BIAS Global Navigator - 2013-Jan

P O R T F O L I O M A N A G E R S S E C U R I T I E S A N A LY S T S December 2012

The Situation

2012 will be re-membered as awatershed year in

personal computing.Increasingly consumersare opting for tablets in-stead of PCs. MobileInternet use is acceler-ating and threatens tosurpass Internet usefrom desktops soonerthan analysts had an-ticipated.

Estimates are thatsome 117 million tabletcomputers were soldworldwide in 2012 and expectations are that another165 million will likely be purchased in 2013. Tablets arereplacing laptops and other devices as consumers usethis one device to meet multiple needs — as a laptop,television, telephone and camera thereby reducing theneed for multiple devices. Tablets also represent thenext evolutionary step in the mobility continuum, havingbeen purpose-built for “anywhere” access to carrier net-works. Users are now free to wander beyond the con-fines of home and office while remaining connected tothe Internet. This change in user preference has lit thefuse of ‘Tablet Wars’.

In this battle, there are four major players slugging itout for supremacy: Google; Microsoft; Amazon; and Apple.

Order of BattleThe Google “Nexus 7” is the company’s chance to finallygain a strong footing in mobile hardware; and if sales areany indicator, it’s a runaway success. This popular tablet,

QUARTERLY MARKET BRIEFING

Bermuda

produced in partnershipwith Asus, is reportedlyoutselling all other pre-vious Android-poweredtablets in just threemonths. The Androidoperating system re-mains open source,meaning that it is pub-licly available and freeto all, ensuring a plenti-ful supply of potentialapplications (Apps) forusers. This is uniqueamongst the tabletplayers and allowsAndroid phones to keep

a lower price point since the operating system is essen-tially free. The pricing advantage of Android-basedphones is one of the reasons for their high penetration inprice-sensitive markets. This said, Google is eyeing thefat margins Apple gets in selling ancillary entertainmentcontent offered through the various ‘Apple’ stores in itsclosed, proprietary universe. Google has already begunvertical integration efforts, purchasing Motorola Mobilityin 2011, thus becoming a hardware vendor

Microsoft was fast becoming irrelevant in a post-PCworld so to combat this they recently introduced the“Microsoft Surface” tablet. A business-friendly tabletthat could revolutionize the market and essentially openup an entirely new category by tapping into high profitmargin hardware and more importantly, giving Windowsa new purpose in the mobile age. In Microsoft’s favouris the “BYOD” (Bring Your Own Device) movementsweeping across offices everywhere. BYOD enables con-sumer devices to be used for work. The “BYO” technol-

This literature does not constitute an offer to sell or a solicitation of an offer to purchase any security and cannot disclose all risks and significant elements of such a purchase. BIAS’ services are only forsuitable investors who are able to bear a loss of their investment plus any undistributed profits. Important information including, but not limited to risks, fees and conflicts of interest, are presented in BIAS’FORM ADV or the Fund’s Information Memorandum. Examine the information contained in BIAS’ FORM ADV or the Fund’s Information Memorandum carefully before deciding to invest. Information hasbeen obtained from sources believed to be reliable, but its accuracy and completeness, and the opinions based thereon, are not guaranteed and no responsibility is assumed for errors and omissions.

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2

ogy trend at offices is supported by estimates that alarge percentage of businesses have already purchasediPads for staff. Microsoft’s advantage in this case wouldbe the availability of genuine Office applications runningon the tablet which would very much appeal to the en-terprise. The Surface represents the first tablet that iscompatible with business networks, almost all of whichare built around a Microsoft-centric infrastructure.Microsoft has been late to the party before and endedup turning the sector completely around – witness thecompany’s embarrassingly delayed re-sponse to the Internet then dominatedby Netscape. Within short order, theseemingly indestructible Netscape wasgone and Microsoft’s Internet Explorerbecame the de facto standard. Will his-tory repeat?

The Amazon Kindle redrew the publishinglandscape and some say the little e-readerbroke new ground for the Apple iPad byproving the concept of the tablet. The“Kindle Fire” first debuted in late2011 and has dominated thelow end of the tablet market— a first-generation Kindlecurrently goes for $159. Butstrangely enough, Amazon hasnever made money on these revolution-ary Kindles. Rather, they appear to be sellingthem at cost simply to get a foothold in the contentspace where the real money is made. In fact, Amazon isnearly giving Kindles away by selling them below cost.Thenew “Kindle Fire HD” for example is retailing at $199. Why?Because once users have a Kindle, they will buy books,movies and more from Amazon’s marketplace resulting inhigher margins and greater sales volume and better prof-its. However, the tablet landscape is not yet fully formedso Amazon must remain relevant and catch on with abroad base of consumers for this business model to work.

