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Fund Prices (16 May 2008) Fund UK Global Emerging Japan Europe 200 A Share £135.40 £198.56 £216.76 £  90.75 £151.15 £  85.67 B Share £134.17 £194.05 £211.79 £  86.58 £149.74 £108.86 Funds under Management - £227.0 million

Unlike most fund management companies, Bedlam is structured to make investors money       Pick of the Week Articles     Financials

The Investment Process

Bedlam's central objective is to make absolute returns of between 1.5 and 3 times the prevailing risk free rate (the UK long bond rate: currently 5%). Thus for all our clients we aim to achieve returns of 7-15% per year. In attaining this goal we are unconstrained by any benchmarks or indices and our funds target low volatility and low stock turnover. Bedlam's sole investment process can be well summed up as "the self-funding takeover test". Every potential equity investment is approached as if we were a trade buyer. In theory we invest the same way as any businessman or venture capitalist would when looking to buy out a company. We will establish that the return we should make from each new holding over a one year period must be a minimum of 20%. This practice of looking for self-funding takeovers builds in an explicit cost of capital, then the realistic chances of a significantly higher return with lower risk. We believe that good investment returns are more about avoiding mistakes than picking ephemeral shooting stars. Successful investment is about discipline. For a company to meet the requirements of a self-funding takeover there are three main criteria which must always be met: It must have a sustainable franchise: the operating and net profit margins must be stable and hopefully expanding; It must show a strong or improving free cash flow yield, with enough cash to meet future dividend and capital expenditure commitments; The valuation must be attractive and neither fully reflect the true current value nor future earnings growth. Bedlam's investment process is fundamentally value-orientated and seeks to screen out absolute risk. We view risk in two ways: first, excessive valuation; second, the threats to the key factors which drive earnings. This is because any reduction in forecast earnings must reduce a company's valuation. All portfolios are built from the bottom up, on a stock-by-stock basis. However, we recognise that no company operates independently of its wider geographic and business environment, so there is a requirement to screen the large universe of listed equities down to a typical portfolio size of 30-50 individual holdings. Thus two macro-economic or 'top-down' filters are used, to generate a practical shortlist of potential investments. These are then analysed in more detail.

Top down filters

There are two - the credit cycle and capacity utilisation:  Credit - the growth in corporate and consumer credit drives demand. Thus a key filter both for a country or sector is to gauge where each lies within the credit cycle.  Capacity utilisation - a key element to a company's ability to sustain or increase its prices and margins is the level of capacity utilisation; this must include both the current and future level of capacity for the company and for the sector in which it operates. These two filters result in the removal of a large number of countries, sectors and stocks. As an example, in a strong consumer credit cycle banks will be beneficiaries; thus in a downturn, they are likely to screen out. There is a risk, however, that the negatives may be already in the share prices and valuations; thus although this sector is dismissed through the macro filters, several back-checks are made through four main valuation screens: Free cash flow yield Price-to-earnings, versus earnings per share growth The price-to-book compared with the return on equity The price-to-sales A sector or individual company may screen in through the top-down filters, but may not meet the self-funding takeover criteria, because of excessive valuation. Or a company may screen out on the credit cycle and capacity utilisation tests, yet the bottom-up valuations and the back-checking process will show whether the poor macro environment is already discounted by the given company's valuation. These bottom-up and top-down screens are used in tandem. The key decision is that, however poor the macro environment may be, if a given company fits the self-funding takeover criteria, it will be bought. Before a company can be purchased, we always create a full cash flow model internally. This modelling results in both an entry and exit price being set before the equity is purchased. As already mentioned, any given company must be a self-funding takeover and must pass the screening criteria. The setting of an exit price is an important discipline; this is the level that the stock should achieve over the following twelve months. When an investment meets its price target it is not automatically sold. First it is reviewed; then, only if there is no reason to raise the earnings forecast and hence the target price, it is sold. Stop-loss policies after purchase are not used, though any significant fall (more than 5%) results in an automatic review of the company's operation and valuation. "Collars" are used when a share price has exceeded its target, in order to capture what can often be significant momentum above our valuation criteria.