We reduced the exposure to the UK and Europe ex UK, and increased Japanese exposure and cash.

The good bond market performance in August gave way to a difficult September, as Hurricanes Katrina and Rita focused attention on the high cost of gasoline and natural gas. US dollar bonds were the weakest market. Eurozone bonds were only marginally negative, but the euro itself was down against the dollar. The strong dollar plagued yen and sterling investments.

The US FOMC raised interest rates at their September meeting to 3.75%. The market now discounts a further 25bp rise in rates in November and indicates a probability of a similar rise in December. The hawkish emphasis strengthened the dollar, while bonds sold off.

In Japan, Junichiro Koizumi won a convincing victory in the general election and now has a strong mandate to implement the various proposed reforms.

The eurozone bond market was more resilient. Unlike the US, however, prices remained well above the August lows. The yield curve continues to flatten, with longer-dated maturities faring better than shorter dates. The ECB has been talking hawkishly and the current inflation measure is above the desired upper band of 2.0%.

In the UK market, prices fell and then drifted sideways. The net result was that yields were 10bp - 15bp higher, except in longer dates, where yields only rose around 5bp.

September was volatile for the US equity market. The S&P 500 Index retreated to end broadly flat. Crude oil fell sharply providing relief for equity investors. Corporate news-flow was relatively light and the market remained focused on macroeconomic news. We continue to believe that the environment for equities remains broadly favourable.

European equities recorded the strongest monthly gains since October 2003. The gains were fairly broad based, led by technology. Cyclical services and telecoms significantly underperformed the market. Equities were aided by the retreat in the oil price and the strength of the US dollar against the euro. We retain our positive view on European equities.

The UK equity market made consistent progress as both earnings and dividend estimates continued to rise. However, two key factors were to the fore. Mining stocks gained further favour with investors. We do not share this enthusiasm and expect bottlenecks seen in the production of some base metals, to be unwound over the coming year. The other significant factor was the surge in corporate activity. We slightly reduced the overall exposure to the UK equity market.

Japanese equities continued to rally. Fundamentally, news-flow points to an improving domestic economy and improved corporate profitability. In Asia ex Japan, markets also performed well, as concerns over hurricane Rita subsided. Going forward, the market will be watching for evidence of the impact that high oil prices have on domestic demand.

The sun shone on bonds, with positive returns in all major markets except Japan, when measured during August in local currencies. The US dollar was weaker, so holding non-dollar bonds was also a positive for dollar-based investors.
The US FOMC raised Fed Funds by another 25 basis points (bp) to 3.5%. The move was fully discounted by the market. There was no indication that the course of rate rises would be halted, but that was before hurricane Katrina.
The behaviour of the eurozone bond market echoed that of the US, although to a slightly lesser extent. The UK was a laggard in the rally, but it achieved a fall in yields of 6bp in two-year gilts; 16bp at 10 years and 12bp at 30 years. This performance could be regarded as disappointing as the MPC cut base rates by 25bp at the start of the month. This was the first cut in UK rates since July 2003 and marked the turning point in rates. The reduced likelihood of further immediate rate cuts helped sterling gain 2.5% against the dollar.
US equities drifted lower. News-flow was dominated by the oil price, with the hurricane on the gulf coast resulting in the temporary loss of US refining capacity, and leading to a very sharp increase in the price of gasoline. On balance though, economic figures remain favourable and inflationary expectations remain benign. Supported by stronger expected corporate earnings and strong free cash-flow generation, we believe that the environment for US equities remains favourable.
Continental European equities ended slightly down as the oil price posted new highs. This, together with some disappointing economic news flow from the US, led investors to take some profits following three consecutive months of strong gains in the equity markets. Resources was the best performing sector, while information technology was the worst. We retain our medium-term positive views on European equities.
We viewed the period of consolidation for the UK equity market in August as healthy. A very solid background to the market provided by corporate profits and cash flow leaves us reasonably sanguine going forward and we expect the very healthy returns recorded in 2005 so far to improve further.
The Japanese equity market rallied, reaching levels not seen for four years. Economic and corporate news flow continues to highlight the improving fundamental health of the nation. Moreover, high oil prices may help Japan to overcome deflation. Over the medium- to long-term, the improving environment will be beneficial for Japanese equities. Markets in the Far East ex-Japan continued to grapple with rising oil prices, leading to a mini currency crisis in Indonesia. Following strong performance in the summer months and continued pressure from oil, the markets may also prove volatile over coming months.

July was an eventful month on the macro-economic front. Most bond markets had a negative return in local currencies, particularly the US. Moreover, the US Dollar was a gainer against other currencies, so non-US markets, translated into Dollar returns, also fared poorly.
In the US, Federal Reserve Chairman Alan Greenspan addressed Congress in his semi-annual testimony, where he was more hawkish than expected, with no hint that the series of rate rises was about to end. The Fed revised down, marginally, their growth forecast and revised up their inflation forecast.
Over the month, reported US data was, on balance, stronger than in June. While the US economy looks still to be strong, inflation data was also higher and bond yields rose. US equities resumed their positive momentum, driven by broadly better than expected corporate earnings for the second quarter, along with favourable guidance for the remainder of the year, and markedly improved macroeconomic data releases.
The Peoples' Bank of China surprised the market by the early announcement of a Renmimbi currency adjustment, re-valuing by 2% and moving to basket peg rather than a simple Dollar peg. An expected beneficiary of such a move was the Japanese Yen. The positive effects were short-lived however. The Japanese economy is showing a slow but steady improvement. Japanese equities gradually rose over the month, as economic growth continued to show positive trends and also the uplift that we have been expecting in domestic demand. We remain positive on the Japanese market over the medium term, as we expect the positive trends at the macroeconomic and corporate level to lead the equity market higher.
The steadiest market was the eurozone, which declined in the first half of the month but then recovered slightly. Continental European equities continued their upward path from end-April to post another month of strong gains. Some of the economic data from Europe have turned up, while the US economy continues to perform strongly. Also, the initial half year corporate reporting season has exceeded investor expectations, and consequently, expectations for full year earnings growth have once again been increased. We retain our positive view on continental European equities.

