QUARTERLY REPORT

30 June 1997
As noted in the last quarter, the market is recognising some of our latent investments while some of the new additions have made an immediate contribution. The Fund advanced a further 6.8% in the quarter, giving the return in the year to date of 12.6%. While we are regaining momentum, our absence from the US market (where we still maintain an over hedged position) is adversely affecting our return in a relative sense but as we have described on numerous occasions, we feel we can make more sense of the valuations of shares in other markets.

PFL Cumulative Performance Versus FT World Accumulation Index

Changes To The Portfolio
As you will see, we continue to find interesting companies in North East Asia. We have added a blend of domestic orientated and export sensitive stocks in Japan such as Japan Tobacco, Asahi Breweries; Kyocera, Shimano and Toshiba. In Korea, we have continued to add to Samsung Electronics and have introduced Samsung Fire & Marine. We have re-entered the Indian market taking a position in ICICI (a provider of long term finance) and VSNL (the international carrier). We have added further to our Siemens in Germany and introduced Rinascente in Italy (one of the country's largest retail chains, principally hypermarkets and supermarkets).

Top Twelve Holdings (as at 30 June 1997)

Stock	Country	Industry	% Holding
Fuji Photo Film	Japan	Photographic Equipment	4.7%
Yamanouchi Pharm.	Japan	Pharmaceutical	4.0%
Schindler	Switzerland	Construction	3.6%
Daiichi Pharm.	Japan	Pharmaceutical	3.3%
Matsushita Electric	Japan	Consumer Electronics	3.1%
Nintendo	Japan	Home Entertainment	3.0%
Lagardere	France	Media/Defence	2.8%
Siemens	Germany	Industrial Conglomerate	2.7%
Canon	Japan	Office Equipment	2.6%
Swiss Industrial Group	Switzerland	Packaging	2.5%
Samsung Electronics	Korea	Electronics	2.5%
Banque Nationale de Paris	France	Banking	2.1%
TOTAL			36.9%

Disposition Of Assets

Region	30 June 1997
Japan	34.1%
Western Europe	31.8%
Other Asia	11.5%
South America	8.2%
North America	3.2%
Australia	1.5%
Cash	9.7%

The markets continue to soar in the world of Goldilocks (economic activity that is not so fast as to create inflation problems and higher interest rates, and yet fast enough for companies to achieve profit growth). As noted in previous commentary, the headwind of restructuring and fiscal rectitude is retarding the recovery in Japan and Western Europe. However, the benefits of cheap money are coming through and growth is apparent on the broadening front. Aiding matters further is the relative calm in currency markets which have allowed Japan and Europe to maintain the competitive advantage their currencies have gained against the dollar starting in mid-1995. The dream run of moderation in the United States continues with the Federal Reserve Board apparently unwilling to pre-empt a rise in inflation with the emphasis seemingly having shifted to a more reactive stance. The concern about asset price inflation has not diminished but in terms of its political brief, the Fed is focusing on consumer price inflation for now.

This "ideal environment" of slow if stodgy growth has however been at a cost to some of the tiger economies of the Pacific. Most notable is Thailand which has long feasted on a rich diet of heavy inward investment and low cost short term money. It now finds itself losing competitiveness and as the economy has slowed, servicing this debt is proving burdensome.

The Korean economy, with its high dependence on world trade, has also suffered from an over-investing binge but its relatively low dependence on external capital flows protects it from external pressures. It is starting to see the benefits of accelerating exports and falling imports particularly of investment related items.

The general wash of events that has overshadowed the Pacific Basin region has passed Hong Kong unscathed. It is continuing to benefit from the relatively low cost of money (related to its fixed exchange rate to the US dollar) which together with a booming hinterland, is creating unrealistic expectations in its property market (a little apartment on the Island without views would now cost you some US$1mn).

Indonesia is receiving more favourable commentary now that the elections are out of the way. The managed float of the currency has given the Central Bank a degree of control over monetary policy. This combined with the migration of manufacturing from its higher cost northern neighbours, is permitting the economy to grow strongly without undue inflation pressures.

