Johnston Asset Management

Like almost everyone else, we are delighted that 2008 is over. While 2009 will undoubtedly be full of challenges, we feel cautiously optimistic as we look forward. The recession is at a depth unrivalled since the 1930’s, but counter-action has been both aggressive and immediate. The Fed has been using a full arsenal of monetary tools to ensure that a 1930’s-type depression is avoided, and, importantly, has been joined by concerted action of central banks of all major nations.

The actions undertaken by the Federal Reserve just since September are staggering. The Federal Funds rate is close to zero. The Fed has provided a back-stop for the commercial paper market, key to short-term corporate borrowing. The Fed has also begun to purchase securities issued by Fannie Mae and Freddy Mac, in an effort to support the housing market. The incoming administration has plans to spend something in the range of $850 billion in a fiscal stimulus program. While other countries’ efforts are somewhat less dramatic, interest rates around the world are being cut significantly, and governments who can afford to have announced fiscal stimulus packages of their own.

Given that we are in a new era of intervention, both fiscal and monetary, economic forecasting is even more challenging than usual. Despite the massive scale of the efforts being thrown at the problem, the impact will be seen with a lag. De-leveraging will take time, and consumer spending in the US will recover slowly. This recovery will be healthier though, based on real demand for goods and services, paid for from discretionary income, rather than cheap borrowed money.

That said, fourth quarter 2008 GDP and corporate profits are shaping up to be dismal, so comparisons will become easier at the end of 2009 and into 2010. As a discounting mechanism, we could expect the equity market to reflect the bottoming in growth well before it happens. We do not expect a sharp, v-shaped recovery though; rather, more of a gradual resumption of growth.

From a portfolio perspective, we continue to focus our investments on high-quality companies with better-than-average long term growth prospects. We pay close attention to the price we pay when we make the initial investment, seeking an attractive entry point that our analysis indicates is a value price. While dividend yield is not a significant driver of our investment process, we do consider it when researching investment opportunities. This is the approach upon which our long-term track record was built; it remains solid, and we believe it will serve us well in the future.

Finally, we understand that this is an uncomfortable time to be invested in equities. Many clients are nervous and would prefer to be in cash. However, as tempting as that is, research shows that there is almost always a sharp recovery year after the end of a bear market, and that coming out of the last nine bear markets the average first year return was 36%. Given the quality of the companies in the portfolio, their operating, not financial, leverage, and the extremely attractive valuations they have, we see no reason to expect a different outcome.

As always, we appreciate your business and welcome your questions, comments, and referrals.

Johnston Asset Management offers commingled investment vehicles to provide accessible and efficient participation in our investment strategies. We offer limited partnerships for our Growth Equity product as well as our International product. The Growth Equity partnership invests primarily in U.S. equities including ADRs. The International partnerships invest primarily in international equities including ordinary shares. We have also opened an International Group Trust vehicle designed specifically for ERISA accounts. These structures are attractively priced and include custody fees. The Growth Equity LP provides for receipts and withdrawals on a quarterly basis. The international vehicles allow monthly liquidity. If you are a qualified investor and would like additional information, please contact us.