US, UK and continental European Equity holdings were increased across all major economic sectors. This was funded from Japanese and Pacific Basin Equities, Bonds and Cash, where the overall level of investment was decreased. Performance was held back by stock selection, due to the portfolio’s cyclical bias. However, this was partially offset by asset allocation, where the underweight position in Equities and overweight position in Japanese Equities added to performance.

Over this period, major central banks kept interest rates unchanged. Bond prices rose sharply and stock markets remained weak. The economic outlook deteriorated slightly, with the UK still one of the most robust G7 economies.

US interest rates held at 1,75% with the FOMC adopting an easier monetary policy bias. Inflation is still subdued, but unemployment remains high at 5,6%. The interest rate markets now discount a reduction in rates. The curve steepened as yields fell across all maturities.

The Bank of England’s Monetary Policy Committee kept the 4% base rate, although their September meeting minutes stated, “the Committee remained ready to take further action, by reducing rates, if and when any additional stimulus to demand were judged to be necessary to meet the inflation target”. Interest Rate Futures rallied. House prices continue to be strong, rising 20% per annum, despite speculation that this boom will end soon. Retail sales also remained strong and consumer confidence is high. Inflation is at 1,9% annually and unemployment remains at 3,1%. Gilt yields fell across the steepening curve.

In Euroland, the repo rate remained at 3,25% with the ECB playing down speculations of a rate cut. CPI inflation for August rose to 2,1%. Both GDP growth and consumer confidence is weak, while unemployment remains stubbornly high.

Japan saw no further changes to the 0,10% Overnight Deposit Rate. Yields fell slightly and the curve flattening seen last quarter continued. Deflation persists and the Bank of Japan’s intention to purchase Equities from private sector banks saw Bond prices fall. GDP growth rose and industrial production improved, yet consumer spending is still depressed. Yields fell marginally.

During the second quarter, the fund managers added to the fund's positions in Equities, notably in the US and UK. This was funded out of Bonds and Cash. Performance was held back by the stock selection in US, UK and continental European Equities, and in Bonds. This was partially offset by asset allocation, where the underweight position in US Equities, and overweight positions in euro-denominated Assets, Cash, as well as Japanese and UK Equities, added to performance.

The major central banks left interest rates unchanged in the first half of the year. However, during the last quarter, Equity markets proved to be weak, prompting Bond market rallies. Fears of imminent rate rises abated, as hopes for a rapid return to growth in the world economy waned.

In the US, there was no rate rise, but short-dated yields continued to fall as talk of a "Double Dip" resurfaced. Consumer and business confidence were steady, while inflation remained benign.

In the UK the Bank of England's Monetary Policy Committee left the Base Rate at 4% throughout the period. The final figure for first quarter 2002 GDP growth was 0,1%.

In Euroland, the ECB left the repo rate at 3,25%. Bond prices rallied, and the curve moved fairly evenly across the various maturities. Inflation figures showed Euroland inflation had fallen back to 2%. This is the first time inflation has been within the target range since December 2001.

In Japan, there was no change to the Overnight Deposit Rate, remaining at 0,10%, for the third consecutive quarter.

The dollar experienced significant weakening over the period, as investors began to question not only the sustainability of the economic recovery, but the strength of the Equity market as well.

Within US Equities, the fund managers increased the holdings in the Information Technology sector. This was funded out of the General Industrials and Cyclical Services sectors, as well as from Cash. Within continental Europe, the fund managers added to the positions in the Cyclical Services and Information Technology sectors, funded from the Basic Industries and Financial sectors. During the quarter, the fund managers added to the UK Equity holdings across all major economic sectors. Finally, within Japan, the positions in the Cyclical Services and Financial sectors were increased, funded out of the General Industrial and Information Technology sectors.

The world’s major central banks left interest rates unchanged over the quarter, however markets continued to discount sharp rate rises as economic statistics suggested a steadily improving world economy.

In the United States the Federal Funds Target Rate remained at 1,75%, although the Federal Funds Futures Contract is implying a rate above 3% by December 2002. The curve flattened by 35 basis points as yields increased across all maturities, but mostly at the front end. Two-year yields increased substantially from 3,03% to 3,71%; 10-year yields from 5,05% to 5,40% and the 30-year yield increased from 5,47% to 5,80%.

In the "eurozone" the repo rate is at 3,25%. As in the US, markets are pricing in rate rises, with Futures predicting 4% by year-end. Bond prices fell and the curve continued to flatten, as it did in the last quarter. Two-year yields increased from 3,65% to 4,32%; 10-year from 5% to 5,25%, and 30-year yields more moderately from 5,40% to 5,57%.

In the UK, the Monetary Policy Committee left the Base Rate at 4%, but as in Europe and the US the market continued to discount any sharp rate rise. The December 2002 Futures Contract reached 118 basis points; Gilt yields rose by roughly equal amounts across the curve: two-year yields increased from 4,76% to 5,09%; 10-year from 5,05% to 5,29%; 30-year from 4,70% to 5,02%. In Japan, there was no change to the overnight deposit rate, which remained at 0,10% for a second consecutive quarter. Likewise, there was little change in Bond yields. Two-year yields fell from 0,12% to 0,05%; 10-year yields increased from 1,37% to 1,40%, while 30-year yields fell from 2,51% to 2,47%.

Having been sold down to below 86 US cents from above 90c in January, the euro recovered ground in February and March, closing at $0.8717, from $0,8895 at the end of December.

The portfolio’s investment in Equities was increased (at the expense of bonds) over the quarter - notably in the US and continental Europe, at the expense of UK and Japanese stock. In the US the fund manager added Basic Industries, General Industrials, Utilities and Financials, while reducing positions in non-cyclical Consumer Goods and Services sectors. In Europe, the fund manager added non-cyclical Consumer Goods and cyclical Services sectors, but reduced General Industrials, Financials and IT. In the UK, the fund manager reduced exposure to Utilities. In Japan the fund manager reduced positions in non-cyclical Services and IT. The fund manager increased exposure to Equities at the expense of Bonds.

During the 4th quarter of 2001 the BoE Global Fund increased its exposure to equities at the expense of bonds and cash. The overall level of investment was increased in the UK and Pacific Basin while being reduced in Continental Europe. The funds overweight position in Japanese equities coupled with the underweight position in US equities offset the overall performance of the fund.