Stock markets rose strongly over the third quarter, in spite of continuing underlying concerns. Indeed, towards the end of the period, world equities reached five month highs. The economic outlook -particularly in the US, but also in Europe -and the strength of the European banking system are still at the forefront of investors' minds. Economic data remain mixed but growth is positive, and emerging economies continue to expand strongly. Sentiment towards western equities is still poor and commentators are tending to report the most negative interpretation of events. Flows into equities are still very low, particularly in the retail funds; bonds and emerging markets -and preferably emerging market bonds -continue to be the consensus purchases. This poor sentiment explains the very cheap valuations for developed world shares. We do see good scope for confidence to improve, driving investment into solid, global equities, particularly where yields are high. We do not dismiss the concerns surrounding US growth, European sovereign credit and the effects on growth of de-gearing in western economies. Against these worries, however, we must set very low interest rates, unconventional monetary stimulus (the famous QE) strong corporate balance sheets and strong growth in emerging markets -and of course, very low valuations for good quality, large companies. During the quarter, a new investment was made in Deutsche Telekom-the dominant telecom provider in Germany -and we increased the portfolio's direct exposure to the Indian mobile market by switching from Singapore Telecominto Idea Cellular.We continued to buy Equinox Minerals and completed the purchase of Xstrata.All of these transactions were discussed in previous monthly reports. In September, further shares were purchased inBelgacom, Belgium's public telephone company -following a positive meeting with the management -and rights were taken up in Sky Deutschland.We recently met the new chief executive of Sky Deutschland, who is very impressive; before joining the company he was a long time executive at BSkyB in the UK, where we knew him well. The holding in Lennar Corporation, the second largest listed homebuilder in the US, increased on price weakness; we participated in a small placing of Ludorum, the children'stelevision production company, at a good price; and a new investment was made in Samsung Electronics.

The first three months of the year ended on a positive note with investors becoming more confident in the recovery and increasing their equity holdings. This confidence, however, evaporated in the second quarter. Fears over European sovereign risk were rekindled in spite of the huge support fund agreed between the members of the eurozone in May, following on from the emergency funding of Greece. European banks retreated again as investors became increasingly worried over the impact of sovereign credit on their balance sheets, and indeed, worry was the most visible emotion during the period under review.

It is clear that investors are currently in no mood to take anything on trust. As if to confirm these fears, the actions of the Chinese authorities appear to have slowed China's economy and economic statistics across the developed world have been weaker. The market response to these developments seems to have been accentuated by a lack of support from conventional investment managers, who increased holdings at the beginning of the year. This left hedge funds and other opportunistic investors to push markets in the direction of least resistance, which at the moment, is down.

There have been some positive developments over the quarter: the long-awaited freeing of the renminbi; the sovereign bailout in Europe; the gathering consensus of fiscal retrenchment as exemplified by a well-received UK budget; a normalisation of foreign exchange rates and significantly diluted bank capital adequacy plans.

The performances of the markets and the portfolio have been disappointing over the quarter and the issues that concern investors are serious. We have maintained our positive view of equities as we believe that ultimately the current fears, although real, will diminish and confidence in the sustainability of the recovery will return. We must not forget that Europe, in general, is in better fiscal shape than the US; that the world is going to grow strongly this year; and that the financial institutions, which so worry the world, have recently been through a very substantial balance sheet clean-up and recapitalisation process.

Most importantly, equity valuations are extremely attractive - particularly when compared to competing asset classes - even though volatility is currently very high. We think that it is correct to be fairly fully invested now, when many investors are capitulating and valuations are so low across the board. The long-term investor is being presented with the opportunity to own shares in a selection of high quality companies at truly compelling prices.

During the quarter we completed the purchase of Pepsico and took advantage of price weakness to add to the holdings in Bunge (the world's biggest oil seed processor), Syngenta (which specialises in seed production and crop protection) and Vivendi (the French media group). The holding in CVS Caremark, the US drugstore chain, was sold at a good profit and the proceeds invested in its rival, Walgreen. New investments were also made in Lennar (the second largest listed home builder in the US), Teliasonera, the Scandinavian telecom company and the pharmaceutical companies, Pfizer and Roche.

In June, the holdings in Husky Energy and Suncor Energy were topped up and further shares were purchased in BP. BP is currently at the height of its difficulties in the Gulf of Mexico. Dividends will be suspended, management changes may be required, fines are likely and restrictions may be placed on BP's future American business. However, there are a number of factors that support the case for investing in BP at the current depressed price, not least of which is the fact that the Gulf of Mexico represents only 14% of its current production (the US as a whole is 27% of current production). Just over one-third of BP's assets are in the US.

