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SELECTOR FUND Quarterly Report - 30 June 2007 [Issue No.16] FUND PERFORMANCE Hutton went on to note that Australians in general embrace China’s growth, harbour no ill-will and Since inception in November 2004 the Fund has perceive little or no threat from this emerging super delivered a compound annual return of 29.95% to power. If our financial market’s eagerness to 30 June 2007 (inclusive of $0.0709 cents in embrace China is any gauge, Hutton’s view is distributions), outperforming the All Ordinaries surely close to the mark! Accumulation Index, which has compounded at 25.99% over the same period. The one-year return Yet the mood in America starkly contrasts this. to 30 June 2007 was 21.57%. Statistics page 13. SFM Middleclass Americans see China as a direct threat to job security and future living standards. BIG PICTURE According to Hutton at least one US Senator believes a war with China (Iraq –style) is required “From the heart” to diminish the threat to the American way of life. Books are great, that’s why this quarter we are sending you one - our clients (not other readers). With that short introduction we hope you enjoy the read. Needless to say Hutton’s view on China does An autographed copy of Will Hutton’s The Writing not encompass US popular thought. on the Wall - CHINA and the West in the 21st Century, is in the mail today. “make as few decisions as possible. This is not only a sensible way to “Books are great, that’s why this invest but one that sits comfortably quarter we are sending you one” with us” As an invited guest of Macquarie Bank during the recent Sydney Writers Festival, we were fortunate On the subject of books, an all time favourite of enough to hear Hutton espouse his thoughts on the ours, and one we have mentioned in the past, is prevailing juggernaut that is China. Sounding half Peter Lynch’s One Up on Wall Street – credible on the topic and with a desire to learn more unfortunately this one is not in the mail. about our northerly neighbours, we thought it only prudent that we should donate to Hutton’s bank During his thirteen year tenure running the Fidelity balance while adding to your library as well as Magellan Fund, Lynch was acclaimed as one of the ours. Hopefully you will enjoy the read although it world’s best stockpickers. He was renowned for buying good businesses and holding them for long can be a bit of a slog in parts. See our story on Hutton’s China on page 8. periods. He wanted to make as few decisions as possible. This is not only a sensible way to invest On a chilly May morning at “Cafe Sydney”, Will but one that sits comfortably with us. We’ll talk Hutton, a London pom, ingratiated himself by more on this a little later in the issue. exclaiming Sydney was the best pace on Earth even though he had only been here for a couple of hours. In his book, Lynch recounts anecdotal stories of his investing experiences. In one such incident, Lynch “at least one US Senator believes a touched on his wife’s stockpicking credentials. Carolyn Lynch, who has never worked in financial war with China (Iraq –style) is markets, is a keen shopper and like many women required to diminish the threat to the who have balanced the family budgets, has a strong American way of life” eye for value. _______________________________________________________________________________________1 SELECTOR FUND Quarterly Report - 30 June 2007 [Issue No.16] “A pair of panty hose… less likely to philosophy that takes nothing for granted and by approaching each opportunity with an open mind. ladder” Lynch explains that Carolyn discovered a new “this is not our flimsy interpretation product released by Hanes called L’eggs. L’eggs of how Warren Buffett, Peter Lynch were neatly packaged in an eye-catching colourful and Philip Fisher do things” plastic egg shaped container and located at grocery store checkouts “right next to bubble gum and the So let’s pose the most obvious questions; razor blades”. The egg contained a pair of panty hose. These stockings had what they called a (1) What do we mean by “investing sensibly”? heavier denier which made them less likely to and ladder or develop a run like the normal stockings. (2) Are we as fund managers adding value? Better still they had superior fit and were comfortable. Carolyn loved the fact that she could Let’s look at these questions separately. What many pick up a new pair of L’eggs at the mall as opposed people don’t realise is that despite having an to making a special trip to the department store. investment portfolio of some 1,400 stocks, Peter Lynch’s great track record was largely centered on Carolyn was obviously also blessed with good holding a small number of winning hands, the communication skills for she was able to educate “tenbaggers” or “twentybaggers” as he was fond of her husband on a subject in which he had little saying. Making only a few right decisions in a big understanding of and no practical experience. way seems a sensible strategy but requires a little Lynch searched high and low for analyst coverage more explanation on our part. of this new product and its sales potential. He found none. (This fact alone probably guaranteed success - Editors As we see it, to end up with a few right decisions comment.) involves a “virtuous circle” of events. We want to In typical Lynch fashion he undertook his own be clear upfront, this is not our flimsy interpretation homework at the local shopping mall “coal face”, of how Warren Buffett, Peter Lynch and Philip interviewing passing customers including wife Fisher do things – rather, this is simply how we see Carolyn and her friends. things. It’s an investment process that makes sense to us. As things would have it, Hanes turned out to be a “sixbagger” (baseball’s equivalent of a home run or Firstly and rather intuitively, in order to be in a in this case making six times your money) before it position to prosper from a few “winning” hands, was taken over by Consolidated Foods now Sara the decision not to invest becomes all important. Lee. Investors in Lynch’s Magellan Fund did even better. When he finally called it quits in 1990, the Since our investment universe encompasses both Fund had recorded a compound annual return of large and small companies covering a diverse range 29.2% and an original investment of US$1,000 had of businesses, our efforts are directed to those that grown to US$28,000. offer the greatest upside. Several factors assist in deciding who stays and who goes during the Not everyone can apply themselves to the task at filtering process. Experience plays an important hand as successfully or as diligently as Lynch’s role while the “process” itself is crucial. Knowing record would highlight. From Selector’s vantage which businesses deserve backing and which are point it’s all about “investing sensibly”, adopting a best left alone requires an investment framework – we have the “road map”. _______________________________________________________________________________________2 SELECTOR FUND Quarterly Report - 30 June 2007 [Issue No.16] Our last two quarterly newsletters have been “Has the potential to cut 5 hours off devoted to an explanation of our “road map”. It is a process that has been refined over the years as a 6 hour long heart surgery experience has been gained. procedure.” While saying “no” to the myriad of opportunities Right side treatment of an arrhythmia involves a consumes an inordinate amount of our time (note technique called ablation – basically using an our calendar diary for companies visited during the electric current to scar the heart tissue – which quarter), our process is also designed to leave the effectively ring-barks the heart muscle. The ability door ajar for companies that have not yet forced for the heart muscle tissue to conduct electrical their way in. An example in our calendar diary this impulses across the scarred tissue is removed and quarter is CathRx (CXD). accordingly a regular heart beat is re-established. Each ablation is delivered individually in an In a similar vein to Lynch’s “panty hose” operation that may last up to six hours - a punishing experience, we took up the challenge of test of concentration for a surgeon, no doubt. understanding atrial fibrillation, and the role of CathRx, when a family member recently suffered a CathRx has developed the first modular catheter non fatal stroke that resulted in blood clots that allows the length and shape of the internal travelling to the brain. stylet to be adjusted without removing the catheter from the patient. This product has received the CE We had seen CathRx on previous occasions. So Mark of approval for sale in Europe. CathRx is we knew a little about the management and the also a good chance of being first to market with a board. This quarter we hosted a meeting in our treatment for the left side of the heart. Furthermore offices and followed up with a visit to the CathRx they are developing a “daisy” ablation technique manufacturing facility at the Australian Technology whereby the end of the catheter is opened into a Park located in Redfern. daisy flower shape, vastly increasing the surface area scarred with each ablation. This has the Atrial fibrillation is an arrhythmia of the heart or an potential to cut 5 hours off a 6 hour long heart irregular heart beat.

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