Case Studies

Facility Visit in China

During the quarter, Richard spent a couple of weeks in China working with the infant milk formula company in which we own convertible debt. We continue to think that the prospects for the company are bright, and we are excited that the company has been implementing some of the changes that we have suggested. In the last year alone the company has upgraded its auditors, hired new investment bankers, brought in a “Big 4” firm as accounting and SARBOX consultants, and strengthened the management team, including bringing on a new CFO. This new CFO should be a great asset for the company. We are urging them to replace their lawyers with a strong multinational firm as well. That change will complete a seismic shift from the counterparties they were dealing with when we first invested in the company. We continue to believe that the company has a tremendous opportunity to be successful in the fast-growing infant milk formula business in China. Of any in our portfolio, this position has by far the widest range of outcomes. The company faces significant challenges — both the normal competitive industry challenges you would expect from a small, fast-growing company and the challenges of transforming into a Western corporation as its U.S. listing requires. After the time in China, Richard spent a couple of weeks in Thailand, Cambodia, Malaysia, and Singapore looking at other potential investments. None have been added to the portfolio at this point, but that could change with time. We expect that region will do well over the next decade, and many companies there are significantly mispriced. About a third of the Fund’s assets are currently invested in emerging markets. We expect that percentage will grow over the next decade, although we will always invest in companies from a bottom-up perspective. Many places around the world have stable governments, private property rights, and hard-working citizens. While some of these emerging economies will have their hiccups and bumps along the way, most will outperform the United States over the next 25 years. We will continue to seek to expand our circle of competence not just among different types of businesses but also geographically.