The search for yield is greatly benefiting Latin America. Foreign buyers of traded securities and the flow of direct investment is acting to reinforce the reforms that have been in place for some while now. Corporate borrowers have moved with alacrity to lock in relatively low fixed term borrowings with quality names being able to raise loans paying barely 2.5-3% more than the US Government.

The big event in Western Europe has been the election of socialist governments in both the UK and France. In the case of Britain, the policies of the new government look like having little adverse effect on the established pattern. The decision to give greater independence to the Bank of England and the emphasis of the Government's first budget suggest that the new regime is following orthodox economic policies. The electoral decision by the French population has resulted in a coalition of socialists and communists and is reminiscent of the Mitterrand era of 1981. The initial utterances indicate a high degree of government intervention and a slowdown of reform. However, it seems unlikely that France can by itself resist the prevailing global pressure to reduce State intervention in the economy. As far as its immediate effects on European Monetary Union, it is clear that fiscal discipline has been somewhat relaxed. The prospects are surely now for a broad and flat grouping rather than a deep and narrow model that seemed probable only recently.

Outlook

The Positive Forces That Have Been Driving Stock Markets Are Still Intact.
The lack of price pressure caused by abundant capacity should continue to encourage Central Banks in most of Continental Europe and Japan to maintain easy money conditions. The lessons learned from the US model, and which is now something of a reference point, is that the reordering of the linkages within an economy should produce a relatively long and gradual recovery which is very different from the inflation-prone cycles of the seventies and eighties. (The ability of the US to tap significant resources on its borders - Mexico and Canada plus the requisitioning of imports further afield aided by a strong currency, do make comparisons a little uneven but nevertheless the big surprise in this environment has been from the supply side.) Even as growth synchronises, cost pressures in the laggards (Japan and mainland Europe) will be held in abeyance by virtue of still under-utilised resources. The likely pattern is that the leaders within the cycle will continue to raise rates ahead of the others and hence the interest rate differential should widen.

The US economy is surprisingly robust given the duration of the current economic upswing. The market is predominately focused on the idea that the low level of unemployment poses a threat to the current level of relative price stability. It is evident that the financial market boom is creating a virtuous circle of confidence and expenditure yet it would be wise to monitor signs of economic weakness. Credit card delinquencies are exceedingly high and durable good sales and orders have stalled.

Enhancing the general feeling of well being in the US is the notion that we are entering a period of greater economic stability on the back of the information technology revolution and that the American model, which looked rather dowdy in the mid-eighties, has now come into its own. The belief that the "business cycle is dead" may have a short life but for the moment it is a popular view. The unusual convergence of events which stem from significant and protracted currency cycles which have unleashed a whole galaxy of sub-events, or which have coincided with such events, should not be misinterpreted as a new economic paradigm. After all, at the macro level, Asia has just demonstrated errors of expectations with a super investment cycle; the micro-chip industry has had a similar binge and nowhere is there better evidence of the vitality and exuberance of crowd behaviour than the current headlong charge into equities.

With most of the indicators suggesting relative price stability, the bets must be with the Fed being reactive rather than proactive notwithstanding its concerns about asset price inflation. In this environment, valuations of stocks will play second fiddle to the tidal wave of money that is seeking higher returns.

The realisation that supply side changes have shifted the level of inflation back to that last seen in the late fifties and early sixties, has added another leg to the bull market. The folklore built around the threat of upward racheting levels of inflation during the Seventies and Eighties, has taken a long time to dispel. The problem now facing investors is that their cash deposits are earning seemingly meagre returns at a time when they observe others capitalising on the rising valuation of long duration assets (especially equities). We are now entering an environment where the stock market is creating its own folklore involving the open vistas of opportunity available to multi-nationals and the selective evidence that equities always produce superior returns through time. So long as the competition for these funds remains low, and there are no exogenous shocks, the compulsion to own equities will grow.

As usual, despite our caution, we are concentrating on the areas where there is some value and maintaining an element of protection through cash and derivatives.

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