During the month no major changes were made to the portfolio's asset allocation.
The yield on UK Gilts, and other major world bond markets, continued to fall as the oil price rose. Currencies continued to dominate as the Dollar continued its plunge against the Euro, Yen and Sterling.
Market expectations for interest rate rises continue to fall with three-month Libor and futures market rates all lower on the month. Economists also seem to be reducing their expectations for the peak in rates. This means Gilt yields are likely to be well supported into the year-end. The next two months also see a large number of Government and corporate bond redemptions, usually a good supporting factor.
Japan suffered a number of serious earthquakes during the month, but of greater significance to the markets was the release of the Bank of Japan's quarterly Tankan survey. This was somewhat stronger than expected, although once again it is the giant exporters who are confident, rather than the domestic orientated small and medium size companies.
Equity performance was aided by stock selection and asset allocation in the UK and US, and stock selection in Europe.
US Election speculation reached fever pitch in October, with election polls swinging from one candidate to the other. On the whole, corporate earnings for the third quarter have been positive, with slowdowns in profits perhaps less than some had expected. Companies remain very cash generative, and at some stage this cash will have to be spent, either on employees or on capital goods.
The oil price remained a major influence on European equity markets. It's near 10% fall in the second half of the month helped continental European equities register a small gain. The third quarter corporate reporting season is also underway, and so far, companies have in general continued to exceed expectations. This reinforces our positive view on European equities that, if companies continue to at least meet earnings expectations, have ample scope for a re-rating.
In the UK, corporate earnings and dividend growth expectations remain firm for 2004 and 2005. We continue to remain optimistic about equity returns over the next twelve months.
The Japanese equity market ended the month lower. The start of the semiannual results season was broadly positive, with many companies revising up their forecasts for the full year. However, this was insufficient to push the market higher that was focused upon the pending US presidential elections, high oil prices and a stronger yen. With valuations still at multi-year lows, the market continues to offer value that is being enhanced by reported earnings.

No major portfolio asset allocation changes were made, and performance was aided by stock selection in US, UK, Japanese and pacific basin equities, and bonds.
The UK (0.9%) had the highest total return in local currencies, followed by Japan (+0.6%), the eurozone (+0.4%) and the US (+0.3). However, currencies were a major factor and the euro was particularly strong against a weak yen and US dollar. The Canadian dollar was exceptional, gaining over 4% against its US counterpart.
The market was sensitive to the US employment report, which showed a growth in non-farm jobs of 144,000. An upward revision to the previous month's data and the fact that the report was not below estimates, resulted in more optimism for the economy and, consequently, more negativity for bonds. US buying were focused on the longer maturities where 30-year yields ended at 4.89%.
The UK's Monetary Policy Committee (MPC) maintained rates at 4.75%. They thought that, "inflation expectations appeared …well anchored to the [2%] target."
The Japanese economy appears to have taken a pause on its recovery path. GDP growth for the second quarter was unexpectedly revised downward to an annualised rate of 1.3%.
The eurozone economy is relatively stable. The latest data indicated a better month for German retailers and the previous month's sales figures were revised upward. Domestic demand has been subdued and export growth boosted the economy. The euro was the beneficiary of weakness elsewhere, rising 1.5% against sterling and 2.0% against the US dollar.
Equity performance was aided by stock selection and asset allocation in the UK and US. The Federal Reserve persisted with its measured pace of interest rate increases and lifted the discount rate to 1.75%.
European equities continued their upward movement making gains in September, led by information technology and resources. We continue to view European equities as attractive investments - valuations are cheap, while corporate restructuring continues to contribute to earnings growth.
In the UK, expectations for economic growth and corporate earnings growth are moderating for next year, which directly led to reductions in interest rate forecasts and positive market response. We continue to expect respectable earnings and dividend growth and view the UK equity market as attractive.
Japanese equities ended the month slightly down, as concerns over high oil prices and economic growth weighed on sentiment. Far East ex Japan equities continued to rise as concerns over Chinese market growth receded.

