Fund Objective

The investment objective and policy of the LG Japan Pacific Fundis to provide investors with the opportunity for investment in an actively managed portfolio of quoted securities issued.

View on Past Performance

The full extent of the credit market collapse became apparent in September as the list of high profile victims lengthened dramatically and the world's monetary authorities appeared powerless in the face of evaporating risk tolerance and moribund credit markets.In September alone, Fannie Mae, Freddie Mac and AIG were effectively nationalized, Lehman Brothers went into liquidation, Merrill Lynch was taken over by the Bank of America, Washington Mutual was rescued by JP Morgan, Wachovia was bought by Wells Fargo, Fortis was bailed out by ABN in a deal underwritten by the Dutch and Belgian governments and HBOS in the UK was taken over by Lloyds Bank. Morgan Stanley and Goldman Sachs ran for cover by turning themselves into commercial banks.With risk aversion reaching almost unprecedented levels, liquidity in the interbank and commercial paper markets collapsed and short term interest rates jumped sharply. Confusion over the Paulson bailout package added to market uncertainty, culminating in what the Financial Times dubbed "Meltdown Monday" on the penultimate day of the month, when the Dow sustained its biggest points fall ever.Closer to home, solvency worries led to a mini "run" on the Hong Kong listed Bank of East Asia, whilst any stock with any hint of balance sheet worries - real or imagined - was punished severely. Authorities across the region have been responding with a raft of ad hoc administrative measures designed to boost liquidity or dampen equity price volatility through short selling restrictions. The real economy impact of the financial crisis is becoming more apparent.The September purchasing manager surveys for both UK and Eurozone manufacturers revealed the worst numbers on record, The US ISM survey showed output falling at its fastest rate since October 2001. September auto sales in the US fell to 12.5m (SAAR), which is the lowest figure since March 1993. Other macroeconomic indicators were equally gloomy.

Future Expectations

The Paulson bailout measures passed Congress, but can government policy solve the credit crisis? The Japanese experience of the late 1990's and early 2000's taught that removing toxic waste alone is insufficient to get credit markets working again. Banks need to be re-capitalized. In a risk-averse world, this will prove difficult unless the banks are re-capitalized with government (i.e. taxpayers') money, which is tantamount to nationalization.We have already seen the start of this process with Ireland, Greece and Germany issuing blanket guarantees on all bank deposits. These guarantees will presumably come at the price of increased regulation and more direct government control.Asian markets have dropped 40-50% from their October 2007 peaks. This begins to approach to declines last seen when the TMT bubble collapsed, although it still falls short of the 66% collapse witnessed during the Asian crisis. Valuations are undemanding, but 2009 earnings estimates remain too optimistic. An observed PER of 10- 11x 2009 earnings thus offers little real comfort.On a relative basis, Asia's superior growth, better valuation (downgrades notwithstanding) and stronger balance sheet all remain compelling, but with markets in redemption and repatriation mode, we have yet to reach the stage where Asia's superior fundamentals will start to generate superior performance. This will only happen once the downward revision cycle starts to accelerate in developed markets and Asia's relative merits become more obvious.The IMF's latest World Economic Outlook warns that banking-driven recessions are the longest and the deepest, lasting anything up to 7.6 quarters. This is because banks are important transmitters of monetary policy changes. When banks are under stress, the policy response to weaker growth becomes less effective. The Japanese experience of the 1990's again supports this thesis.

Fund Details