INVESTMENT PHILOSOPHY

The advisory services of Nielsen Capital Management Fondsmaeglerselskab A/S seek to achieve long-term growth of capital by investing throughout the world in common stocks of well-financed companies at a substantial discount to our assessment of the issuing company’s intrinsic business value.

Our investment philosophy derives directly from the investment principles of the late Benjamin Graham. In her book “Benjamin Graham on Value Investing” Janet Lowe writes:

Our primary goal is to preserve capital while seeking a satisfying rate of return on funds. As formulated by Benjamin Graham in his original textbook Security Analysis, “An investment operation is one, which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”.

Companies quoted on any stock exchange have two values attached to them; the market value and the intrinsic business value. The intrinsic business value is the value that would be allotted to the owner of the company if it were to be sold in an arm’s length transaction between the owner and a knowledgeable buyer. In liquidation, intrinsic business value would be the monetary value that the owner would end up with after having realized the assets of the company and paid all debts. Over time the market value tends to fluctuate up and down around the intrinsic business value.

We seek to analyze and evaluate this intrinsic business value by determining what the company could be sold for in the private market or by determining the value of the assets in liquidation. Investments will be made when the market value is at least 40% lower than the assessment of intrinsic business value.

The difference between the two sets of values is defined as “The Margin of Safety”. The lower the market value compared to the intrinsic business value the higher the margin of safety. This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.

Screening for companies internationally increases the possibility for finding undervalued securities, which again with the concept of margin of safety minimizes the risk for permanent loss of capital and increases the possibility for future potential reward. The principles of intrinsic business value and margin of safety are working in international markets as long as the particular country has the characteristics of democracy and a capitalistic mindset.

As the possibility for finding undervalued securities increases when screening for companies worldwide, so does the potential amount of undervalued companies increase, when the whole spectrum of market capitalization is taken into consideration. The majority of companies quoted on stock exchanges are in the medium capitalization to small capitalization categories. By focusing only on the big capitalization companies would simply be to close the fund for investment opportunities. We believe that the stock market, in its excesses, has and will continue to undervalue and overvalue companies compared to the intrinsic business values. Again to quote Benjamin Graham: “In the short run, the stock market is a voting machine. In the long run it is a weighing machine”.

Sometimes the market value will be at a lower level than the intrinsic business value influenced by the negative attitude from ma Sometimes the market value will be at a lower level than the intrinsic business value influenced by the negative attitude from market participants towards the near-term outlook for the economy or for the stockmarket in general. In other periods the market value will be above the intrinsic business value influenced by optimism and faith in the clear-sightedness and perceived “in-control-feeling” of individuals. These periods are but the mirror of market participants emotional swings between self-complacency and perceived control when everything is nice and fears and consensus-search when the mood is bad.





INVESTMENT CONCEPT

We seek to analyze and evaluate this intrinsic business value by determining what the company could be sold for in the private market or by determining the value of the assets in liquidation. Investments will be made when the market value is at least 40% lower than the assessment of intrinsic business value.

The difference between the two sets of values is defined as “The Margin of Safety”. The lower the market value compared to the intrinsic business value the higher the margin of safety. This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.

Screening for companies internationally increases the possibility for finding undervalued securities, which again with the concept of margin of safety minimizes the risk for permanent loss of capital and increases the possibility for future potential reward. The principles of intrinsic business value and margin of safety are working in international markets as long as the particular country has the characteristics of democracy and a capitalistic mindset.

As the possibility for finding undervalued securities increases when screening for companies worldwide, so does the potential amount of undervalued companies increase, when the whole spectrum of market capitalization is taken into consideration. The majority of companies quoted on stock exchanges are in the medium capitalization to small capitalization categories. By focusing only on the big capitalization companies would simply be to close the fund for investment opportunities. We believe that the stock market, in its excesses, has and will continue to undervalue and overvalue companies compared to the intrinsic business values. Again to quote Benjamin Graham: “In the short run, the stock market is a voting machine. In the long run it is a weighing machine”.



REALISTIC EXPECTATIONS

The concept of investing in undervalued securities with a large margin of safety requires the difficult characteristic, which generally goes against human nature; patience. Typically it takes 3 to 5 years for a security to go through the cycle from under valuation to fair value. This, on the other hand, has the positive side of lowering securities turnover and transaction costs to the fund. Historically, the amount of undervalued companies increases when fear is creeping into stock markets. Declining and depressed stock markets influenced by a general negative mood present numerous investment opportunities meeting the principles of intrinsic business value and margin of safety. We will become increasingly invested in securities in such an environment. Conversely, when the general mood is positive, investor enthusiasm is strong and stock markets are reaching new highs, the amount of investment opportunities decreases and we will become less invested in securities.

Since the 1920’s the US stock market has produced pretax “total returns” (appreciation plus dividends) of 10% - 12% p.a. US Bonds have returned 4%-5% p.a. International stock markets, measured by the MSCI World Index, has since 1970 produced pretax total returns of 10% - 11%. Our objective in managing funds is to achieve a long-term performance record superior to that of general stock markets.

At times we will be out of sync with the Market but by focusing on the margin of safety and trying to minimize the risk of permanent loss of capital, at least historically, rates of return have outpaced the Market. The most important notion in applying our investment criteria is to be disciplined and patient.

The track record of Mr. Nielsen presented in Appendix A has certain important characteristics; when markets are roaring ahead rates of return for the fund lag. But when markets are normal or declining the fund has outperformed dramatically. In 60% to 70% of the time the fund return has been higher than the general market.

Therefore, any superior record, which we might accomplish, should not be expected to be evidenced by a relatively constant advantage in performance compared to the average. Rather it is likely that if such an advantage is achieved, it will be through better-than-average performance in stable or declining markets. To the extent that this is true, it indicates that our portfolio may be more conservatively, although decidedly less conventionally, invested than if we owned “blue-chip” securities. During a strongly rising market for the latter, we might have real difficulty in matching their performance. We think the most objective test as to just how conservative our manner of investing, is arises through evaluation of performance in down markets. So, over a period of time there are going to be good and bad years compared to the general markets. There is nothing to be gained by getting enthused or depressed about the sequence in which they occur.

We must buy "value" when we find it. Sometimes these work out very fast; many times they take years. It is difficult at the time of purchase to know any specific reason why they should appreciate in price. However, because of this lack of glamour or anything pending which might create immediate favorable market action, they are available at very cheap prices. Therefore, we ask that clients evaluate our performance over 3-5 year periods, since semi-annual, or even annual, rates of return are not particularly meaningful.

When we have trouble finding stocks to buy at bargain prices, we may hold significant cash reserves. The price of this discipline has sometimes been missed opportunity, but the long-term result has been safety of principal and superior returns.

Our investments will be chosen on the basis of value, not popularity. We will attempt to bring risk of permanent capital loss (not short-term quotational loss) to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments.

We are not in the business of predicting general stock market or business fluctuations. Our efforts are devoted to finding undervalued securities. It is very important for us that clients understand this, are able to identify themselves with our investment philosophy, and have realistic expectations. Periods starting after reconstruction of portfolios and ending at the same time as portfolio responsibility is ending.



Our investment concept is suitable for investors meeting the following criteria