No major changes were made to the portfolio's asset allocation.
Global bond markets rallied strongly at the start of the month, consolidated gains and continued to advance at month-end. The initial spur to the market was the weak US employment report, which indicated that their economy might be slowing down. Although the bond market took the view that interest rates would not have to rise as aggressively as previously thought, the Federal Reserve still hiked rates by a further 0.25% at its August FOMC meeting. They intend to continue to raise rates.
The UK's Monetary Policy Committee (MPC) voted unanimously for this month's rate increase, but the minutes were more dovish than expected. They have built in plenty of latitude for the future, but the tone would suggest a pause in official action in the immediate future. In the Eurozone, we continue to receive mixed signals. German GDP growth for the second quarter was +0.5% quarter-on quarter; French GDP was rather better at +0.8%. Inflation edged down to 2.3% year-on-year, compared to a target of below 2%. If a slowing in US growth is translated into slower global growth, the prospects for the Eurozone appear restricted. Domestic retail demand, particularly in Germany, remains weak.
The Japanese economy slowed in the second quarter to an annualised growth rate of 1.7%. There seems to be plenty of momentum in the main Far Eastern economies to sustain further Japanese growth.
In the US, the second quarter earnings season drew to a close in August. The market continued to focus on outlook statements that confirmed expectations of slowing earnings growth. While this news came as no surprise, the additional headwinds from an inflated oil price and increasing interest rates led to further selling, albeit on low seasonal volumes. After making a low for the year, the S&P 500 index, helped by a slight correction in the oil price, recovered to close flat for the month.
There was very little new equity news flow to drive continental European markets in August and investors focused on rising oil price consequences. We believe equity markets performed well in the face of the strength in the oil price, which on an absolute level surpassed its previous high. Attractive continental European equity valuations, on both absolute and relative terms, and ongoing improvements in earnings in the face of a peaking of global growth, sustain our positive view.
In the UK, the tension between a solid fundamental background and the extent to which this will moderate over the next 12 months resulted in virtually no overall movement in the UK equity market. However, the equity market valuation looks attractive but sustained market appreciation may well need resolution of some of the uncertainties.
Following a rebound, Japanese equities ended the month little changed, although the yen strengthened considerably against sterling reflecting weakness in the latter currency. Far East ex Japan equities have rebounded from their recent lows as fears of a hard landing in the Chinese economy recede.

Equity performance was held back by stock selection in continental Europe, partly offset by stock selection in the Pacific Basin and the overweight in UK equities.
In the US, economic statistics painted a mixed picture with some signs of weakening consumer demand but the industrial sector remaining robust. The majority of companies in the S&P500 index reported second quarter earnings numbers. Growth continues to surpass expectations but investors are concerned about the likely deceleration of earnings in the second half of the year. Cautious outlook statements have increased investor anxiety at a time of rising interest rates. This is holding back stocks, leading to a continued contraction in the market's valuation.
Continental European equities declined, with information technology the worst performer. With the reporting season underway, companies are in general continuing to exceed expectations, although few management teams have raised their full year targets. The fund manager's positive view remains, as continental European equities appear lowly valued, while offering double-digit profit growth.
The UK market has been concerned that there may be some reduction in the anticipated rate of both economic growth and corporate profits over the next twelve months. The fund manager's view remains, that a modest downward movement in expectations is likely and that this will in turn feed through to a moderation in the expectations for interest rate rises. In the meantime, a combination of a broadly flat market and robust earnings growth makes the UK equity market look even better value than it did. That said, there are few obvious catalysts that the fund manager's can see for sharp appreciation in share prices over the next two or three months. The fund manager's shall continue to use this period as a window of opportunity to purchase stocks that have been harshly treated in the dull market conditions.
Japanese equities and the yen fell, despite a strong corporate results season. Economic news was more disappointing with weaker than expected readings from retail sales and industrial production. Markets in the Far East ex Japan also corrected. Direction was dictated by heightened security concerns, oil prices and ongoing growth outlook uncertainties. Until these issues are laid to rest, the fund manager's do not see much headway being made by local markets.

Performance was held back by the overweight position in Japanese equities and by stock selection within US, UK and continental European equities. This was partially offset by stock selection in Japanese equities.

During November, no changes were made to the US equity portfolio. Corporate reports released for the third quarter indicate that earnings are likely to have risen by as much as 20% year-on-year. This, coupled with a much stronger than expected initial GDP growth estimate of 7.2% annualised for the quarter, suggests that the economic recovery is in full swing. October also saw a rebound in merger and acquisition activity, implying that confidence is at last returning to the boardroom. The equity market had already risen, anticipating much of the good news, but earnings momentum and signs of a more self-sustaining economic recovery could drive markets higher.

No changes were made to the continental European holdings during the month. Economic data and third quarter corporate earnings were broadly ahead of the more optimistic expectations that have been priced into the market. Looking forward to next year, although the Eurozone is expected to show the slowest rate of GDP growth, it is expected to show the greatest improvement, albeit from a low level. This should allow European companies to shift their focus from cost improvements to top-line growth, resulting in better quality and more sustainable profits growth, and provide the grounds for further equity market gains.

Further evidence over the summer months was suggestive of accelerating UK economic growth. Recent data has confirmed this and we expect this trend to continue. As such, the fund manager's have maintained the funds broad sector strategy, in addition to being wary of companies with disproportionate exposure to the weakening US dollar.

No changes were made to the Japanese holdings. Economic and corporate news-flow was encouraging. Following the recent setback, Japanese equities again look attractively valued. Key to unlocking this value will be domestic investors who, according to recent polls, will be adding to their equity weightings, taking them to the highest level in seven years. The markets in the Far East ex Japan also trended downward over the month, though not to the same extent as Japan, led by concerns over dollar weakness and global trade. Additionally, domestic demand in the region is becoming a significant contributor to growth.