At the start of 2010, we have but one resolution. Portfolio management needs to be wary of the socialization of capitalism. The 1990s started with the collapse of state ownership of the means of production. The start of 2010 needs recognition by investors, rating agencies and governments alike of failure of another real time experiment. By requiring state rescue of global capital markets, it has been demonstrated at great cost that securitization cannot diversify away the systemic risk that arises from hubris. We believe that investor focus on quality is called for as the full dimensions are still unclear of the unintended consequences of concurrent liquidity injection. We have a less than maximum weight in fixed income (but favor quality corporate, strong smaller currency and emerging country issues) and favor gold/precious metals as hedge. Across asset classes and certainly in equities, we expect sharp bifurcation to be an enduring characteristic even as global economic growth bottoms and corporate earnings recover with valuation contraction likely as 10 year U.S. T-Note yields cross 5%. At the margin, our geographic equity mix has an overweight in North America in advanced markets. In the overweight of emerging markets we have a more nuanced stance favoring smaller ASEAN countries that have learnt the lessons of 1997 over the blanket favor of many others for BCRIC countries. In sectors, we expect dilution id finance but see its sector leadership by the strong few as crucial. In cyclical groups, we favor industrials over consumer discretionary. In restructuring accrued or underway, we favor healthcare, information technology and telecommunication services. As quality balance sheet/ operational companies, we see the major energy companies as beneficiaries.

Asset Mix

At the start of 2010, instead of a long list, we have one resolution for investments. Portfolio management needs to be wary of and apply pressures against the socialization of capitalism. Even if forced, the first decade of the 2000s ended with a sharp increase in state influence in capital markets whether in the form of stimulus spending or quantitative ease or whether in advanced or emerging economies. By contrast, the 1990s started with the collapse of the theory and application of state ownership of the means of production whether looked at in the collapse of the Iron Curtain or in the loosening of state control of industry in countries like China and India or in the form of de-regulation in advanced economies. Real life experiments in economies are rare. The post 1990s expansion of industry globally reflected the failure of the Marxist view that value would be added by entire state control of the means of production and even of its softer form in many advanced and emerging economies alike that had favored governments owning so-called commanding heights of industry. Currently, there appears little appetite today for governments revisiting this form of state influence. However, the start of a new decade needs recognition by investors, rating agencies and governments alike of failure of another real time experiment in the 2000s. By requiring state rescue of global capital markets, it has been demonstrated at great cost that securitization cannot diversify away the systemic risk that arises from hubris. The injection of massive liquidity may have already have had an unintended consequence of boosting hubris driven expectations of seamless and costless recovery as witnessed in the decline of junk bond yield spreads, of recovery of equities and in the very low levels of yields of publicly traded government debt.

In contrast, we believe that investor focus on quality is called for as the full dimensions are still unclear of the unintended consequences of concurrent liquidity injection. It would be a mistake to assume that financiers as a cohort have become smarter than in the past. The age old lesson has been that massive liquidity causes inflation which in turn contracts quality and valuation. The more recent example of Japan has been that tardiness in forcing financial restructuring in the name of reducing social cost does no such thing and in fact also results in valuation contraction even as government bond yields remain artificially low. Japan today has been reduced to pining for 2% GDP growth as a target, its financial institutions still need massive recapitalization and real fears exist of debt absorption limits with domestic institutions having absorbed well over 90% of the low yield debt financing undertaken since 1990. Backward looking rationalization already started in finance in late 2009 but we would prefer to see now the quintessential humility of the depression seasoned generation of bankers as diverse as L. Rasminsky of the Bank of Canada and W. Vocke /O. Emminger in post- war Germany as well as W. Wriston of Citi and especially Sigmund Warburg of S.G. Warburg who was reputed to remark that brains do not always follow the money trail.

In the focus on quality in asset mix, we maintain the following points. We see no reason to dispute the pre-crisis viewpoint expressed on numerous occasions by the Federal Reserve that reported inflation under 2% risks the spread of deflation. In turn and more recently, the Norges Bank indicated that 2% inflation would under normality imply rates of closer to 5%. In turn such normality would for us using as benchmark, 5% for 10 year U.S. T-Note yields and in turn, earnings bottoming in 2009 notwithstanding, normalized S&P 500 price-earnings ratios in the 15-18x region. As such, our allocation to bonds remains below maximum with the advantages likely resting more with higher quality corporate issues and conservatively financed dollar denominated emerging market government debt over advanced country government debt. Second, we expect more details to be demanded (hopefully with the vigilance of the1980s globally and not with the timidity of Japanese investors of the 1990s) by the markets of exit strategies to be executed from government liquidity injection. Given the size of the deficits and the importance of transparency, we believe the 1.20- 1.50 USD/EUR range to be key in reducing capital market fissure risk of the sort experienced in 1987. In light of significant uncertainties therein, we see gold bullion as a hedge to be favored by central banks and portfolio investors alike against paper currency uncertainty. Within currency markets but with varying degrees of liquidity constraints, we anticipate more favor for the stronger and generally smaller currencies like Australia, Canada, Norway, Switzerland and the ASEAN countries as well as Brazil, China and India backed by faster growing economies.

