The Terra Fund posted a gain of 0.x% for November. We have maintained a cautious approach towards markets in November, finishing with a net exposure of 11% and a gross exposure of 75%. The Fund has 34 positions with the top ten accounting for nearly 50% of NAV. Our greatest exposure remains in alternative energy, a net long of 18.5%. At the stock level, the biggest winners were positions in Detour Gold +22.7% (precious metals); Rio Tinto +14.7% (mining); and Yingli Green +22.6% (solar).

The alternative energy sector’s biggest event – the UN Climate Change Conference takes place in Copenhagen 7-18 December. The conference will attempt to lay the groundwork for a binding agreement to stabilise greenhouse gas emissions to less than 550ppm, the upper range considered necessary to limit temperature rises to a manageable level of 2-3 degrees.

Much has been written in the press about the Conference being a failure because there will not be a legally binding agreement between countries at its conclusion. We believe the conference WILL be a political success and should be seen as the end of the beginning of global consensus on emission control and climate change. It is expected that in 2010 a legally binding agreement will be ready to be signed. The reason for this is that politically the positions of US and China have converged on climate change and emission controls and both countries will have a more co-ordinated approach in future. We believe this will provide the powerful catalyst for many other countries to fall into line.

From an investor’s perspective, this is tremendously exciting. The billions of dollars already invested in alternative energy generation will just increase over the coming years. Furthermore this will have huge ramifications across all sectors and industries, especially in the natural resources asset class. Many companies that are today involved in production and generation of energy from conventional sources are becoming increasingly involved in energy generation from alternative sources due to the necessity to do so and also because they have the financial scale and ability to invest the billions of dollars needed.

The single biggest source of CO2 is the burning of fossil fuel to generate electricity, accounting for 40% of total CO2 emissions. Together China, US and EU currently account for 55% of global emissions. With China likely to contribute 63% of total global incremental emissions by 2020, its participation is a must to make a meaningful difference in emission levels even if the rest of the world cuts unilaterally. One of the key routes China will have to follow in reducing its carbon emissions is by reducing its coal consumption (over 2.5 billion tonnes per year). This explains China’s unprecedented thrust towards nuclear and renewable energy.

The day after Barack Obama conditionally pledged US emission reduction targets of 17% by 2020, China announced that it will reduce its CO2 emissions per unit of GDP by 40-45% from 2005-2020. Already, China has very ambitious alternative energy targets for 2020: wind 150GW (current capacity circa 20GW), solar 20GW (minimal) and nuclear 86GW (just under 10GW). When put into context, this is remarkable, as its estimated on demand generation capacity currently stands at 900GWh, so the new generation will add almost 30% of capacity. Bear in mind that a large coal fired power plant is around 1GWh.

There has already been something of a ‘Copenhagen rally’ in renewable and clean energy stocks. It is becoming clear that more investors are now assessing the impact of climate change on their investment strategies and portfolios. As we keep saying, we believe that this will be the most exciting investment sector for the next 10-20 years. We believe that clean utility, wind, solar and nuclear stocks will benefit from the Copenhagen rally and have taken positions in selected stocks like Yingli Green, Scottish and Southern, Dongfang Electric, China High Speed Transmission and Cameco.

Although we continue to see numerous valuation anomalies in the alternative energy and broader natural resource market, we are concerned that the general market consensus seems to be short the US Dollar and long risky assets. Even though we believe that the USD will continue its path lower as global flows seek high yielding assets and sovereign reserve managers seek diversification away from the USD with its numerous structural issues, this is becoming a very crowded and dangerous trade. It seems that all asset classes gain when the USD weakens and fall when it strengthens. Dubai may have served as a wake up call to overly complacent investors. When anything as relatively small as Dubai spooks the market, it should serve as a warning sign. The world has priced in 5% GDP growth for the US and much of the developed world in the equity and commodity markets. Either we have to get that or the markets are going to have to come back to the reality of what we think is going to be a much lower growth figure.

We believe alternative energy and natural resources are inextricably linked, with alternative energy just another way to ultimately produce cleaner electricity, as a replacement for coal or natural gas. This is a fact. Furthermore this new capacity has to be connected to local or national power grids. Copper is the medium by which this connection is made and we are bullish on the metal and long selective stocks. For example, China accounts for 38% of global copper consumption. Of that, 2.8 million tonnes of copper (16% of global consumption) is consumed in electrical applications which include cabling, power generation, and electricity distribution alone. This year, miners have staged strikes in Peru, Mexico and Chile to push for higher wages.

Overall, commodities are flying high: although global industrial production, a proxy for demand, is 14% lower than a year ago, most commodity prices have soared despite elevated levels of inventory. Even long dated commodity future prices have increased significantly, with long dated copper futures nearly doubling in price from March’s levels. We believe that a significant portion of commodity price appreciation is due to the flood of liquidity that central banks have injected into the world’s financial system and in turn the increased investment in commodities as an asset class, which has completely changed the rules of the game. The danger is that constantly increasing commodity prices will lead to higher inflation forcing central banks to tighten monetary policy quicker than they desire. Although we are long term bulls on the natural resource sector, short term technicals looked stretched in some sectors.

Among the signs that the stimulus package has not repaired the yellow brick road to prosperity is the upside breakout in the “bad news asset”: Gold. Investors and emerging-market central banks have become keen on gold, with India, Russia and Sri Lanka all buying the oldest currency and ultimate store of value. Highly underweight bullion, Asia’s official gold holdings now account for only 2.4% of total reserves, compared with 60% in the EU and 77% in the US. For the first time in years, central banks are net buyers, not sellers of gold. Investors view gold as a portfolio diversification tool to protect against volatile stock markets, low interest rates and inflation concerns.

Physical demand remains strong with the SPDR Gold Trust (GLD) accumulating the equivalent of 25% of global gold mine production since the beginning of the year. The NYSE listed ETF is now the 6th largest holder of gold in the world. Also, gold is not just a USD weakness story; it is setting new highs in Sterling, Yuan, Indian Rupee, Swiss Francs and other currencies. But higher prices are not leading to increased production – despite a three-fold increase in global metal exploration expenditures, gold mine production has remained stagnant at 80 million troy ounces for the last decade.

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