ERQA-Capital Fund

Investment Philosophy
Key points:     Contrarian Value driven Long term oriented Focus on inefficient markets

Financial markets tend to overreact, leading to huge market inefficiencies. This is due to a natural human behavior explained by crowd psychology theories. As a matter of fact, most fund managers fail to outperform their benchmark because of this flaw. Standing away from the crowd requires discipline and is usually psychologically difficult but highly rewarding.

Long term oriented:
Because of several factors such as the institutional imperative and the structure of bonuses for most managers, there is a strong competition to predict short term movements and little profit to be made there. Focusing on long term prospects proves to be far more rewarding and cost efficient.

Focus on inefficient markets:
If markets were efficient, there would be no need to conduct thorough financial analysis and a passive indexed investment strategy would be just fine. Small and Mid cap stocks presenting low liquidity are not followed by many analysts and huge inefficiencies can be found there, leading to great opportunities.

Value Driven:
“A bird in the hand is worth two in the bush.” Value investing with a margin of safety provides genuine conservative investors with both limited downside risk and high profits. Both a strong balance sheet and good cash flow ratios are required before further analysis.

Mehdi MEZIANE, Asset Management & Equity Research.

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Past Performance and Statistical Analysis:
The portfolio total return yields a +77% since inception (over a 4 year period) which translates into a +15.4% compounded annualized return despite 2011 financial crisis in Europe.

Figure 1: Portfolio Performance against CAC40 French Index

As we can see, the beta (sensibility to market movements) of the portfolio has been increased progressively since inception of the portfolio. It results in both higher correlation to equity market and in higher global volatility. This move satisfies the established contrarian strategy and is aimed to profit from currently depressed prices in European equity markets.

2012 2011 2010 2009 Since inception (4 years)

+23,56% +3,7% +12,26% +16% +77%

Volatility: (annual) Average annual return: Sharpe ratio: Max Drawdown:

12.2% +15.4% 1.26 -15.04%

Mehdi MEZIANE, Asset Management & Equity Research.

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Statistical analysis:
The histogram of the portfolio’s daily returns shows a positive skewness. This means small downside risk relative to upside profits. Note that no derivative products have been used in order to obtain this positive skewness. This characteristic is mainly due to the effect of takeover and share repurchase announcements on stock prices.

Figure 2: daily returns (2009-2012)

Mehdi MEZIANE, Independent Financial Analyst and Portfolio Manager. Contact:

Important note: This fund is not open to the public and this presentation should not be considered as a commercial proposal. Mehdi MEZIANE, Asset Management & Equity Research. Page 3

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