Interim Management Statement

6 August 2014 BACIT Limited ("BACIT") Portfolio Update During the second quarter of 2014 BACIT's net asset value ("NAV") increasedby0.30%. The FTSE All-Share (Total Return in £) rose by 2.24% during that time,and the HFRI Fund of Funds Strategic Index fell by 0.66%(in £) and rose by 1.84%(in US$). Since launch BACIT's total return has been 17.12%, the FTSE All-Sharehas risen by 23.35% and the HFRI Fund of Funds Strategic Index has risen by8.87% (in £), and 15.40% (in US$). BACIT started the quarter with 90.1% of NAV invested and 96.8% committed, andended it with 92.6% invested across 31 underlying funds and 22 managers. As wenoted in our May letter, we also made our first investment into one of theICR's early stage drug prospects during the first quarter of the year, takingthe number of holdings to 32. During the second quarter, we increased our holdings in Maga Smaller CompaniesFundand WyeTree European Recovery Fund, and thus the portfolio's exposure toEurope. We also met additional capital calls from the Fund's second privateequity investment Permira V, which has now drawn down 27% of our capitalcommitment, following the announcement of six acquisitions since late October2013. At 30 June 2014 the list of investments was as follows: % OF NAV Polar Capital Japan Alpha Fund 7.1%Majedie Asset UK Equity 5.8%BlackRock UK Special Situations Fund 5.2%Maga Smaller Companies Fund 4.9%Polygon European Equity Opportunity Fund 4.8%Tower Fund 4.8%SW Mitchell European Fund USD 4.7%Salt Rock Master Fund Ltd 4.4%Sinfonietta Fund 4.3%WyeTree European Recovery Fund EUR 3.7%The SFP Value Realization Fund 3.4%Portland Hill Overseas Fund 3.3%CG Portfolio Fund plc Dollar Fund 3.2%Chenavari Multi Strategy Credit Fund 3.1%Polygon Mining Fund 2.9%Russian Prosperity Fund 2.8%HC Master Fund Limited 2.6%Cumulus Energy 2.4%Infracapital Partners II 2.4%Chenavari EU Regulatory Capital Strategy 2.2%AIMS Diversified Fund 2.1%Polygon Convertible Opportunity Fund 1.8%WyeTree RRETRO 1.8%Prosperity Russia Domestic Fund 1.7%PCM Europe 1.5%Alphagen Relative Value Agricultural Fund 1.4%Chenavari EU Real Estate Strategy 1.1%Permira V 1.0%BlackRock Natural Resources Growth & IncomeFund 0.9%Optimal Australia Fund 0.7%SW Mitchell Emerging European Fund 0.4%CRT Pioneer GP Limited 0.2% BACIT continues to leave all investments made into US$ denominated fundsunhedged, but to hedge out all exposure to the Euro share classes. Sterlingappreciated by 2.36% against the dollar during the second quarter, prolongingthe headwind to NAV progress that has been a feature of the last 16 months. Asregular readers will know, this has detracted substantially from performanceof the underlying managers, ten of which are up over 35% since BACIT'sinception, and two are up over 100%. % of NAV UK £ 35.4% US $ (unhedged) 52.3% € (hedged back into £) 12.3% This sterling strength has reversed since the quarter end, as themarketsrecognisethat while theUK has shown solid growth for five quarters it isquite late cycle in shape, with house price inflation, car sales at 10 yearhighs, and a deteriorating trade deficit. The effects of PPI claims are nowwaning, and with rates currently too low, households will soon bere-mortgaging at higher rates.The Scottish Referendum is now being discountedby markets which appear to be sanguine about a `no' vote, but the generalelection is just 9 months away. % of Invested Capital Europe ex-UK 34.4% Asia-Pacific 16.7% Europe & US 16.3% UK 11.8% Emerging 10.5% US 9.3% Global 1.0% These effects, combined with profit-taking driven by over-valuation, therelative attractions of defensive large cap sectors which are lessdomestically exposed and so less vulnerable to the UK interest rate cycle, anda wave of new issues (85 in H1 vs. 94 in the whole of 2013), made for a weakquarter for UK smaller companies. With some similar issues in Europe, the second quarter prove challenging forlong only and hedged equity managers in the UK and Europe, as they moved tomore defensive positioning in terms of names in their portfolios and, for thehedge managers, flatter books. Nonetheless, the UK and EU remain 10% and 20%respectively below their long-term mean valuations, and managers remainconfident that there is plenty of opportunity. Q2 also saw a tsunami of new issuance (market estimates of €150bn) acrossEurope which dampened performance. The convergence of rates in Europecontinued during the quarter, helping all of the credit managers in theportfolio to solid or even strong contributions. With greatly improved coststructures across the continent, even a small increase in demand would have asignificant effect: equities are still on relatively low valuations andcompany visits suggest that the EU recovery is solid, even if credit demand ischronically weak. The key reason that we have continued to increase