The Eclectica Fund

PERFORMANCE ATTRIBUTION REPORT 29 April 2011

Discretionary Global Macro

The investment objective of the Fund is to achieve capital appreciation, whilst limiting risk of loss, by investing globally long and short mainly in quoted securities, government bonds and currencies, but also in commodities and other derivative instruments.

Monthly and Yearly Performance % ( A Shares net of fees)

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 +5.2 +4.0 +2.4 +12.7 +0.7 +5.5 +1.9 +3.7 -1.1 -8.1 -1.0 +9.7 -8.2 +1.7 +18.0 +3.7 +5.2 -1.0 -4.6 +4.6 -2.5 -0.8 -2.9 -15.6 -2.1 -0.2 -0.3 +8.8 -4.9 -0.1 +3.6 +0.7 -2.7 -5.4 -0.5 +0.8 +16.2 -0.9 -4.8 -5.4 +1.8 -3.9 -0.9 +1.7 +1.9 -1.7 +3.5 +3.6 +3.7 +2.4 -1.4 +2.5 +1.8 -0.2 +0.0 -5.9 -1.0 -9.1 -1.7 +0.6 +4.2 +0.5 +4.2 -2.1 -6.4 -1.7 +0.9 +1.6 Jan Feb Mar Apr May Jun Jul Aug Sep +0.0 +7.8 +3.4 +8.5 +2.2 +1.8 -5.7 -0.1 -3.1 Oct -4.8 +1.9 +5.7 -7.0 -2.1 -1.8 +49.8 -1.9 -1.9 Nov -0.1 -3.7 +1.7 -4.8 +0.9 -3.4 +2.9 +3.0 -4.3

AUM: $240, 820, 000

Dec +0.8 +12.4 -3.0 +5.9 -0.6 +7.5 +0.4 -4.0 -2.1 Year -4.2 +49.9 +8.0 +14.2 -3.7 +1.6 +31.2 -8.0 +2.7 -1.6 Source: Daiwa. Calculation on NAV basis.

Performance Attribution

Fund Performance Since Inception Fund

250 225

Equity (Net) Carry Interest Rates CDS Currency Commodity

-1.06% -0.10%

0.10%

HFR Macro Index

1.90%

200 175 150

-0.15% 0.12%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

125 100 75

*HFR Macro Index in USD Assumes constituent funds performance is fully hedged. Bloomberg Ticker: HFRXM Index. Past performance is not a guide to future returns.

Asset Allocation Summary (% NAV)

Interest Rate Futures* Interest Rate Options* Long Equity* Short Equity* CDS* Commodity* Gov Bonds Corp Bonds FX Options* FX (Pegged) IRS DV01 (bps)**** Outright Swaps Swap Curve FRA/OIS Spreads EUR 2.9 GBP 3.1 USD -1.2 3.1 JPY 5.2 13.1 5.2 24.9 -9.6 4.5 5.4 2.7 0.4 1.8 48.8 AUD 0.3 NZD 0.9 -

CDS Position Breakdown Summary CDS Payout Profile

% 20 15 10 5 0 -5 Ave. Spread Notional Exposure Total CDS 195
Assumes liquidation of portfolio at 2.5yr spread levels in 1 years time

Annual Carry -1.3

CV01 (bps)* 7.2

Ave. Life 3.4yrs

* Currency, equity and commodity include listed and OTC derivatives, cash or futures on a net delta basis. Interest rate options figure represents net option premium/interest rate futures are shown on a 10yr adjusted net delta basis. CDS figure represents max loss. DV01 figure represents basis point contribution for a 1bp rise/steepening/widening of the underlying rate/curve/spread.

* CV01 figure represents basis point contribution for a 1bp rise in the weighted average credit spread of the portfolio.

