The small and micro cap oriented RMG2 Value Catalyst model portfolio posted a loss of 26.65% for the quarter ending September 30th, 2008. As of the end of the third quarter, the year to date loss was 31.80%.

The portfolio is largely composed of small and micro cap securities, and the majority of the businesses, based upon portfolio weightings, operate outside of the United States. The public peer group that I benchmark against are also small cap oriented internationally themed mutual funds. Their returns as of September 30th were as follows:

Trailing Returns as of 9/30/08 (8.44%)

Ticker	Fund Name	3 Mo. Return	YTD Return	1 Year Return	3 Year Annualized	5 Year Annualized
PVADX	Allianz NFJ Small Cap Value Admin	(4.57%)	(6.79%)	(10.26%)	4.92%	12.86%
PASMX	Pacific Advisors Small Cap A	(12.16%)	(18.35%)	9.58%	18.43%
NTKLX	ING Intl SmallCap Multi-Manager A	(28.34%)	(35.20%)	(41.44%)	(1.66)%	10.16%
IEGAX	Thomas White International	(25.30%)	(36.88%)	(39.76%)	3.35%	17.44%
OSMAX	Oppenheimer International Small Co A	(41.59%)	(50.28%)	(52.30%)	(4.33)%	11.20%
RMG2 VC	Value Catalyst	(26.65%)	(31.80%)	(29.07%)	11.34%	33.01%

Returns assume reinvestment of dividends and distributions. Performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment returns and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.

1. All returns as of September 30, 2008
2. Mutual fund returns from Morningstar
3. RMG2 VC returns are from a model portfolio managed at www.marketocracy.com using virtual money. Returns include virtual transaction fees of 5 cents per share and virtual annual operating expenses of 1.95%

All of the peer group have posted negative results for the year to date. This is reflective of both market volatility, and the lesser liquidity generally attributed to small cap securities. However, for the first time in a number of years, RMG2 VC has soundly underperformed its peer group.

I believe that there are several reasons for the current level of underperformance.

1. RMG2 VC has a more focused and concentrated portfolio than many publicly available mutual funds. Most publicly available mutual funds will often hold several hundred securities, and seldom less than 50. They will also endeavour to distribute overall portfolio assets broadly, often limiting any specific holding to less than 5%. By way of contrast, I tend to hold no more than 25 securities in RMG2 VC, and often less. The portfolio also will overweight securities that I consider as having the potential for long term performance superior to small cap indexes in general.

This deliberate emphasis on concentration and overweighting of preferred investments will often magnify returns, but can also magnify losses periodically. Concentrated portfolios are generally used more among several well known value oriented hedge funds, rather than mutual funds. It is also the methodology of icons such as Warren Buffet.

Value oriented hedge funds and private capital (Buffett et al) are able to adopt this style. They are able to "lock" investors into timeframes sufficient to prove out an investment thesis. The risk of underperformance over shorter timeframes typically precludes most mutual funds from employing this methodology.

2. Most of the key investments in RMG2 VC are far less liquid than the median small or micro cap company. During periods of extreme volatility, illiquid securities often move in an exaggerated fashion. The top two investments in RMG#2 (by portfolio weight) generally only see a few thousand shares per day trade. Some days, no trades will occur.

Any portfolio that is overweight in illiquid, or less liquid securities, carries with it the potential (and risk) for greater than average volatility. This has certainly been the case for the virtual account. Economic recessions are always accompanied by reduced liquidity. Accordingly, during periods of broadly based decline, volatility will be more pronounced for illiquid securities.

This is not the first period of short term underperformance for RMG2 VC vs. peers, and certainly won't be the last.

Reflective of my investment methodology, I deliberately pay little attention to liquidity issues in the marketplace. In the last recession, RMG2 VC had another six month period whereby the returns were below peers. The portfolio fell off, and then muddled along for a while. I grumbled a bit, and wondered why great stocks traded for such poor prices. Then the turn came and liquidity improved. Values of key stocks rose to reflect the fundamentals.

While a concentrated and focused style carries the potential for short term underperformance, I have no intention of changing my stripes in this recession.

There are a host of simple reasons for this.

1. Global equity markets generally have far more "up years" than down. Downturns fill investors with angst, but they don't tend to last very long. Stock prices also generally lead economic turns. Those who move out of stocks during recessions run the "opportunity risk" of missing the new bull cycle. As I'm not smart enough to know with 100% certainly when we are going into recession, I certainly can't call the turn out. Therefore, I am generally fully invested at all times of the economic cycle.

Both the mainstream media and the investment industry are less than helpful in recessions. Most widely economic indicators supplied are typically "lagging". Leading indicators are mostly just guesses. It has also has been my experience that stocks often move up inexplicably, often while the media is still reporting doom and gloom. These broadly based historical moves, often without good news, often sneak up on investors.