Although BP was the operator and main partner in the Macondo well, 35% belongs to Anadarko and Mitsui. Responsibility for the spill currently rests largely with BP, but ultimately, the costs may be shared amongst the various partners in the project. In addition, a combination of balance sheet strength and highly cash generative operations put BP in a strong position to cope with this crisis. Analysts estimate that even if total costs from the spill exceed the upper end of current estimates by 50 per cent BP will still be trading on less than 5x enterprise value to debt adjusted cash flow, which is a very low valuation on both a relative and absolute basis.

New purchases were recently made in the resource companies Equinox Minerals and Xstrata, and in Transocean, the largest owner of offshore rigs.

During the quarter, pessimism surrounding emerging market growth has caused share prices in the resource sector to decline. While we have thought for some time that growth in China in particular, will be moderated from the high levels of recent times, we believe that the refocusing of growth within China away from the coastal area will still lead to strong growth in demand for many natural resources. The long-term theme of increased urbanisation and prosperity in the emerging world should continue to provide demand for natural resources and we are particularly interested in those which are supply constrained, whether from a paucity of new projects (such as copper and metallurgical coal) or from bottlenecks in infrastructure (such as thermal coal).

Equities followed a broadly positive trend during the first quarter, with major indices ending the period on an upbeat note. Over the three months to 31 March, the FTSE 100 was up by 4.93% in sterling terms, the S&P 500 had risen 4.87% in dollar terms and the MSCI (in sterling) had increased by 9.38%. This positive performance was achieved in spite of the continuing uncertainties over global recovery.

For much of the period, economic data has been mixed and fears over the effects of the removal of fiscal stimulus, the path of the Chinese economy and the credit worthiness of some sovereign borrowers have persisted. The Greek crisis, which weighed on the euro and sentiment generally throughout most of the quarter, moved a step towards resolution when Eurozone leaders agreed a plan. Nevertheless, it is still a salutary reminder that the stressed state of the fiscal position of some countries is real and will not be reversed without patience and some fairly significant budgetary cuts.

Against this backdrop, the consolidation which began in Q4 2009 continued during the opening months of 2010. Markets, however, have become used to climbing a wall of fear, as has been demonstrated repeatedly over recent months, and during March - one year on from the lows - major indices recorded their highest levels since 2008.

During the quarter, additions have been made to Exelon and Royal Bank of Scotland at good prices and the purchase of Alliance Data Systems, the Texas based technology and marketing company, has been completed. Rights were taken up in Unicredit, the Italian bank, and new investments have been made in Banco Santander and Oracle Corp. Cairn Energy was switched into Husky Energy and proceeds from the sale of ICBC were used to participate in a placing of Sumitomo Mitsui. Each of these transactions was explained in the monthly reports. In March, we bought further shares in Yum! Brands, the fast food restaurant company in which we first invested at the end of last year; the holding in St Joe, which holds a large block of development land in Florida, was topped up following a visit to the company; and new investments were made in Metric Property, Pepsico and Syngenta.

Metric Property is a specialist UK retail property company set up by Andrew Jones and Valentine Beresford, whom we first met when they ran the UK's largest retail warehouse portfolio for Pillar Properties. When Pillar was taken over by British Land, Jones and Beresford became responsible for running the entire retail portfolio of British Land in the UK and Europe They now see an opportunity in retail parks where some of the tenants, such as the DIY companies, have suffered during the recession and now have surplus floor space. Metric Property aims to use their expertise to re-let the space, increase the foot fall and optimise the tenant mix. It is fairly easy for a landlord to shuffle the tenants and Metric plans to bring in more of the faster moving fashion chains and crowd pullers such as Marks & Spencer, at higher rents.

Pepsico has grown its global savoury snacks business to the point where it is a bigger contributor to revenues than the beverage business. The branded foods business includes the Frito Lay brands in North America, Doritos, Quaker, Walkers crisps in the UK and a multitude of other local brands around the world. Drinks include the eponymous cola, Tropicana juices, Gatorade sports drinks and Lipton iced tea. The company has now bought its two main bottling operations and is investing to use the strong global snacks distribution network to expand sales in the faster growing areas of the world. The product offering is also being made healthier with cuts to salt and sugars in snacks and drinks and an expansion of the higher margin healthier brands such as Tropicana and Quaker. The balance sheet is sufficiently strong that while making these investments the company has been able to recommence buying back shares and pays a dividend of a little below 3%. Pepsico is one of the strongest global branded consumer companies. Historically, it has traded at a premium rating and this has prevented us from investing. After de-rating over the past few years the shares are now trading at around 13x next year's earnings while the company should be able to generate double digit earnings growth over the coming years.

