The Eclectica Fund

The Fund returned 3.5% (net) in Q1. 1 The main positive contributors to this performance were equities and FX. There were gains from long positions in consumer staples and Japanese stocks, as well as gains from shorts in industrial commodity related stocks. In FX, the Fund profited from being long the US dollar. Offsetting losses came primarily from long positions in commodity futures, spread across gold, oil and softs.

As measured by the DXY Dollar Index, the dollar gained 2.5% for the first quarter, and seasonally recorded one of its best monthly performances on record for the month of February. This strength was partly attributable to investors' perception that American economic conditions are improving, and also partly helped by the continuing crisis in Europe. Perhaps more interesting was another break from recent tradition, as the US dollar proved less negatively correlated to the performance of the stock market. It is early to draw anything firm from this, but Long Consumer Staples the sight of the stock market and the dollar rising in tandem looks more like the regime which accompanied the last two Given our longstanding caution regarding the prospects for the dollar bull markets of 1980-85 and 1995-2001. global economy we have looked to express equity risk by being long cash generative businesses with the strongest balance Long Japanese Equities sheets and the least economic sensitivity. This served us well in the first quarter when the performance of the S&P consumer Another investment theme we have been leaning toward ever staples index defied recent convention.2 Such stocks tend to since the end of 2012 is a long position in Japanese equities. under-perform their industrial brethren given the seasonal Back in 2008, we purchased a ten year 40,000 Nikkei oneoptimism that tends to surround the global economy at that touch call option. We had been struck by the historical time of year.3 This time around however they out-performed by observation that it had taken the Dow Jones Industrial Index rallying 13.8%. But with the annualised Sharpe ratio on our twenty five years to recover from the nominal price losses of basket looking unsustainably high, we took a tactical decision the Great Crash of 1929 and make new price highs. The gold to realise profits towards the end of March.4 price had required twenty-seven years to overcome its previous bubble high. Was Tokyo somehow different or would An unresolved but pertinent question is whether this price the persistent inflationary threat of a fiat currency and social action might mark the start of the next asset bubble? Consider democracy's abhorrence of deflation be such that dire the plight of a conservative investor: concerned about the risks economic circumstances could once more persuade them to to the global economy and hence cyclical equities; fearful of elect public officials intent on repealing the nominal loss? financial repression in Treasuries; trapped (possibly unfairly) by the prejudice of the ten-year bear market in US dollars; scared In order to turn bullish, we had to see a further deflationary that governments may have to haircut his savings account in shock. And as we examined Japan's economy we conceived of the bank; and now terrified by the sudden price collapse in a catalyst. As a consequence of the mercantilist policy of gold. It could be argued that for such an investor all roads lead seeking an external surplus with the rest of the world through to the safest, least volatile, most liquid consumer non- resisting the yens strength, the Japanese economy had built discretionary blue chips on Wall Street, which provide a 3% up a huge short position against its own currency. This left dividend income payable in dollars. them, we reasoned, vulnerable to exogenous shocks similar in nature to the Lehman crisis, when the currency strengthened Long US Dollar as foreign denominated assets had to be sold to make good yen losses registered back home. We reasoned that further The second of our major investment themes is the likely exogenous shocks were likely to produce yet more yen durability of the US economy relative to the rest of the world, strength. and the impact this may have on the US dollar. Unlike the rest of the world, America has dealt with the overhang of bad debts 2011 saw not one but two huge shocks. The global economy from the housing bubble through a vicious house price weakened as a result of the European crisis, and Japan was correction and resulting bust and the recapitalisation of its struck by a catastrophic earthquake. The yen strengthened banking system. Wages have come down sharply relative to sharply. We had posited that further FX strength would create Asia, the shale gas boom means energy is now far cheaper as duress at the corporate level and sure enough credit spreads well, and the resulting lower cost base is allowing the US to soon widened. By the start of 2012 we had witnessed the reclaim market share within the global economy. As such, US nation's two largest manufacturing debt restructurings, and at real GDP is 3.3% above the pre-crisis high of Q2 2008, one point it seemed that the impossible was becoming a reality whereas the European economy is still languishing 3.1% as household names such as Sharp, Panasonic and Mazda 5 below the all-time high recorded in Q1 2008.x looked likely to go bust. Even Sony only just managed to hold it together by issuing a large and very dilutive convertible.

1 EUR A shares. 2 The S&P 500 consumer staples index return for Q1 2013 was 13.8% whilst the S&P 500 industrial index was up 10.1% for the same period (Bloomberg). 3 See first quarter performance of the S&P 500 consumer staples index versus that of the S&P 500 industrial index (Bloomberg): Q1 2012: 4.8% vs 10.7% Q1 2011: 1.7% vs 8.2% Q1 2010: 5.0% vs 12.5% 4 S&P 500 consumer staples index achieved a Sharpe ratio of 7.8 for Q1 2013. Calculation based on daily data and a risk free rate of 1.95% (Bloomberg/EAM). 5 Sources: Bureau of Economic Analysis (US) and Eurostat (Eurozone). US data is Q1 2013 vs Q2 2008. Eurozone data is Q4 2012 vs Q1 2008.

