International Share Fund Update

September Quarter 2008

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Market outlook The global economic outlook has deteriorated significantly and we now face global recession. Economic weakness is evident globally and earnings momentum is falling. Global earnings are likely to fall sharply over the next 12 months, while deleveraging should be an ongoing feature of markets. The outlook depends critically on the speed and strength of governments’ policy responses, which so far appear to have reduced near-term tail risks and are likely to become the norm.

Composition may not total 100% due to rounding.

• With risk premia now at extreme levels and inflation peaking, the re-emergence of recession worries has brought interest rate cuts back on to the agenda across all major economies.
• While equity valuations appear attractive, we are conscious that bottom-up earnings estimates are still too high, given the economic environment. As a consequence, we are placing much greater emphasis on value in portfolios.
• We continue to favour higher quality companies with clear, strong and sustainable earnings growth. On a sector basis, we favour defensive areas such as Staples and Telecommunications and are underweight the consumer, Financials, Energy and Materials.
• Relative valuation continues to lead us to be overweight Europe and underweight the US, although the latter position has been reduced.

• Information Technology sector has been more resilient, with good results and raised guidance from Hewlett-Packard and Cisco Systems.

• Reflecting the crisis in global financial markets, the biggest detractor from performance was the Financials sector. Among the significant fallers was Morgan Stanley – one of our largest Financials holdings.
• Fears regarding slowing global growth led to weakness in the Energy and some commodities sectors. This was illustrated by falls in the share prices of thermal coal exporter Bumi (supply disruptions), Subsea7 and Cairn Energy.
• The impact of the credit crisis on hedge funds intensified over the period, and this was reflected in the weakness of Man Group.
• The deteriorating economic environment hit our Industrials holdings. In particular, there was a sell-off of General Cable Corp, on what the marked deemed poor guidance and concerns over the US housing market.
• The falling oil price also hit wind turbine manufacturer Vestas Wind Systems, with cheaper oil lowering investor interest in alternative energy. There was also concern that some small wind developers were suffering from the reduced availability of credit.

• Up to 10% of the Portfolio can be invested in cash, both domestic and international.
• Currency is generally unhedged, however, from time to time currency hedging may be undertaken.

• Seek an international share portfolio.
• Accept the risk of fluctuations in global share markets and currencies.
• Have a longer term investment horizon.