The Eclectica Fund

PERFORMANCE ATTRIBUTION REPORT What happened in April? 29 April of globalisation (aka QE2) continued to work its way through the economic system. The Asian mercantilists now have The Fed's rejection 2011 domestic price inflation to contend with and are raising rates. We expect their economies to slow in due course.
In Europe, the ECB is ignoring the perils of contractionary fiscal policy and is similarly engaged in raising rates to thwart higher QE2 induced commodity price inflation. The central bank raised rates by a quarter-point. Again, we are not optimistic on the continents prospective growth prospects. But it was a better month for the central bank that gets it. British economic data of late has been an unqualified endorsement of the Banks premise that this economic upswing will prove less vigorous for highly indebted nations and that contractionary fiscal policy should take precedent over raising interest rates. The market was compelled to rein in its hawkish rate expectations (see chart 1). How did the Fund Perform? The Fund recorded a gain of 80bps. By category, the Fund's interest rate positions were the most profitable with a gain of 214bps for the month; the Sterling swaps book contributed half of this. This was countered by a 1% loss from Japanese credit which takes this part of the book back to flat on the year. Long-short equity made 10 bps, FX cost 14bps and FRA/OIS spreads cost a further 25bps and the DVO1 exposure has been cut further from 11bps to 6bps. Accepting absurdity? I was reading something recently about the Nobel Prize winner Richard Feynman that made me think that money management was perhaps similar to physics in that you advance by accepting absurdities. The history of physics, he claimed, is one of unbelievable ideas proving to be true. "Our imagination is stretched to the utmost not, as in fiction, to imagine things which are not really there, but just to comprehend those which are ". British interest rates are a case in point. To most it is simply absurd that rates will not rise. Having adopted the Feds policy of quantitative monetary easing, inflation is now running at twice the Banks target and the core rate is at its highest since the series began in 1997. I recently presented at an investor conference during which a very prominent manager predicted that British prices would rise 11% next year; there was no dissent. And yet rate hike expectations have moderated (chart 1 again). Perhaps investors are imagining things which are not really there? The CPI data measures price changes for goods and services. But this only captures about one-third of all prices in a developed economy. The most important price is not represented. The price of labour, or wages to you and me, represents the missing two-thirds. Our obsession with CPI data is that it provides a causal explanation for the periodic bouts of general price inflation that we have observed through history (see chart 2).
Chart 1: Distribution of expectations where 3M GBP LIBOR will be on 21/09/2011
2.0% 1.8% 1.6% Expectation Weights 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 0.00 0.50 1.00 1.50 Expected Interest Rate 2.00 2.50 29/04/2011 31/03/2011

Source: Bloomberg

Chart 2: UK Private Sector Nominal Wage Rate YoY % Change

% 35 30 25 20 15 10 5 0 Mar-71 Mar-74 Mar-77 Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 -5 Mar-10

But for all prices in the economy to expand at say 11% yoy Source: OECD / Bloomberg households and businesses require the necessary additional xxxxxxxx means to accommodate such an increase in their nominal outgoings. Presently, and despite QE, this is not happening. The culprit monetary is the banking system. Historically its willingness to extend credit has allowed a rise in relative prices to pass into a general bout of price inflation. But today, with higher credit standards and the private sector repaying loans faster than the banks are willing to grant new credit, the environment is deflationary. Should households maintain their consumption of those goods and services which are presently the subject of price inflation they quickly discover that they have less to spend on other outlays. In practice the pattern of consumption changes with less spent on discretionary items.

The Eclectica Fund

PERFORMANCE which has blunted REPORT So a condition of stasis prevailsATTRIBUTION the overall impact of QE and is unlikely to result in the elevated general inflation that many macro investors fear; as the chart below illustrates it is likely that there are just too many losses still to be recognised by the banking system. 29 April 2011 reported cumulative loss rates of just 6.2% on risk assets versus the 8.5% written off following the non-crisis British banks have recession of 1989-93. One has to think that it is the presence of such unrecognised losses residing on the British banking ledger that is likely to stymie the present infatuation with mass inflation
Stock Insight: Olam Trees Don't Grow to the Sky This month's IPO of Glencore may attract some unwelcome scrutiny to the opaque world of Asian commodity trading and supply chain . management. Trading of grains and oilseeds is relatively transparent and carried out by agribusinesses such as ADM, Bunge is and Cargill. But we are short a company which is engaged in sourcing, transporting and trading lesser-known commodities like shea nuts, cashews, sesame seeds and spices. These are often produced exclusively in obscure parts of Africa or South East Asia, and have no futures market. We have no problem with this. Indeed the combination of sourcing difficulties and information asymmetry can and does lead to very nice profit margins for businesses with the physical network to exploit such inefficiencies. As a rule of thumb, the more obscure the product, the higher the margins, with grains attracting EBIT margins of 1-3% and nuts and spices up to 10%. The Singapore listed Olam has historically grown fast, with 2009 revenues up fivefold since 2002, an impressive achievement recognised by the stock trading on 20x consensus earnings forecasts.
Loss Rates as a % of Risky Assets
0.0% 5.0% 10.0% 15.0% 20.0%