2. Investors sometimes use the "50% down-100%" up rationale, as a reason not to ride out swings in equities. This is a mantra of market timers. If refers to the fact that when an investment falls 50%, it must subsequently rise by 100%, to get back to break even. The investor theorizes that it must take at least 2X as long for a stock to rise by 100% to recover the loss.

While I understand the principle, I don't subscribe to it. In fact, I consider this to be just another misconception. In my years of investing, I have seen a great number of stocks rise by far more than 100%; faster than they fell 50%. Market timers often miss the ten baggers, in their efforts to avoid downturns.

3. Great companies look to capitalize on downturns through transformative acquisitions, or with organic expansion. Some companies, such as American Pacific (APFC), have broadcasted their intention of making an accretive purchase for a while now, but were unwilling to pay high prices. I have little doubt that in this buyers market, management can do something substantial.

Other companies are more closely guarded with their long term strategies, for competitive reasons. However, I want to own a business before the transformative purchases are made, not after the fact.

Next week, I will start to rollout my specific investment thoughts on the companies contained within RMG2 VC. Like my recent blog for RMG1, I will start highlighting three companies per article. I'll supply my investment rationale, what I am looking to see from the businesses over the next 36 months, and also spell out what I consider to be the bear case thesis.

Brazil is on the verge of a new era in offshore oil and gas development. Speculation abounds that one, or more, of the largest discoveries in the last 25 years has been found in Brazilian waters. While one elephant sized field is generally all that is required to turn a company into an oil "major", concessions largely owned by Petroleo Brasileiro S.A, or Petrobras (nyse: PBR $70.5), the Brazilian oil company, may potentially be home to an entire herd of elephants. Ultimately, production from the Campos, Santos and Espirito Santos basins may rival that of the North Sea.

Oil production from the new deepwater finds isn't likely to commence before 2011. However, companies that provide infrastructure to offshore rigs are already profiting from recently awarded contracts. Petrobras, as a partially state owned firm, has an informal mandate to distribute oil wealth throughout the domestic economy. Brazilian companies that supply goods and services to Petrobras will be first in line to benefit from this corporate largesse. Just as in other rushes, owning low risk businesses which provide "picks to prospectors" might, once again, represent an easy way to earn big returns over the long haul.

One local firm positioned to profit from this boom is Wilson, Sons (Bovespa-WSON11, 21.8 Brazilian Real). All amounts are converted from Brazilian Real to US dollars. The company operates two container terminals and an oil terminal, builds and owns drilling supply vessels (DSV) and owns the largest and most modern towing fleet in South America. A fast growing logistics division manages 1.5 million square feet of warehouses, and handles shipping and storage for a variety of multinational and domestic companies. The company was founded in 1837 and raised $117.8 million in an IPO on the Sao Paulo Stock exchange in April 2007. Wilson's Brazilian Depository Receipts (BDRs), were listed at a price of $11.74 US, 10.6X the trailing 2007 EV/EBITDA ratio.

Perhaps due to its limited history as a public company, this rapidly growing small cap is priced at what I consider to be value multiples. The discount certainly can't be attributed to a weak balance sheet. Total liabilities were just $55.6 million on March 31, 2008. There are 71.2 million shares outstanding for the market cap is $950 million. From 2005-2007 revenues grew from $258 million to $404 million, an annualized increase of 18.9%. EBITDA grew from $49 to $91.4 million, an annualized increase of 28.8%. Net profits grew from $25 million to $57.8 million, an annualized increase of 43.8% over the past 36 months.

With funds raised from the IPO, management embarked upon a major expansion of all operations. $220 million of capital spending is planned for 2007-2008. This represents a substantial increase over the $78.4 million invested in the two years preceding the IPO. Port handling capacity will increase by 55%, to 1.4 million twenty foot equivalent units (TEU) per year, up from .9 million TEU in 2007. The terminals had been running above capacity and had turned away substantial business in the past. Much of the newly added capacity will be immediately utilized.

Expansion plans in other divisions are equally well defined. Wilson is adding 12% more towing vessels to its fleet this year. The wholly owned DSV fleet will grow by more than 130% in size by 2010. All supply boats will be chartered to Petrobras. A $100 million four year contract to build supply vessels for a Chilean firm has recently been awarded. Petrobras has also announced a new 24 DSV tender. Wilson intends to bid for a further 8 vessels in this round, the maximum award any one company can receive per bidding round. Additional tenders for 122 more DSVs are likely during the next 6 years.

The expansion of high profit container ports, offshore platform supply businesses and towing services should produce strong revenue gains and improved operating margins. By 2011, revenues could exceed $610 million. EBITDA may surpass $180 million. If my forecast is met, three year EBITDA growth of 96% is possible, on revenue gains of 51%.