The Eclectica Fund

We reasoned that such was the corporate pain that the political class would be forced to intervene more directly in the policies of the Bank of Japan. And, sure enough, as the economic conditions worsened last year, we saw a newly elected government fire the institution's two most senior decision makers and embark on a policy shift on the scale of the Plaza Accord. This dramatic regime shift and the resulting 20% depreciation of the yen is very bullish for Japanese assets (denominated in yen terms) and so with our catalyst in place we started buying TOPIX index futures and shares in Japanese property companies. Receive Rates However, we also caution that Japan's monetary pivot towards QE will not create economic growth out of nothing. Instead it seeks to redistribute global GDP in a manner that favours Japan versus the rest of the world. This is the last thing the global economy needs right now. For as we have moved into spring, business activity appears to be slowing as the inventory cycle brought about by Draghis speech and the re-opening of Chinese liquidity taps last year fades away. Reported PMIs are rolling over, and a destocking cycle combined with a resurgent and competitive Japanese export industry does not bode well for economies in Europe and the rest of Asia. This slowdown is occurring at a time when better global economic statistics over the last six months had served to enrich the risk premium available at the front end of sovereign bond curves, US dollar 3y1y rates backing up from 95bps to 150bps as an example. 6 We judged that the combination of richer rates and weaker economic data justified a much greater and wider fixed income exposure. Accordingly, since the end of the quarter, we have initiated positions split geographically across Australia, Europe, Korea, Switzerland and the US.

Conclusion In summary, as we move into the second quarter the key elements of our portfolio are as follows: long the Tokyo stock market trading just barely greater than its 50 year moving average (comparable to where gold traded ten years ago and where the Dow Jones traded shortly after the attack on Pearl Harbour in 1941), long low variance US equities, long the US dollar and receiving fixed income at the short end sovereign curves. Hugh Hendry, CIO

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Sources: CRB, Bloomberg, TSE, MOF and Eclectica AM. Data at 30 April 2013.

This document is being issued by Eclectica Asset Management LLP ("EAM"), which is authorised and regulated by the Financial Conduct Authority and registered with the SEC as an investment adviser. The information contained in this document relates to the promotion of shares in one or more unrecognised collective investment schemes managed by EAM (the "Funds"). The promotion of the Funds and the distribution of this document in the United Kingdom is restricted by law. This document is being issued by EAM to and/or is directed at persons who are both (a) professional clients or eligible counterparties for the purposes of the Financial Conduct Authority's Conduct of Business Sourcebook ("COBS") and (b) of a kind to whom the Funds may lawfully be promoted by a person authorised under the Act (an "authorised person") by virtue of Section 238(5) of the Financial Services and Markets Act 2000 (the "Act") Chapter 4.12 of COBS. No recipient of this document may distribute it to any other person. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed by EAM or their respective directors. This does not exclude or restrict any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any securities mentioned herein nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. Recipients of this document who intend to apply for securities are reminded that any such application may be made solely on the basis of the information and opinions contained in the relevant prospectus which may be different from the information and opinions contained in this document. The value of all investments and the income derived therefrom can decrease as well as increase. This may be partly due to exchange rate fluctuations in investments that have an exposure to currencies other than the base currency of the relevant fund. Historic performance is not a guide to future performance. The results portrayed for the Eclectica Fund are estimated, unaudited and subject to adjustment. Also, the net results reflect the reinvestment of dividends and other earnings and the deduction of costs and the management fees and profit allocation to the investment manager and the general partner, as applicable. Particular investors returns will vary from the historical performance due to participation in New Issues and due to the timing of subscriptions, withdrawals, and redemptions. The TOPIX index has not been selected to represent an appropriate benchmark to compare Eclectica performance, but rather is disclosed to allow for comparison of the Funds performance to that of well-known and widely recognized index. Past performance is no indication of future results. Inherent in any investment is the potential for loss. Eclectica has had positive trading results over certain periods in the past in the Eclectica Fund. However, prospective investors must consider the uncertain significance of past performance in determining whether or not to invest in the Eclectica Fund. Investors should not substantially rely on Eclecticas past record as a prediction of future performance. Investors should not assume that trading decisions made by Eclectica in the future will be profitable. An investor must realize that he or she could lose all or a substantial amount of their investment in the Eclectica Fund. All charts are sourced from Eclectica Asset Management LLP. Side letters: Some hedge fund investors with significant interests in the Fund receive periodic updates on the portfolio holdings. 2005-13 Eclectica Asset Management LLP; Registration No. OC312442; registered office at 6 Salem Road, London, W2 4BU.

6 Source: Bloomberg.