Three things caused me to raise an eye brow this week:

• An email that came across my desk this morning from a major investment bank stating “The Fed now holds almost 40% of long Treasuries” (long term being defined as 5+ years). My immediate reaction was what are the implications for the USD and where is the true underlying level of economic activity given this distortion.

• The price Transurban are prepared to pay for Queensland Motorways. It struck us as a massive one way bet on low interest rates; a bet on a yield curve construct that we perceive as being held at artificially low and unsustainable levels

• Bank of America disclosing an error in their capital calculations requiring them to cancel their proposed buy back and dividend increase. I think it is a mistake to dismiss this as a non event. The error has persisted for 5 years at one of the largest bank s in the US. I find it hard to fathom, given their resources, how such an error occurred; I find it even harder to reconcile how it has persisted for five years given the focus on bank capital requirements. We will never know all the facts but my reaction is it looks like one big cockroach. They rarely exist alone.

Our focus has been on identifying a group of businesses we regard as being desirable assets to own longer term regardless of the environment that eventuates. We think markets will provide us with an opportunity to invest capital in these businesses at lower prices. To date we have been patient, waiting for suitable entry points. This patience has not hurt the fund’s performance. The cash we hold provides us with a significant degree of flexibility to enable us to aggressively invest capital where we identify opportunities. We regard this flexibility as valuable in the current environment.

Fund Positioning 31_03_2014