Apple has traditionally made large profit margins onhardware sales but the Company’s mega-growth and plushmargins really depends on what comes next. Consider thattwo-thirds of Apple’s profits come from the iPhone and thatAndroid has all but caught up with the iPhone in terms ofphone features and functionality. On the other hand, iPadmargins are nearly half what they are for iPhones. Fromthose numbers alone, absent iPhone’s breakneck growth,

profits and margins are likely to lose momentum. Apple willsimply have to evolve beyond the iPhone in the next fewyears as the device hits critical mass and margins com-press. Stronger competition from cheaper hardware is be-ginning to have an impact on Apple’s penetration rate asrecent figures show that Apple's dominance of the tabletmarket has declined to 50 percent in the Third Quarter2012, down from 65% the previous quarter.

Google is pursuing a similar low-cost strategy withthe Nexus tablet, profiting by driving traffic to the

search engine earning cash from ad-vertising and through-clicks ratherthan by the sale of digital or physicalgoods. Like Amazon, Google sells theNexus 7 tablet on a low-margin basis,aiming to really profit from tabletsonly after they are in owners’ hands

via their services businesses.While Amazon and Google

attempt to win share by price,Microsoft is taking Apple on di-

rectly: The ‘Surface’ sells for apremium price of $699, suggest-

ing that Microsoft's — not Apple's— device has higher margins. If

things go well, Microsoft could captureas much as 10 percent of sales by 2016,

Gartner Research estimates. That's stillfar behind Apple, but not bad for a late-

comer.However, Apple has one other huge critical

success factor — Apps. Apple recently surpassed275,000 iPad apps. That’s an order of magnitude higherthan the 4,000 in the Windows Store. Any device will failin the market if developers do not write apps to supportthe user – witness the RIM Playbook.

In the short term, the expanded iPad family will con-tinue to dominate the tablet world. Apple’s momentumis simply too great. But the Surface proves thatMicrosoft is serious about taking control of its destinyand will obviously not rely on their hardware partnersfor help. The mere existence of this device has alreadyspurred Windows 8 device makers to step up their game— or at least to lower their prices. That’s a sure-fire signthat a true tablet war is upon us.

BIAS owns all four of the following equities men-tioned here: Google, Amazon, Apple, and Microsoft.

Tablet Wars (Continued)

Any device will fail inthe market if developers

do not write apps tosupport the user.

3

US equity markets have witnessed a rush of newsaround companies declaring special cash divi-dends. This comes as investors brace for what

may be a significant tax increase on qualified div-idends in the New Year. To clarify, quali-fied dividends for tax purposes aredefined as:

Dividend that must — • be paid between January 1, 2003 and

December 31, 2012,• be paid by a US corporation, by a corpo-

ration incorporated in a US possession,by a foreign corporation located in a coun-try that is eligible for benefits under a US taxtreaty that meets certain criteria, or on a for-eign corporation’s stock that can be readily tradedon an established US stock market (e.g. anAmerican Depositary Receipt or ADR), and

• meet holding period requirements: You must haveheld the stock for more than 60 days during the121-day period that begins 60 days before the ex-dividend date.

According to Markit, a recognized global data firm,since the start of the Fourth Quarter 2012, a record 103companies have announced they will pay special divi-dends before the end of the year. Moreover, the firmforecasts that 123 companies will announce specialfourth-quarter dividends, compared to the previous av-erage of just 31. Reasons given relate to the changescoming in the US tax law. Major companies such asCostco, Las Vegas Sands, Paychex, and Wal-Mart havedeclared special dividends or have moved up quarterlydividend payments so as to avoid the tax increase from15 percent to 20 percent at a minimum, to as much as39.5 percent depending on the outcome of the ‘fiscalcliff ’ negotiations. These figures do not take into ac-count a supplementary tax of 3.8 percent on investmentincome to pay for the President’s health-care law whichwill also take effect in the New Year.

Possibly, the driver of this largesse is the result ofUS corporate incentive schemes related to stock optionawards. Many major US corporations offer employeestwo versions of stock options as an inducement to re-main with the company. Incentive Stock Options (ISO)

a n dRestricted

Stock Options(RSO). ISO’s do

not figure into theequation since these awards pay no dividends until therecipient exercises the option, but RSO’s do in a big way.The way RSO’s work is that an employee is awardedcommon stock that vest at some point in the future —usually ten years. The shares are issued at the closingmarket price just prior to the date they are awarded sothat over the ten or so years one hopes — and the em-ployees are encouraged to work — to increase the valueof the company so the shares will rise. The value of theaward is tax deferred until they expire or mature but inthe meantime the recipient is entitled to the dividends!

The favourable tax treatment on qualified dividendsthat are distributed quarterly will, over time, result in a niceaddition to one’s pay packet. Moreover, since the higher-upthe food chain one is, the more RSO’s one receives as thesize of most awards is based on salary or salary plus bonus.

So there you are! Senior executives with several yearsof service build up plump RSO accounts, all the whiledrawing quarterly dividends. With the imminent changeto the tax laws and the consequent impact on the tax ad-vantages of qualified dividends executives have everyreason to declare large special distributions or accelerate2013 dividend payments into 2012. This has very little todo with current year earnings of the underlying company.

Going forward, however, once tax changes are putin place we suspect that special dividend declarationswill return to the long term averages between 15 and 40instances in coming years.

