As outlined in its September letter to investors, Tina Larsson’s Pendo International

Strategy fund returned -0.60% in August (vs. -3.09% and -4.51% for the MSCI EAFE
and S&P 500, respectively) bringing the YTD return to -5.34% (vs. -7.62% and -4.62%
for the MSCI EAFE and S&P 500, respectively) and the trailing twelve-month return to
8.83%, (vs. -1.93% and 4.91% for the MSCI EAFE and S&P 500, respectively). Pendo
seeks absolute returns (or as they put it, “We don’t hug an index”) through in-house
bottom-up fundamental analysis in order to find undervalued companies outside the
United States while remaining agnostic regarding market cap, industry, sector,
geography, traditional weightings, etc.

In the letter, Larsson notes that despite tumultuous and volatile world markets, they
remain quite optimistic about the future of their international investments, and not just for
the long term (as always), as they believe their investments will out perform their
benchmark indices over the next 6-12 months. While not satisfied with their recent
performance, they believe their strategy is now ready to outperform as the global
economy improves and they continue to hold businesses that are insulated from the ails of
the US market and dollar. Their portfolio is currently trading at 13.5x trailing earnings,
down from an ~18x multiple at the beginning of the year. A PE expansion back to
previous multiple would provide a 33% return on its own. They believe this is reasonable
considering that the MSCI EAFE benchmark currently only trades at ~20x but has traded
at an average PE ratio of ~25.5x real earnings since 1982. Larsson reiterates that they are
not market timers, but they remain committed to actively managing their long-term value
approach by reducing positions as they become over-valued while increasing positions
that become undervalued.

The second half of the letter focuses on recent developments in China where the visiting
Premier Wen Jiabao addressed the need for political reform, or more specifically, the
need to curtail excessive political control. Such sentiment reassured Larsson that China
understands they will have to continue to allow more freedom in the marketplace in order
for China’s 30+ years of overall growth and development to continue. Larsson feels that
centralized planning can work very well in steering a nascent economy towards a more
developed, functioning entity. Yet, he also acknowledges that, “in order to fully develop
and remain an expanding, dynamic, and innovative powerhouse, free markets must be
respected and embraced.” Like China, Brazil is another country that has benefited from
starting to separate itself from socialism, as GDP growth is expected to be a robust 7.34%
in 2010. Brazil is becoming a global leader through providing financial and technological
aid to developing countries, and thus building good will and valuable trading partners
(Larsson notes that these developing countries are notably commodity-rich). They cite a
quote from July 17th economist to drive home their point:

“This aid effort—though it is not called that by the government—has wide implications.
Lavishing assistance on Africa helps Brazil compete with China and India for soft-power
influence in the developing world. It also garners support for the country’s lonely quest
for a permanent seat on the UN Security Council. Since rising powers like Brazil will one
day run the world, argues Samuel Pinheiro Guimarães Neto, the [minister for strategic
affairs], they can save trouble later by reducing poverty in developing countries now.”
Larsson is also wary about the dangers of further stimulus, which have been supported
loudly by Paul Krugman and other Keynesian proponents. He concludes the letter by
citing an article from the NYT that was written about Japan but could easily been written
about the US:

“An aging, dwindling population has further sapped demand. So have widely held fears
over jobs, wages and pensions, which are prompting consumers to hunker down and save
instead of spend. “Zombie” companies, propped up by rigid regulations and comfy ties
with banks, leave little space for newer companies that might take more investment risks,
offer more innovative products and services, and stimulate demand.”