As We See It, the Current Equity Outlook ...                      Third Quarter 2006

It appears that a few of the headwinds that have concerned us over the last nine months are starting to abate. Energy prices, while still high in absolute terms, are starting to fall to the palpable relief of consumers. Interest rates have plateaued. However, our third major concern, a potential slowdown or retreat in the housing market, is in full swing. The effect that it will have on consumers and the broader economy remains to be seen. Anecdotally we hear that housing inventory in the northeast is sky-rocketing, and that many parts of the country are seeing price declines for the first time in many years. This is accompanied by a dramatic slowdown in mortgage refinancing. The impact on cash out refinancings, technically known as mortgage equity withdrawals (MEW), is of a magnitude that we have never experienced. Therefore, we have no basis for predicting what its effect will be. It is widely agreed that strong MEW was a boost to consumer spending. It is prudent to think that the converse could be true. The stock market appears to be discounting a modest economic recovery. We remain slightly more cautious.

Happily, our firm has been growing, and we have selectively added employees to ensure that we continue to provide the high level of client support that you deserve. This has meant a person here or there over the last few years, but to our tight knit group, every one counts! Our formerly comfortable suite in Stamford, CT has started to fill up, and now presents us with the opportunity to apply some of the technologies we have been evangelizing about for years. Let us highlight two in particular.

Companies in the financial services industry generate enormous amounts of paper. In our case our company research alone fills a corner of the office with file cabinets. Thanks to the online availability of company filings and sell side research, and the improved functionality of scanning technology we are moving to a model where we keep the vast majority of our research on our server, where it is backed up daily and is electronically accessible remotely by our portfolio managers when they are out of the office. Our proprietary notes from meetings with companies can be scanned and retained the same way. All members of the investment team will have access to the information when they need it, improving our ability to give each other input, while we save space and find the room for another desk!

Similarly, our phone system is at the limits of its current capacity. We cannot add lines without adding an expensive new module. One alternative we are exploring is a Voice over Internet Protocol (VoIP) system. This would effectively allow us to use the office’s data network as a voice network. It is many times more scalable than a conventional solution, and would allow us to add sophisticated internal messaging features that would help us all be more productive. External calls would be handled with the same personal care that you have come to expect from us.

Why are we telling you about these issues? To highlight our investments in enabling technology providers, of course! EMC (11.98), for example, is the leader in data storage. We think that, among small firms, we are in front of the curve in terms of digital storage and archiving of data. While EMC has made great strides with large organizations, the company has a largely untapped opportunity with smaller firms. Cisco Systems (22.98) is the leading VoIP system provider. They leverage their expertise and customer base in data networking to provide reliable, flexible, and cost effective telephony solutions to their clients. One of the systems we are considering is made by Cisco. It might not be the right one for us, but we’ll let you know.

EMC and Cisco offer exciting opportunities, and we look forward to keeping you posted on their progress.

Water: A Compelling Investment

Water is both mundane and precious. We cannot create it, yet water is infinitely renewable. It is by far the most common substance on earth, but it is an unequally distributed essential resource, often polluted and wasted. We have exactly the same amount of water in our ecosystem today as we had 10 million years ago. The difference between then and now is that there are now more than 6.6 billion people competing for this increasingly scarce resource, and there is no substitute.

Shortages of fresh water are a major problem in both developed and developing countries. Even in the US, the pipes, valves and pumps that transport water throughout many regions are over a hundred years old and need to be replaced. In China and the Middle East big projects are under way to create new water supplies. Parts of Africa and India have water shortages that create ongoing crop failure.

The global imbalance between supply and demand for water has created a healthy business environment for a broad range of companies that provide solutions to the dilemma. These companies range from manufacturers of water treatment and filtration equipment, to those building water infrastructure such as pipelines and sewage treatment plants, to those running water utilities.

A recent addition to our international portfolios, Veolia Environment (60.38), is one such company. Veolia, headquartered in Paris, specializes in the outsourced management of water services for municipal and industrial customers. It is also a world leader in the design, building and operation of turnkey facilities for water and wastewater systems using a wide variety of technologies. More than half of Veolia’s business is outside France, and France itself is the world’s second-largest water consumer per-capita behind the US.

Veolia is not the first water-related company in which we have invested. Calgon Carbon provides services and solutions for purifying water. Pall Corporation, a supplier of integrated filtration, separation and purification technologies, has a significant water business. Millipore filters lab water for life science applications, and although water process technologies are a relatively small portion of GE’s overall business, the area has been the focus of many of the company’s recent acquisitions.

The United Nations estimates that the demand for fresh water will triple in the next 30 years. With no source of additional supply, the global water industry, and those companies with a dominant franchise within it, are well-positioned for continued robust secular growth.