Why Special Dividends?

Certain statements contained within this literature are forward looking statements including, but not limited to, statements that are predications of or indicatefuture events, trends, plans, or objectives. Undue reliance should not be placed on such statements because by their nature they are subject to known and

unknown risks and uncertainties. Actual results could differ materially from projected results due to numerous factors, many of which are beyond our control.

Bermuda Investment Advisory Services LimitedWessex House, First Floor, 45 Reid Street, Hamilton HM12

P.O. Box HM 988, Hamilton HM DX, BermudaTel: (441) 292-4292 • Fax: (441) 292-7292

E-mail: [email protected] • Web Site: www.bias.bm

BIAS (Cayman) LimitedGovernors Square, 23 Lime Tree Bay Avenue, Suite 5-203,P.O. Box 30862, Grand Cayman, KY1-1204, Cayman Islands

Tel: (345) 943-0003 • Fax: (345) 943-0004E-mail: [email protected] • Web Site: www.bias.ky

Registered Investment Advisor with the U.S. Securities & Exchange Commission. Licensed to conduct Investment Business by the Bermuda Monetary Authority. Licensed by the Cayman Islands Monetary Authority to conduct investment business.

Past Performance is not indicative of future results. Please note that the investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost; and that current performance may be lower or higher than the performance data quoted.

Management Commentary

low highRisk:

low highRisk:

low highRisk:

low highRisk:

Performance Q4/12 1-Year 2-Year 3-Year Since Incept.(Annualized) (Annualized) (Annualized)

Equities Fund 0.11% 4.73% -2.20% 1.70% -2.15%

Benchmark 2.35% 13.83% 1.79% 4.44% -1.22%

Performance Q4/12 1-Year 2-Year 3-Year Since Incept.(Annualized) (Annualized) (Annualized)

Dividend Fund -1.76% — — — —

Benchmark 2.35% — — — —

GLOBAL EQUITIES FUND

GLOBAL DIVIDEND INCOME FUND

GLOBAL BALANCED FUND

SHORT DURATION INCOME FUND

www.biasglobalportfolios.com

Equities Q4 2012

In Fourth Quarter 2012, equity price volatil-ity returned as global equity markets de-

clined into mid-quarter. From late Novemberon, global stocks rallied as eurozone minis-ters agreed to a tighter regulatory regime byauthorising the ECB to oversee the region’s20 largest banks. Further, economic datafrom China showed improvement signallingan end to the slowdown in Asia’s largesteconomy. Perversely, the decline in US mar-kets came on fears that a compromise on the‘fiscal cliff’ would prove elusive. The top per-forming regions were Europe and Asia whilethe top three sectors included Finance,Consumer Discretionary, and Industrials.

Fixed Income Q4 2012

Longer-dated Treasury yields werevolatile in the Fourth Quarter but ulti-

mately ended higher on speculationPresident Obama and Congress wouldreach a deal on the ‘fiscal cliff’ and on signsof improvement on the eurozone’s sover-eign debt crisis. Yields on the very shortestTreasuries fell slightly in the quarter as theFed announced that the Fed Funds rate willremain low until US unemployment de-clines to 6.5 percent. Corporate bonds hadanother good quarter and delivered strongresults owing to high investor demand fortop-rated issuers that offer relatively betteryields than Treasuries.

Currencies Q4 2012

The US dollar weakened against the euroin Fourth Quarter as eurozone finance

ministers and the IMF broke a deadlock onreducing Greece’s long-term debt and au-thorised the ECB to regulate the region’s 20largest banks. Boosted by a stronger euro,other European currencies appreciatedagainst the dollar as well with theNorwegian krone as the region’s strongestperformer. The Canadian dollar depreciatedagainst the greenback on weaker economicdata. The Japanese yen depreciated againstthe dollar on the likelihood that oppositionleader Shinzo Abe was to become Japan’snext Prime Minister.

Benchmark:* S&P Global 1200 Index

Inception Date: December 29, 2006

Benchmark:* S&P Global 1200 Index

Inception Date: September 28, 2012

Performance Q4/12 1-Year 2-Year 3-Year Since Incept.(Annualized) (Annualized) (Annualized)

Balanced Fund 0.17% 5.14% 0.09% 2.85% 1.01%

Benchmark 1.47% 8.87% 2.71% 4.87% 1.81%

Performance Q4/12 1-Year 2-Year 3-Year Since Incept.(Annualized) (Annualized) (Annualized)

Short Duration Fund -0.28% 0.26% 0.25% 1.18% 1.92%

Benchmark 0.06% 0.43% 0.95% 1.41% 3.09%

Benchmark:* Blended Composite†

Inception Date: December 29, 2006

Benchmark:Citigroup 1-3yr Treas Index

Inception Date: December 29, 2006

*Prior to April 1, 2012 benchmark was FTSE World Equity Index. † 60% S&P Global 1200 Index/ 20% Citigroup 1-3Yr Treas. Index/ 20% Citigroup 3-7 Yr Treas. Index

Performance (as at 31st December 2012)