QUARTERLY REPORT

AS AT 31 MARCH 1996

Markets
The year started with a positive tone as most equity markets continued the strong trend shown in 1995. The world index was up by 4.0% in US dollar terms in the first quarter but there was considerable variance in performance among markets with Continental Europe showing rises in excess of 6%, the US somewhat less and the likes of Japan, Korea and Taiwan being flat to down. However, in Australian dollar terms, the MSCI recorded a decline of 1% on account of the Australian currency's strength. Fortunately the company's assets were 70% hedged back into Australian dollars and as a consequence, its pre-tax return was a positive 2.3%.

There are some interesting inter-market patterns. In Germany and Switzerland large capitalisation stocks have been very strong and the smaller companies have languished; in France it is quite the reverse with most of the large companies (tainted by Government interference) doing relatively poorly and some of the smaller stocks skyrocketing. In the US, the Dow Jones Industrial Index (30 major stocks) has done better than the broader market, while in Japan the price action has been more homogenous.

Portfolio Changes
The main activity through the quarter was to further reduce our US and Canadian investments notably in Airlines and we continued to add to our holdings in Japan and Korea. We consolidated our positions in Europe and reduced our holdings in Australia.

Disposition of Assets

Region	31 March 1996
Japan	28.9%
Western Europe	21.4%
North America *	15.9%
Other Asia	11.1%
South America	6.7%
Australia	2.3%
Eastern Europe and Russia	2.2%
Africa	0.5%
Total Invested	89.0%

* The North American position is fully hedged by offsetting sales of S&P futures contracts.

Top Ten Holdings (as at 31 March 1996)

Stock	Country	Industry	% Holding
IBM	USA	Information Technology	5.3%
Fuji Photo Film	Japan	Photographic	5.3%
Sekisui House	Japan	Housing	3.5%
Yamanouchi Pharm.	Japan	Pharmaceutical	3.3%
Olivetti	Italy	Computers/Telecoms	3.2%
Tabacalera	Spain	Tobacco	3.2%
Canon	Japan	Electrical	3.2%
Novell	USA	Technology	3.0%
Matsushita Electric	Japan	Electrical	3.0%
Alcatel Alsthom	France	Telecommunications	2.2%
TOTAL			35.2%

Investment Outlook
Readers may be a little perplexed by our enthusiasm for Japan given the adverse press coverage regarding the Japanese banking system. Our assessment is that this is already old news and that by and large the system is well on the way to mending itself. At present, we estimate that around 7.8% of total loans are non-performing assets (NPAs) and of these more than half have been fully provided for. On various measures of solvency, this suggests that between one third and one half of shareholder's funds (adjusted for hidden reserves) may still be under threat should it be necessary to make full provision for NPAs. With high profits presently being earned from the steep yield curve, such provisions would absorb less than three years of profits. Should spreads narrow as interest rates rise, there would be a corresponding improvement in asset quality. These figures represent the experience of the 21 largest banks in Japan which account for approximately 70% of the banking system. The stronger banks have already made full provision for NPAs while the weaker banks are still under-provided. This suggests that there may be periodic concerns about the weaker players (and indeed some of the non-bank financial institutions), but overall the system has passed its critical point.

It is precisely this deterioration in general profitability in Japan that gives us confidence about that market's attractive prospects. In contrast with US companies, which have just gone through a sustained period of rising profitability (growing returns on funds employed), the Japanese companies have just been through five years of severe profit suppression. This is well illustrated by the accompanying graph.

Note that return on shareholder's funds has fallen to barely 2% from around 9% in the early eighties. There were times in the seventies when this ratio was in the low teens.

Though the prices of most of our Japanese holdings have risen sharply since our initial entry, we feel this is just the beginning. Our research suggests that over the next 2-3 years these companies will see earnings exceed peak levels of 1990 which suggests that these companies are trading on prospective PE multiples in the high teens. These represent very undemanding valuations for the quality of businesses that we have been buying, notwithstanding the prospects of Japanese long term bond rates rising to say 4.5 to 5% in the intervening period (from current levels of around 3.5%). We are further comforted by the observation that our stocks are likely to earn higher ROEs than the market average and yet are trading at below average price to book ratios.

