Global Equity Enhanced Index Fund Update

September Quarter 2008

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• While the first two months of the quarter were marked by significant sector rotation, including a premature rally in Financials stocks and an aggressive Energy/commodity sell-off, the quarter was dominated by the tumultuous events of the final month.
• World equity markets were extremely volatile in September, falling over 11% in dollar terms.
• The main culprit was the lock-up of short-term funding markets, driven by the collapse of a large number of US financial institutions.
• Following earlier bailouts of Bear Stearns, Fannie Mae and Freddie Mac, markets fell as Lehman Brothers was allowed to go bankrupt.
• The drastic outcome sparked fears of counterparty risk driving remaining investment banks to seek shelter either by morphing into bank holding companies, which was the case for Goldman Sachs and Morgan Stanley, or being acquired by one, which led to Bank of America’s bid for Merrill Lynch.
• The bailout of the insurance giant AIG added to a string of turbulent events.
• The sell-off reflected the fact that global markets seem to have moved from a financial to an economic crisis.
• Resource producers have been among the most successful investments of the last few years, but were savaged during September, as concerns grew about global recession.
• Defensive equities such as Consumer Staples and Healthcare were able to outperform over the quarter.
• The escalation of the credit crisis and macro data released during the quarter forced significant downward pressure on growth expectations.

• Both earnings surprise/estimate revisions and price momentum signals were negative, while value signals were positive. Also the earnings quality and short interest signals were positive.
• The capital investment/external financing and earnings sustainability signals were negative.
• In Japan, the signals were overall positive, in particular value and external financing.
• The rally in the financial stocks that began on July 16 and falling oil and commodity prices marked a turning point in the performance of the value and momentum signals with the momentum strategies under-performing and the value strategies out-performing in the second half of July.

• The signal performance patterns observed in the second half of July continued with the momentum strategies under-performing and the value strategies out-performing as global equity markets rallied in August on the back of better than expected earnings reports, falling oil prices, and US dollar appreciation.
• Both earnings surprise/estimate revisions and price momentum signals were negative, while value signals were positive.
• The earnings quality, capital investment/external financing, earnings sustainability, and short interest signals were negative.
• In Japan, the signals were positive overall, in particular earnings estimate revisions and external financing.

• September was an historic month, as the financial crisis in the US deepened, the US government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy protection, Bank of America agreed to acquire Merrill Lynch, the US government bailed out AIG with an $85 billion loan and the US Congress deliberated on a $700bn financial rescue plan.
• Both price momentum and value made the largest positive contributions.
• The capital investment/external financing was also positive.
• Earnings surprise/estimate revisions, earnings quality, earnings sustainability, and short interest signals were negative.
• In Japan, the signals were positive overall, in particular value and external financing.

• September was the third consecutive month where losing trades outnumbered winners.
• The main negative driver of performance for the month once again came from our structural change strategies. These trades had been driving performance over the past year, however have sold off aggressively with the extreme de-leveraging in the market.
• The size of this portion of the arbitrage book has continued to decrease as we have unwound a number of preannounced mergers and restructuring plays. We would expect that the size of the event driven book as a percentage of the portfolio to remain in the 4% area for the near future until the credit markets recover.
• nNo one particular trade drove this negative performance however positions in Massey Energys restructuring and the breakup of the proposed takeover of Lonmin by Xstrata were the two most significant losses.
• On the positive side of the ledger was the SP500 quarterly rebalance as well as positions in Intercontinental Exchange and CME Group as we feel they will be the beneficiary of both exchange consolidation as well as the launch of a transparent CDS market.
• The spinoff of Sunpower by Cypress semiconductor benefited the portfolios.
• Mergers went through a very rocky ride in September. Two months of steady gains were wiped out mid-month when the failure of Lehman Brothers threw the markets into turmoil.
• Over the 9/12 – 9/15 weekend Lehman failed, Merrill Lynch was forced to purchase Bank of America, and AIG was taken over by the federal government. The combination destabilized the risk arbitrage space.
• Our funds were in risk arbitrage during September and we were hurt by our skew towards cash deals.
• The current universe of stock deals yields few opportunities for us, as we are only naturally long a few of the acquirers and cannot short. As a result our book has been mostly filled with cash deals, which carry a greater financing risk. To mitigate this we have tried to only invest in strategic deals, and ones with strong committed buyers.
• We significantly cut our exposure to leveraged situations and deals with easy buyer outs.
• Two significant negative deals for the month were the Take Two – Electronic Arts break and Continental AG – Schaeffler.
• We continue to look for opportunities to trade around the book as the market provides opportunities.

• The Global Equity Enhanced Index funds are managed to appear similar to the index in terms of key characteristics but, within this constraint, contain a large number of small stock specific positions.
• Our investment philosophy relies on opportunistically applying a wide set of investment strategies and combining these strategies into a highly risk controlled portfolio that shares similar risk characteristics with the benchmark.
• We believe that superior, risk adjusted returns can be achieved by capitalising on a broad set of quantitative stock selection techniques and trading strategies designed to exploit predictable market anomalies.
• In contrast to traditional active management, these opportunities are clearly measurable and do not rely on internally generated economic or company specific forecasts.