Equity Mix

Across asset classes and certainly in equities, we expect sharp bifurcation to be an enduring characteristic even as global economic growth bottoms and corporate earnings recover. Unlike the low quality driven equity recovery since March 2009, going forward from early 2010, quality is likely to be favored as investors’ transition to a gradual scenario in the real economies alongside the valuation risks inherent in fiscal/monetary exit strategies. While 2009 became a year of valuation expansion as earnings declined, going forward, the normality of valuation contraction is likely to assert itself even as earnings cyclically expand. We regard the experience of information technology in the last decade to be salutary for countries and sectors alike. On quality, notwithstanding momentum preferences into and just after the hi-tech bubble of 1999/2000 and despite strong secular information technology growth, many such low quality favorites globally disappeared into failure or takeover as a result of a lack of capital and management skills. Post the euphoria of the late 1970s and early 1980s, the same shake-up took place in energy and commodities. Despite the low quality nature of the 2009 advance from global market lows and despite assertions still of central bank largesse, for companies and investors, the issue of capital budgeting is likely to be paramount. It favors stronger balance sheet companies irrespective of sector as well as continual pruning in favor of those companies with the more strongly positioned manufacturing/service operations.

Much of hubris appears returning about strong growth particularly in Asia (despite the recent Q4/2009 contraction of 6.8% annualized) and appears returning about extreme financial practices in advanced economies even as financial institutions resist transparency, market value accounting and issue massive tranches of equity. We expect both forms of hubris to diminish. Restructuring in Greece and threats of wide spread downgrades in Europe as well as inflation in India are but two indications of more onerous conditions than appear incorporated in the seamless recovery hopes in the markets of late 2009. We favor a well diversified geographic mix focused on the multinationals of advanced markets and stronger emerging markets. At the margin, our geographic equity mix has an overweight in North America in advanced markets. In the overweight of emerging markets we have a more nuanced stance than many others have adopted in favoring BCRIC countries. We recall that much like the better positioned information technology companies and major multinationals, many lessons of financial prudence were learned by ASEAN and North Asian countries after the 1997 debacle while China and India sailed through on the back of then incipient de-regulation. Brazil may be better balanced and more financial vigilance in India and China may be needed than is realized. Russia remains a regulatory enigma for investors.

Consumer Discretionary: Smaller volume packaging and higher quality remain watchwords for the emerging consumers in China and India in consumer goods, services and entertainment alike. The advanced country consumer still faces issues of high unemployment, weak income and savings stress to be alleviated. Company balance sheet and operations are likely to remain in restructuring mode even for leading consumer discretionary companies. We are underweight consumer discretionary. Consumer Staples: Even as strong balance sheets and defensive tilts held consumer staples in good stead during the downswing, the shift of growth to the consumer in emerging countries as well as more onerous competition has meant a renewed wave of restructuring in consumer staples, including massive divestments and brand pruning. We are underweight. Energy: Energy especially large capitalization companies learnt the lessons favoring balance strength and stringent return on investment control during the pressures of the 1990s. Hubris in the industry returned as crude oil moved towards USD200/Bbl wti. Now even though prices have remained in the USD80/bbl wti range, we believe new opportunities for expansion will accrue to the more sizable companies. Our market weight in energy is a balance between several singularly well managed companies and a plethora of restructuring candidates. Financials: For the markets at large and the real global economy, a healthy financial sector is crucial for leadership. However, more transparency is required and massive external equity financing is likely to be prolonged. Even some two decades after the start of credit debacle and despite mega mergers, Japanese financials have been amongst the largest issuers of individual equity tranches in late 2009. We favor quality financials with strong structures that are few in number.

Healthcare: Even with the overhang of the requirements of reconciliation between the House and Senate versions, passage of healthcare bills in the United States is another albeit large step forcing restructuring globally of healthcare companies. The business realities of demographics in the aging advanced countries as well as rising wealth in emerging nations are additional features making for business choices that cannot be postponed for healthcare, for instance in pricing versus volume tradeoffs in products and services. We are overweight healthcare as a likely prime restructuring delivery sector. Industrials: More so than is the case for consumer discretionary, strong balance sheets and the ability to globally leveraged infrastructure government stimulus programs with diverse products boost the industrials’ cyclical activity with a growth bent. However, many companies also require restructuring from the excesses of the last decade. We are overweight industrials but focusing on the strong balance sheet and the more tightly defined product/services companies. Information Technology: Not just for its high beta history but also for reasons having to do with extensive restructuring after the hubris of 1999/2000, we expect information technology to be one of the key proponents of this new cycle. Compared to old line industries like automobiles and finance, information technology did not turn to governments for support. Product growth and the expansion of businesses have played a role in growth. We re-iterate that strong balance sheets present in Information technology and the communications revolution are likely as stimulus to growth larger, more fundamental and more extensive geographically than many may envision. We have overweight information technology. Materials: Our Materials market weight has at core strong exposure to gold bullion/ precious metals as being hedges against financial instability, including the potential for bifurcation of inflation in some countries, deflation in others as well as high deficits weighing against paper currencies. In 2009 a considerable focus in materials revolved around expectations of strong growth from Asia and China in particular. Going forward, we expect that for the non-precious materials ranged from base metals to chemicals, the trajectory and the amplitude of general global growth will play a larger role. The historical bane of operations in materials has been the tendency of production to be step-wise and hence exacerbate supply/demand. For materials as well, we believe our central theme of favor for quality in balance sheets and operations is likely to apply. Telecommunications Services: Global expansion, a plethora of new services and declining prices appear enduring characteristics of telecommunications services. To their credit, telecommunications services companies have been severely restructuring businesses and balance sheets. Such restructuring continues as measured by M&A ranged from Europe to growth in emerging countries but declining product prices offer challenges as well. We would diversify our overweight of telecommunications services, once more favoring the stronger entities. Utilities: The potential for rising government bond yields in advanced countries is part of our core expectation for a more valuation sensitive market. In turn, the historical focus within utilities on relative yield versus fixed income is likely to result in underperformance of the sector. Growth in utility demand in emerging regions would be an offset but the demand for greener energy generation and requirements therein for new facilities and/or refurbishment are likely to exacerbate funding pressures especially for the weaker and less diversified utilities. We are underweight.

Asset Mix

Geographic Mix

Equity Mix