Despite all this potential, Wilson, Sons sells at valuations below that of slower growing peers. Trico Marine (nasdaq: TRMA, $38.39), Hornbeck Offshore (nyse: HOS, $52.70) and Gulfmark Offshore (nyse: GLF, $61.57) sell for 10.5X, 9.9X and 10.5X my 2008 forecast EV/EBITDA ratio. Wilson could generate $110 million of EBITDA in 2008, which prices the shares at 9.1X my forecast EV/EBITDA ratio. Arguably, a faster growing company with a stronger balance sheet than peers deserves a premium valuation.

I prefer owning overlooked companies capable of doubling earnings in three years, without leveraging up their balance sheets. Wilson nicely meets my criteria. Net profits may grow to $120 million by 2011. Management intends to pay out 25% of net annual profits in the form of dividends. The current payout of $.225 per share (1.8%) could increase by 100% by 2011. My three year price target is $26.80 per share, roughly 102% above the current quote.

Wealthy people often attribute success to simply being in the right place at the right time. If this is the case for individuals, can't this also be true for entire companies? It certainly appears to me that Wilson, Sons, a fast growing firm prior to the Petrobras discoveries, is about to embark upon an extended run of good fortune. The biggest two year capital expenditure program in corporate history will be completed by late 2008. Results of these investments should be apparent to all in 2009. Furthermore, Wilson's logistics division should produce superior returns as the Brazilian economy prospers. Finally, as a local company, Wilson will have the important "home field" advantage over foreign competitors, when attempting to generate more business with Petrobras. Intrepid global investors will find this small cap stock to be right up their alley

Wilson, Sons can be purchased by a wide variety of brokerage firms. I was able to place an order with my full service broker as easily as with any other foreign. The shares trade on the Bovespa (Sao Paulo Stock Exchange) in Brazil under the ticker symbol WSON11. Shares are quoted in Brazilian Reals and converted to US funds at purchase. The corporate website can be found at www.wilsonsons.com

BMB MUNAI (AMEX-KAZ, $6.95)

Investors seeking an international junior oil producer with rapid growth potential should consider an investment in BMB Munai. This company has a 100% interest in a 460 square kilometres concession in western Kazakhstan, known as the ADE block. This block is located within 28 km of oil pipelines and is fully covered with modern seismic undertaken in 2003. Infrastructure, rail and roads allow the firm to quickly bring oil production to markets. In addition, BMB has the right to explore an adjacent area known as the "extended territory".

The ADE block consists of carbonate Triassic formations, typically found at 3100-3800 metres (10,161-12,500 feet) below surface. Exploration drilling at the ADE block to date has proved up two oil fields, known as Aksaz and Dolinnoe fields. To date, a total of 8 wells have been drilled at these fields. Production from 4 Aksaz wells to date average 216 bpd. The 4 Dolinnoe wells have produced an average of 99 bpd.

Investors have found some Kazakhstan oil plays to be a frustrating experience

Kazakhstan exploration and production companies have sought to develop both sandstone reservoirs and carbonate reservoirs. There has been a clear correlation between the success of a junior in Kazakhstan and the type of oil reservoir targeted for development. Historically, companies in Kazakhstan that developed sandstone reservoirs generally grew production steadily, were highly profitable and eventually were bought out.

Kazakhstan companies that develop oil production from carbonate reservoirs have, on the other hand, often experienced difficulties in trying to coax oil flows from the "tight" shale like deposits. Wells plug up frequently and are tricky or expensive to stimulate. Production can be highly erratic. Some juniors find carbonate reservoirs to be problematic, and financial results have been disastrous in certain cases. Accordingly, sophisticated investors prefer sandstone reservoir producers.

BMB's newish discovery has the potential to be, by junior standards, a "company maker"

Until 2006, BMB was considered one of the "carbonate" companies, and traded at a steep discount to global peers based upon reserves. The discovery of a sandstone reservoir in the Kariman prospect may have changed fortunes for the better. A total of 6 wells have been drilled over the past 2 years in a relatively uncomplicated sandstone formation. Average production has been surprisingly good, at 528 bpd per well. BMB intends to drill at least 4-6 more wells into this structure within the next 12 months. I am confident that equally high levels of productivity might extend to future wells in the Kariman field.

Proven reserves are likely to grow rapidly in 2008

BMB reported 14.95 million barrels of proven reserves in 2007, which included 2.7 million barrels attributed to one successful Kariman well.

Since that report, a total of 5 more Kariman wells have been drilled. All were successful.
Probable and possible reserves attributed to Kariman were 20.1 million barrels in 2007. A shift of some of these reserves to the proven category should have occurred in 2008, based on this success.

Production looks to be on a steep growth curve, albeit from a modest base

In 2006, production averaged 624 bpd. Average production for 2007 was 882 bpd. For the fiscal year ending March 31st, 2008, it appears that production averaged 2400 bpd.
This year, production might average 3700-3800 bpd. Next year, I forecast 5600-5800 bpd of average production. In 2010, production could surpass 10,000 bpd.

