Got this from Investors Mutual. This is definitely one of the better funds on the scene, so I tend to pay attention when Anton has something to say. Recent share market volatility and implications for investors in our Funds. Anton Tagliaferro - IML Investment Director 29th May 2006 Background The Australian sharemarket, as measured by the S&P ASX300, had risen sharply and almost without pause since the beginning of 2006. The index reached a record high of 5,366.2 on 11th May 2006. The most recent phase of the rally was fuelled by a very narrow concentration of companies, particularly those related to the commodities sector. In recent months the moves in the prices of many commodities were actually accelerating, the higher they went. These almost-daily price gains were pushing many commodity spot prices – already at historical highs– to levels that defied any fundamental explanation. Since peaking on 11 May the ASX300 index has fallen back to around the 5,000 mark last week, a drop of just over 6%. This fall has been primarily focused on the commodities sector and accompanied by a sharp increase in volatility of share prices. Reasons behind the recent sell-off What triggered this sell-off is the subject of debate, but in IML’s view it can largely be attributed to speculative market participants realising that there were a growing number of factors that warranted caution. In aggregate these factors, which can no longer be ignored, should serve to make investors more cautious in their outlook for world economic growth rates going forward. In particular, IML believes some of the following factors are reason for caution for growth prospects going forward: 1. The end of cheap money – the US Federal Reserve Board has increased interest rates 16 times in the last 2 years, from 1% to 5%; 2. US bond yields have also risen sharply, particularly over the last six months due to investors concerns over inflationary pressures; 3. High energy prices also appear to be slowing consumer spending – thus for example recently, the world’s largest retailer, Wal Mart, noted that sales growth was slowing due to high energy prices; 4. Record high commodity prices which are feeding into high raw material prices, which is inflationary. What drove markets to recent record levels? In IML’s view, since the start of 2006 commodity prices have been driven to their current levels largely as a result of a frenzied level of speculative activity by hedge funds in commodity markets. While overall demand for commodities remains firm and in some cases supply is being slow to respond. IML believes that a lot of hot money has taken many commodity prices to levels well above their fundamental value. This frenzy was covered in a release recently published on our website (The Commodities Casino – 5th May 2006). Such events occur in all markets from time to time and are always obvious after the event, but much harder to identify during the period that a speculative bubble is forming. Many commodities have bounced back in the last week, but in our view they continue to trade well ahead of their true value due to continued large positions held by financial players. How are IML’s portfolios positioned? Over the last year or so IML has maintained a below-index exposure to the Resources sector of around 10%. We believe this level of exposure is prudent for our Funds; we cannot justify any greater exposure than this given the extreme volatility of the income streams of many of the participating companies. We expect that given the above uncertainties that we are likely to see volatility in the market will continue to be higher going forward, than what has been experienced for much of the last few years. That said, while parts of the share market have in recent months become quite irrationally exuberant, IML as a disciplined value-style manager has been focused on taking advantage of emerging value opportunities as stocks ignored by many investors in the recent frenzy become more attractively priced. Examples of what IML considers to be attractively priced, good-quality companies and in which IML has been steadily building positions are as follows: 1. Lend Lease 2. Insurance Australia Group 3. Publishing and Broadcasting 4. Ansell While our Funds have underperformed their relevant benchmarks over the last 12 to 24 months, IML is confident that the stocks in which we have been building positions, in addition to our core portfolio holdings, are well placed to generate attractive returns with a high degree of certainty for our investors over the next three to five years.