow
are robust.

1
We retain a residual concern that this cannot sustain indefinitely (profit share in GDP will likely
move lower over time), but judge that this is tomorrow’s worry rather than today’s, given capital
constraints and the perception of economic uncertainty.

Our preferred tests for general market valuation – measuring market capitalisation against GDP
and long term trend earnings – support our stock level analysis which delivers a good number of
candidates which surpass both “smell” and valuation hurdles. So you should expect to find that we
are pretty much fully invested; that is indeed the case (how’s that for an example of drawing the
target after the arrow has landed).

Portfolio Review

The portfolio structure – as we think about it – has changed little over the 6 months. We remain
biased towards international revenue streams and towards more cyclically - resilient products and
services on a look through basis; towards higher return on capital businesses; and towards those
with modest financial leverage (in relation to cash owner earnings). These are where our
screening process, valuation discipline and, to a limited degree, macro-economic view has led us.

We did not, for instance, set out to create a bias towards companies that serve the business sector
more than the consumer or government sectors; however, our factor risk assessment does
highlight that position whilst our intuition tells us not to counteract. Conversely, our relatively light
weighting in the mining sector reflects (a) governance issues in some instances and (b) some
considerable difficulty, in most cases, reaching a comfortable conclusion on normalised profitability
– and in a few cases even an uncomfortable conclusion.

We hold around 30 stocks at present, slightly more than we would ideally like, though the top
dozen positions (listed below) aggregate to over 50% of the portfolio – which we do like. Relative
to notional benchmark (FTSE ASI) we have a preponderance in FTSE 100 vs FTSE 250
constituents – again that is a product of the process rather than an input.

Top 12 Holdings at 30th June 2010

Royal Dutch Shell B AB Foods
BSkyB G4S
Anglo American BAT
HSBC Bunzl
Glaxo Diageo
Vodafone Compass

Since year end 2009 we bid farewell to Filtrona, our Gold ETF and Wolseley; farewell in part to
Xstrata; and switched our RD Shell A into (more) RD Shell B (that was a very quiet week). We
have new positions in Smith & Nephew, Experian and Imperial Tobacco; we have also added to
numerous existing positions over the 6 months. Our “turnover” remains low, by the hyperactive
standards of the industry, which saves a lot of dealing commission and stamp duty.

We do hold BP. There are many actions and inactions about which we might apologise, but this is
not one. We think Big Oil is a good business (not a great one since its normalised post tax return
on capital is not much above 10%) with a demand profile that is reasonably resilient and a strong
balance sheet. Hence over the long term the stocks have usefully outpaced the general market
and assuming a sensible entry price, should do so again.

2
 In the absence of evidence demonstrating negligence, we categorise the decline in BP’s share
price in the broad category marked unknowable equity risk – that being what we in part are paid to
manage and investors accept as the price of long term returns in excess of risk-free rates. So, we
regret it but do not apologise; conversely we are delighted that News Corp has bid for BSkyB but
since that was also unknowable (we’ve held BSkyB since fund inception) it would be dubious to
claim credit for the extra performance arising therefrom (though we may well be doing so before
too long).

Summary

We think equities offer attractive investment returns from here, indeed even from a bit higher than
here. We have no clear view on when the value we perceive will be reflected in prices but would
stress that whilst waiting the dividend yield significantly exceeds risk-free rates. We are unfazed
by the lack of clarity on timing.

Footnote

We rarely feel emboldened to making predictions, but here is one: UK CPI will exceed RPI over
the next ten years.

09.07.2010

This document has been prepared and published by Williams de Broë Limited (Williams de Broë). The information and opinions contained
herein are based upon sources believed by Williams de Broë to be reliable, but which may not have been independently verified and no
guarantees, representations or warranties are made as to its accuracy, completeness or suitability for any purpose. Any opinion or estimate
expressed in this publication is Williams de Broë’s current opinion as of the date of this publication and is subject to change without notice.
Past performance is not an indication of future performance. The value of investments and any income from them is not guaranteed and may
go down as well as up; you may get back less than the amount invested. Higher volatility investments are subject to sudden and large falls in
value and could result in a loss equal to the sum invested. Certain investments are not readily realisable and investors may experience
difficulty in realising the investment or in obtaining reliable information on the value or associated risks. Changes in rates of exchange may
have an adverse effect on the value, price or income of investments denominated in currencies other than Sterling. Any references to the
impact of taxation are made in the context of current legislation and may not be valid should levels and /or bases of taxation change.
Williams de Broë, its employees or a connected company may trade in the investments referred to herein and may also perform investment
or other banking services for such companies. This document is not intended as an offer or solicitation for the purchase or sale of any
investment or any other action.

No personal recommendation is being made to you; the securities referred to may not be suitable for you and this material should not be
relied upon in substitution for the exercise of independent judgement or seeking independent advice. Williams de Broë will not be liable for
any direct or indirect damages, including lost profits, arising in any way from the information contained in this material. This material is for the
use of intended recipients only and is not directed at you if Williams de Broë is prohibited or restricted by any legislation or regulation in any
jurisdiction from making it available to you. This document is being supplied to you solely for your information and may not be re-produced,
re-distributed or passed to any other person or published in whole or in part for any purpose. The material in this document is not intended
for distribution or use outside of the United Kingdom.

Williams de Broë Limited. Registered in England and Wales under Company Number: 2485266.
A wholly owned subsidiary of the Evolution Group plc. Registered office: Austin Friars House, 2-6 Austin Friars, London, EC2N 2HD.
Authorised and regulated by the Financial Services Authority. A member of the London Stock Exchange.