Syngenta is the world's largest crop protection business supplying pesticides and herbicides to farmers across the globe. Over the last year we have been investing in the new theme of agriculture. Our idea is that a growing and increasingly prosperous population in the developing world will want more food and particularly more meat and dairy products. Producing these products uses land inefficiently and requires more inputs in order to raise productivity. The portfolio already owns holdings in Bunge (grain and feed traders and processors) and Potash Corp (which mines potassium fertilizer) and we have now added Syngenta to the list. The shares trade at a very reasonable low teen P/E multiple and have an attractive yield. The company has a strong balance sheet and capable management. Of particular interest is the second biggest division of the company, which is the world's second largest producer of seed. Until now, Monsanto has made very good returns as it had a virtual monopoly of the most advanced GM seeds. Syngenta has now developed a competitive range of seeds containing the most important genetic traits. We expect that this division will now grow very well, taking market share from Monsanto and raising margins considerably.

Sales completed during the quarter included Cairn Energy and ICBC - as mentioned above - and AMP and Prudential - the majority of which was sold before the price went down following the bid for AIG assets. In March, we started to sell Takeda Pharmaceutical and Nestlé and some profits were taken from Human Genome and Ludorum after extremely strong performances from both companies.

Strong contributions over the period tended to come from economically sensitive stocks including companies recovering from the effects of the credit crisis. Returns, however, were reasonably spread across the portfolio.

Equities, having risen substantially since the spring, began to consolidate in the fourth quarter. Fears over the financial strength of Dubai and then Greece threatened to undermine performance, but markets proved resilient, perhaps showing that valuations remain reasonable. Over the three months to 31 December, the FTSE 100 rose by 5.43% in sterling terms, the S&P 500 by 5.49% in dollar terms and the MSCI (in sterling) increased by 2.68%.

The significant recovery in share prices since the March lows reflects the degree of economic stabilisation that has been achieved. The worst affected sectors such as banks, insurers, property companies and other operationally and financially geared companies have recovered strongly, but valuations are still very moderate and further progress in the return to normality should see multiples move closer to previous levels.

The economic outlook does, however, remain unclear. We still need to see how global growth will cope with the coming withdrawal of fiscal and monetary stimulus. The authorities must balance the risks of recession and inflation quite finely -a difficult but not impossible task, particularly as emerging markets should continue to support global growth.

Sterling continues to trade at a depressed level, particularly against the euro, reflecting the economic and political uncertainties in the UK. However, on a purchasing power parity basis, the pound is significantly undervalued. A substantial improvement in the current account can already be seen as exports are supported and imports suppressed. A clear Conservative win in the general election, which we see as likely, would improve confidence that the fiscal position will be tackled. The fund has a significant sterling content which will reduce any drag from sterling appreciation.

As we outlined in November's report, the improvement in the markets has spawned a number of rights issues as companies have set about repairing their balance sheets.

During the quarter, the fund took up rights in BNP, which continues to be one of the winners emerging from the crisis. We also participated in the share offerings of Elders-the Australian rural services company -and Yell, the international yellow pages business, as outlined in the monthly reports. Recently, rights were taken up in ING.

As discussed in previous reports, additions have been made to the holdings in Bunge, the largest oil seed processor, IDEA Cellular, a large Indian mobile phone company, PICC Property & Casualty, the Chinese insurer, Potash Corporation of Saskatchewan, the world's biggest potash producer and Q-Cells, the world's largest producer of photovoltaic cells. In December we added to the holdings in HSBC and SNC-Lavalin.

New investments made during the period include Alliance Data Systems, a Texas-based technology and marketing company and Suncor, a Canadian oil sands company, where output is due to increase substantially. The holding in Bank of China, which had risen substantially, was sold and the proceeds invested in ICBC, China's largest bank -each of these transactions was discussed in detail in November's report. In December we made a new investment in Yum! Brands.

Yum! Brands operates over 36,000 quick service restaurants in more than100 countries. Its three largest brands are KFC, Pizza Hut and Taco Bell. The company is moderately valued with good exposure to emerging market growth. Its KFC chain is proving particularly popular in China where there are currently 2,700 outlets (compared with 1,000 MacDonalds). The company entered the Chinese market 10 years ago under the Pepsico umbrella. The company has also announced a major expansion in India in early 2010. Yum! Brands trades on a PE of 15x.

Several holdings were sold during the quarter including Alfresa, China Merchant, ConocoPhillips, Portugal Telecom and UCBH, for the reasons given in the earlier reports. In December, the fund completed the sales of Home Depot and Inpex. Human Genome continued to advance strongly and as in the third quarter, produced the highest contribution.

In general, positive contributions were achieved by resource stocks and economically sensitive companies such as Rio Tinto, Experian and WPP. Solid, reliable, dividend paying companies such as Nestlé, News Corp and Unilever also performed well. PICC Property & Casualty benefited from China's growth and Potash Corp rose in response to better news on both prices and volumes for the year ahead. Schibsted recovered well following its rights issue.

The worst performer in the fourth quarter was Sky Deutschland, which declined following the decision of the CEO to step down. The company has since had a placing and the shares have picked up. Other poor contributors have been primarily financials which had recovered strongly and have since given back some of the gains -often where equity raising measures have been announced.