Focus on value in the midst of fears of inflation, financial instability, and rising commodities in 2010

Kurm investments NAV this quarter, and thus the value of your investment, has now almost recovered to the peak immediately before the credit crisis.  This is with underlying assets whose values range from cheap to fair at most.  While this certainly brings a sense of relief and satisfaction, this recovery does not reflect the full story.

In many cases, investors simply missed the tremendous rally in stocks from March 2009, because they sat on the sidelines, paralysed by fear and uncertainty, wounded by losses.  The discipline of value investment allows an investor to maintain a rational perspective.  When the rest of the world is in a state of panic as a result of declining stock prices, the value investor should be able to focus on the underlying business and the issues it faces and then make a judgement about the intrinsic value of the business.  When the gap between this rational, business-minded valuation and the market price is large, the value investor can take advantage.  Simply looking at how far Kurm has risen compared to the indices does not reflect the importance of keeping focused on values, and thus being able to be fully invested near the bottom of the market, when many missed out.

During the course of the quarter, Kurm has increased its exposure to investments outside of North America and Europe.  This has been done through the process of identifying fund managers with a focus on fundamentals and the principles of value investment.  Each of these managers has an excellent reputation, and we have been able to identify, vet and conduct satisfactory due diligence on their investment processes, often visiting the underlying companies with them.  The managers all have substantial assets invested alongside ours and have interests aligned with ours.

Kurm has invested in South East Asia, as well as in portfolios which cover wider Asian markets, frontier markets and global value opportunities.   Kurm has largely avoided the volatility in China, but has recently made a small private equity investment there.  We have identified managers with whom we might work in Africa, India, Vietnam and other countries, but will develop further confidence in them, as well as ensure that valuations are attractive, before investing.

The largest portion of Kurm’s assets still remains in North America, and the underlying investments in unloved or underappreciated sectors such as finance and real estate, as well as a smaller exposure to distressed assets, remain attractive despite the uncertainty of the US economy with its high unemployment and latent inflation driven by lax policy.

At this time, as inflation threatens and commodity prices rise, there is also concern about further problems for the financial system from default in commercial real estate as well as certain European sovereign debt, which some suggest could even prompt deflation.  The outlook remains uncertain for any family looking to preserve and grow wealth.  Kurm continues to benefit from its focus on businesses with good economics, conservative balance sheets and attractive valuations, and on the long-term causes of value generation despite inflation and volatility.  It is these businesses which generate wealth and such investments should provide the long-term value investor safety of principal and ultimate profit.