theportfolio's exposure to the region is the expansionary package of QE policiesfor 2015, which should provide the area with a liquidity insurance policy ifQE withdrawals hurt elsewhere. Japan and Russia recovered ground lost during the previous quarter, withBACIT's managers all outperforming their benchmarks - one ofour Japan managersis up 170% since BACIT's launch. Japan remains a core part of the portfolio,though five straight months of declines in industrial production perhapsexplain in part why Prime Minister Abe continues on his frenetic world tour,visiting 47 countries in the last 18m asking them to "Buy Abenomics". Theinflation critics have been silenced for now with 13 months of inflation, nowrunning at well over 3%, and more importantly the structural reforms thecountry needs are starting to take shape. In addition to the expected corporate tax cuts (from 35% to 25%), visa andimmigration changes, and possibly another round of easing, the Cabinet mademajor announcements on Corporate Governance and a Stewardship Code which arelikely to have profound long term effects on Japanese equities and theirvaluations. For example, directors will need to explain publically whycompanies have cross-shareholdings, and many companies are expected to unwindthem increasing liquidity. Finally, the dividend payout ratio is risingrapidly now, swinging the pendulum further towards shareholders. The second quarter saw markets reopen for Russian debt capital raisings, andthe markets and the currency recovered the ground they lost in Q1on the backof the Ukraine crisis. However since the quarter end, anticipation of and theimplementation of sanctions against Russia in retaliation for the horrificevents surrounding flight MH17 in mid-July have caused both markets andcurrency to retrace some of that progress. Though financial centre reformscontinue - as of 1 July Russian equities are now clearable, and there was asecondary public offering of the Russian Exchange - and Russia signed agame-changing energy deal with China (worth $400bn over 30 years, and underwhich Russia will export 20% of its gas and 25% of its oil from ~6%), thesehave unsurprisingly garnered little attention. % of NAV Equities 56.6% Credit 11.9% Macro 8.8% Commodity 8.6% Fixed Income 3.2% Infrastructure 2.4% Private Equity 1.2% Cash 7.4% The portfolio also benefited from positive contributions from the managers inthe macro, commodity andresources, fixed income, infrastructure and privateequity spaces during the quarter. Finally, our South African manager also madea strong contribution, and we continue to look to add to BACIT'semergingmarket(EM) holdings over time, subject to finding the right managers, and tothe consequences of the withdrawal of liquidity by the Fed. Though one wouldnot know it to look at the calm in EM today, normalisation of QE is likely tohave ramifications for other areas of the world. We have therefore continued to pull the net exposure of the portfolio backthrough allocations to managers with a lower beta than the equity markets, andmany of the managers themselves have cut their books, or rotated them intomore defensive positioning. This is with the aim that the portfolio shouldweather any coming rise in volatility and correlations and resultant falls inasset prices better than the markets. In this vein, we are incredibly pleased to announce that on 1 August we haveadded a new fund manager to the portfolio, Zebedee Growth Fund ("ZGF"), takingthe portfolio to 95% invested. ZGF is a long-short European equity manager whohas a propensity to vary his gross and net exposures according to opportunity,and a history of preserving capital in difficult markets. BACIT's success is entirely dependent on the philanthropy of the talentedmanagers with whom we invest, and we warmly welcome those who are now engagingwith BACIT. We are extremely grateful to our existing managers for delivering anotherquarter of absolute returns, and look forward to updating you in the autumn. BACIT Management Team, 6 August 2014 About BACIT BACIT Limited ("BACIT") is a closed-ended investment company, registered andincorporated in Guernsey (registration number 55514). BACIT was admitted totrading on the London Stock Exchange's main market for listed securities on 26October 2012. Shares in BACIT trade under the ticker BACT.L. BACIT's investment objective is to deliver superior returns from investmentsin leading long-only and alternative investment funds across multiple assetclasses. BACIT only invests where the relevant investment manager providesinvestment capacity on a ``gross return'' basis, meaning that BACIT and itssubsidiaries (the "Group") do not bear the impact of management or performancefees on its investments. If you would like to receive our monthly factsheets and quarterly commentariesdirect, please contact: [email protected]