Korea
Having been one of the hottest markets in Asia in the late eighties, Korea is now one of the most neglected with PE ratings approximately half those of the rest of Asia. This is so even though the economy has matched the spectacular growth of the South East Asian tigers without greater inflation. The main reason for this low valuation relates to high interest rates, political concerns and limitations on foreign investor participation in the Korean capital markets. Each of these factors is arguably on the mend.

On the interest rate front, the picture is improving significantly. With the capital spending cycle having peaked in mid 1995, short term interest rates have already fallen from 15% to 11% in the last nine months. Capital goods account for nearly 40% of imports. Reduced imports imply lower liquidity flows out of the domestic economy. This together with easier official credit policy should raise interest in domestic equities. At the same time, the Ministry of Finance is gradually lifting the ceiling on foreign participation thus adding support to the market.

The political scene is far harder to assess. North Korea is reported to be on its last legs, characterised by power and food shortages. Attempts to divert attention from domestic difficulties have occasionally in the past led to desperate acts. Unlike in earlier periods though, the North will presumably have to consider any acts of aggression with the prospect of less overt support from its traditional allies.

Over the next twelve months it is probable that most of these concerns will have lost their thrust and we may well witness a liquidity/unification-driven bull market.

Shares of the broking houses have been the most ill-treated in this environment and it is our view that they will be among the strong participants in the market recovery. We have acquired several companies at their inherent book value which mainly consist of portfolios of bonds and equities which themselves are depressed by the weak market.

Europe
In Europe, we continue to pursue our theme of corporate restructuring. Though commentators tend to be rather critical of the speed at which the European companies are addressing their high cost structures, the process has been in motion for some while and we are quite impressed with the improvements that are revealed by close scrutiny of these businesses.

Currencies
There has been little change on our currency strategy; we remain fully hedged out of the Yen and the hard European currencies into US dollars. Further, we have hedged approximately 70% of our foreign asset holdings back into Australian dollars.

Stock Story - Oil Service Companies
Investors will know, frequently our stock ideas come from themes. We happened upon the theme of the oil service companies when we were looking into the oil tanker industry. We learnt to our surprise of the increasing amount of oil that was being extracted from older fields and discovered that this was a function of changing technology. This change has been driven by both the oil companies and their suppliers, the oil service companies. This classification covers all those companies that provide the highly technical services ranging from geophysical surveys, down-hole tools, well drilling, well logging, reservoir stimulation and resource management.

Following on from the massive boom caused by the oil price spike in the seventies, the industry went through a decade of severe contraction with worldwide exploration and production spending falling from US$45bn to US$29bn. During this phase, the oil companies took full advantage of the over supply of services and prices deteriorated sharply. This was accentuated by a major shift away from service-intensive exploration and deep gas well development to the exploitation of existing fields. This fall in revenues encouraged considerable industry consolidation.

Technological change continued to surge ahead with innovations such as the evolution of 3D seismic exploration which allows for much greater precision in locating and sizing potential oil bearing zones. Directional drilling technology has also seen a major breakthrough. Here drill bits can be steered from the surface which allows the drill string to move from the vertical plane to gradually curve onto the horizontal plane and then be steered in a manner which allows the well hole to follow the contour of the pay zone. Other devices have been perfected which allows the drill operator (from literally thousands of feet above the drill bit) to assess the nature and viability of the ground through which the bit is travelling. This "sight" and more reliable equipment has reduced breakdowns and drilling errors and this has sped up completion times of wells and therefore reduced costs.

Having been through this very difficult time, the climate is beginning to change for the oil service companies. Capacity contraction and consolidation is largely complete and a handful of companies have emerged as the principal players. At the same time, the oil companies have become more dependent on these outside suppliers following a philosophical change by oil companies regarding use of outsourced services. This combined with a general improvement in oil company profitability and a desire to increase oil and gas reserves, is giving the oil service companies more latitude to raise prices. Further helping their revenues is the growing complexity of the services they offer as well as new services such as those relating to reservoir management. The relationship has changed considerably over the last couple of years with there being a much greater sense of partnership than hitherto.

We have invested in two of these companies, Schlumberger and Western Atlas. The former is regarded as the all-round champion in the industry covering all aspects of exploration and recovery, while the latter is principally concerned with seismic and logging. Some of the contracts that Western Atlas is engaged in involve sharing in the risks and returns of the early stages of the development of a field.