UK Big 4: Current Crisis (To Date)

6.0%

UK 1989-1993 (Non-Crisis Recession)

8.5%

US: Current Crisis (To Date)

8.8%

10% "Typical" Single Country Crisis

10.0%

Synchronous (Nordic) Crisis

15.0%

Japan

20.2%

Source: Companies Data, Arbuthnot

But is this due recognition of a job well done or a temporary leave of absence from Mr Market's renowned laws of reasoning? Is Olam fully valued or overpriced? We think the latter. The trouble with life is that it is often so difficult to stay popular. Back in 2007, Olam vowed to pull out all the stops in its quest for enduring investor satisfaction. If its eps growth they want ,its eps growth they're going to get. However this necessitated a change in strategy whereby they would invest more in capital intensive upstream production and downstream processing rather than the asset-light supply chain business. Rarely is this strategy called by its true name: the acceptance of lower marginal rates of return. This shift was no doubt in part driven by the fact that you can only grow so big trading shea nuts. In practice, it made them far more comparable to someone like Glencore, who have a presence throughout the value chain. But putting the trading business on a P/E of about 15x (in-line with Singapore-listed metals trader Noble) and the rest in-line with mining groups like Rio Tinto (on a P/E of 7x), values Glencore at 11x earnings which is a pretty sizeable discount to Olams 20x. Furthermore, close analysis of the Olam annual report reveals a notable change in the quality of earnings since the new strategy in 2007/08, with large percentages of stated profits coming from items such as revaluation of their own convertible debt, negative goodwill from acquisitions and non-cash "biological" gains. The latter is my favourite and derives apparently quite legitimately from the accounting treatment of all those little acorns the group planted in its Asian almond and palm oil plantations several years back. As the trees grow they are reckoned to be more valuable to the bean counters; its a jack and the beanstalk business! The sell side analysts (with 14 buy recommendations, 3 holds and 2 sells) adjust for some of these but not all, taking historical profit numbers (in Singapore dollars) for 2009 and 2010 down from the reported $252m and $372m to $182m and $272m respectively. However, our analysis suggests that more realistic figures are $100m and $170m, the latter putting the stock on 40x historic earnings as opposed to the 25x used by the sell-side. This means that the forward P/E is probably at least 25x, not 20x, and looking stretched relative to peers. Maybe we should just stop there; job done. Alas some $95m out of last years $170m came from export incentives and subsidies, which may be part of doing business in Africa but certainly should not be valued by the stock market on anything like 20x P/E (never mind 40x). Just don't call these items a "bung" from the Nigerian government whose respectability is of course beyond reproach.

The Eclectica Fund

PERFORMANCE ATTRIBUTION REPORT 29 April 2011

Fed QE
High sovereign debt restricts fiscal stimulus US rejects globalisation

Long Interest Rate Receivers

Zero lower bound restricts monetary policy

US rejects China gaming FX

US and Germany slow

US seeks to create domestic price inflation overseas

EM growth slows Debtor countries raise rates despite high unemployment a la 1931 Creditor countries tighten monetary policy

US seeks to revalue China et al FX real v nominal prices

Long Equities & Commodities

We Are Here

Fund Information Fund Details Investment Manager Administrator Fund Managers Structure Inception Date Share Classes Minimum Investment Dividends Stock Exchange Listing

Fees, Costs & Redemption Structure Eclectica Asset Management LLP Dealing A Shares Daiwa Europe Fund Managers Ireland Ltd Dealing B & C Shares Hugh Hendry & Espen Baardsen Dealing Notice Cayman Islands OEIC within a Master Feeder structure Dealing Line 30 September 2002 Dealing Fax //$ 100,000 or equivalent in /$100,000 Accumulated Irish Dealing Email AMC A Shares AMC B & C Shares Performance Fee Exit Fee

1st & 15th of each month 1st of each month 7 days before dealing day (+353) 1 603 9921 (+353) 1 647 5830

daiwaSHSdealing@daiwagas.com 1% 2% 20% 1% exit fee on redemptions within 12 months

Service Providers Custodian/Prime Broker Custodian Auditors

Eclectica Asset Management: Investor Relations 1) Morgan Stanley and Co Int Plc Telephone 2) Credit Suisse Securities (Europe) Ltd Email Daiwa Securities Trust & Banking (Europe Plc) Deloitte & Touche

+44 (0)20 7792 6400 info@eclectica-am.com

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