EBITDA looks to be increasing at an equally fast pace

I report a fully outstanding share count of 55.6 million shares. I include a variety of "in the money" options, warrants, share grants and a $60 million convertible debenture that verges on being "in the money". BMB has net liabilities of 10.4 million, after assuming conversion of the debentures. This results in a current enterprise value of $391.2 million.

For fiscal 2007, EBITDA was $2.5 million. In 2008, EBITDA was approximately $38.7 million. For 2009, EBITDA could surpass $61 million. At this level of EBITDA, capital expenditures and SG&A look to be about fully met. In 2010, EBITDA could surpass $90 million.

Based upon my forecast, BMB is selling for roughly 6.4X my 2008 EV/EBITDA ratio and 4.3X next years' forecast EV/EBITDA ratio. This represents a discount to valuations for 11 other international junior E&P firms in my sample.

Management's interests seem to be fully aligned with common shareholders, a rarity in Kazakhstan

BMB is considered to be the first public oil and gas company listed in the US that is operated and controlled by Kazakhstan citizens. Management and insiders control roughly 34% of the outstanding common shares. BMB's CEO is Boris Cherdabayev, a well known member of the Kazakhstan oil community. The Cherdabayev family has ties with many of the leading public and private companies now operating in Kazakhstan.

As a largely Kazakhstan company, BMB may be better prepared to operate in the Kazakhstan oil business than foreign run firms. Unlike many junior oil and gas firms that I have followed in Kazakhstan, I am impressed with management's attention to detail during the exploration and development stages of the field concession. Often, juniors take shortcuts in their efforts to quickly get production flowing. In Kazakhstan, shortcuts generally cost a firm its concession. A rigid oil ministry often pulls licenses for failing to comply with exploration contracts to the letter. When this happens, local Kazakhstan firms readily swoop in and claim potentially valuable assets for themselves.

BMB, thus far, has taken great pains to exceed all terms and conditions of its concessions, at the expense of short term production growth. Many of the ADE and extended territory wells can produce from multiple horizons. Management carefully tests all productive zones and shuts in wells periodically to satisfy conditions spelled out by the government. Current rates are being reported from just one zone in each well. It seems clear to me that rates from all fields will jump during the production phase.

One caveat to this story is that tax rates for BMB will jump dramatically in the latter half of 2009

Investors should note that oil producers in Kazakhstan are required to sell 20% of all oil production to local markets, at local prices. This is priced at 25%-27% of quoted Brent. Remaining output may be exported at world prices.

All export production in Kazakhstan is now subject to a recently imposed export tariff of $14.95 per barrel. BMB export sales also have freight and shipping charges of $14.15 deducted from quoted Brent prices.

BMB presently pays a modest royalty (2%-6%) on production, as the firm is in the exploration phase on its oil fields. Production licenses are to be sought on July 9th, 2009. Upon conversion of the concessions to a production license, the fiscal terms change considerably. In addition to increased royalties, an export rent tax, based upon a sliding scale will apply during the license phase. At current prices, this tax is 33%.

To put this into simple terms; while in the exploration phase, BMB should receive roughly 63% of Brent benchmark prices for its output.

For all of 2009, taking into account that BMB will have lower taxes until July 9th and higher taxes thereafter, the firm should receive an average of 54% of Brent benchmark in that year.

In 2010, after the license agreement is fully in force, BMB should receive roughly 46% of world prices after all government taxes, levies and shipping charges apply.

In order for BMB to simply remain as profitable in the license phase as they are at present output will need to increase by 36%, or 1332 bpd. For many junior companies in Kazakhstan this would represent a real challenge. As I estimate that BMB's oil output may grow by a further 6300 bpd over the next 24 months, the new taxes should not be problematic.

It is possible that BMB will shortly become a self funded producer

In the next 24 months, accelerated development at Kariman might push total oil production from all fields to above 10,000 bpd. It is possible to envision 2010 EBITDA of $120 million. At that rate, BMB could dramatically step up development of all fields, without having to issue more shares or add debt.

BMB is my top Kazakhstan oil pick for US investors

Unlike a number of US junior firms which have "tried and failed" in Kazakhstan, local management at BMB is intimately familiar with the workings of the oil ministry. BMB has at least one uncomplicated field with some real upside (Kariman), which is all a junior generally needs to become self funding. Management also seems keen on the outlook for the Aksaz and Dolinnoe fields. I consider any potential success from these fields to be an added bonus. If production growth meets my forecast, BMB could be fairly valued at $15 per share, or 6.5X my 2010 estimated EV/EBITDA ratio.

I have recently purchased BMB for RMG#2 as an overweight position.