There were no major changes to the portfolio's asset allocation and the fund performed in line with its benchmark.
While the US bond market lagged the UK and the eurozone in June, the continuing strength of the dollar was the major feature over the month. All markets produced positive returns in local currencies.
Most of the US economic data was weak. Payroll numbers were below expectations, retail sales were poor, purchasing managers surveys were down and durable goods orders were disappointing. The trade deficit was slightly better than expected. Fed Chairman Greenspan, said that, at best, the US was only in the earliest stages of stabilisation of the deficit.
US first quarter GDP was revised up to 3.8% on an annualised basis. The Federal Reserve raised interest rates again (to 3.25%), commenting, "Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained."
In Japan, the economic improvement continues at a gradual pace. First quarter GDP growth was recorded at 4.9% (annualised rate). This looks stronger than the US, but we saw a strong 5.2% growth in the first quarter of 2004, followed by three weak quarters.
Official estimates of eurozone GDP growth for the first quarter were +0.5% on the last quarter and +1.3% year-on-year. Both business and consumer confidence is improving slightly. The recent weakness of the euro is, in effect, an easing of financial conditions. This, together with inflation running at 1.9%, suggests that the ECB will remain reluctant to cut rates.
The UK was the best performing market in local currency terms, despite a mixed bag of economic numbers. Rates were left unchanged at the June Monitary Policy Committee meeting, however, rate reductions are on the agenda and the market has already discounted one 25bp cut by the year-end.
Continental European equities recorded strong gains. Oils performed best as the price rose 10%, followed by consumer cyclicals and information technology. The defensive non-cyclical consumer goods and services sectors were the worst performers. We retain our positive outlook on European equities, as valuations remain compelling and earnings growth is expected to remain resilient in the face of domestic economic weakness.
The overall UK equity exposure within the portfolio is broadly unchanged although we further reduced consumer exposure.
The Japanese equity market continued to rise over the month and the market outlook remains positive. Markets in the Far East ex Japan continued their strength from last month as concerns over increasing rates in the US subsided.

There were no major changes to the asset allocation of the portfolio. The overweight equity position and underweight bond position aided performance. With the exception of the Japanese market, there were positive returns from bonds in May.
In the US, the longest bond generated a return of 3.2% in local currency. Longdated total returns were 2.9% from the Eurozone and 2.3% from the UK. In the UK, the Debt Management Office issued a new 50-year bond. The issuance was partly responsible for the UK's lacklustre performance.
The Japanese bond market took a tumble on 9 May, coinciding with the start of a weakening of the yen that continued to month end. China rebuffed calls for an immediate revaluation of the renmimbi (yuan). Despite a modest bond recovery, Japanese returns beyond 10-year maturities were slightly negative. Shorter dated issues produced a marginally positive return.
In the US, the FOMC minutes noted that economic growth had slowed somewhat unexpectedly, employment had been weaker and housing starts had fallen back. They believed that the "economic fundamentals appeared to remain quite supportive of continued solid expansion." They unanimously voted to raise the Fed Funds rate by 25 basis points to 3.0%. The Committee's central case was that risks were balanced.
The Bank of England's quarterly Inflation Report contained a more dovish outlook. The Committee left rates unchanged. The bottom line seems to be that the MPC are unsure how matters may develop and markets need to be vigilant as regards the factors that they regard as critical.
Equities outperformed over the month. Stock selection in the US and Japan boosted performance.
In the US, the S&P 500 index managed to make good headway. Large capitalisation technology stocks led, with the Nasdaq composite index returning 7.7%, on a total return basis.
Continental European equities rebounded to post the largest monthly gain since October 2003. The main driver was the weakness of the euro and we remain positive on European equities.
The UK equity market recovered in May. There are continuing signs that economic activity is moderating. The UK retail sales pattern remains weak and house price inflation is subsiding, suggesting that inflationary pressures will abate. The oil price stabilised and we therefore added to the oil exposure and smaller company exposure within the portfolio. Elsewhere the overall strategy remained largely unchanged.
Japanese equities continued to be volatile. Markets in Asia ex-Japan rose steadily, as fears over global growth subsided. The impact of sustained high oil prices and global economic growth will continue to test the regions markets over coming months.

During the month there were no major changes to the portfolio's asset allocation. The overweight cash position aided performance but was offset by the overweight position in equities.
Bond markets continued the recovery that started towards the end of March and all markets registered positive returns in local currencies. Currency moves were an important factor, as usual. The chief driver of lower yields and higher bond prices has been a general feeling of a weak economic outlook, after disappointing data releases and muted forward guidance in corporate results. The advanced estimate for first quarter GDP growth from the US was 3.1%. This did not stop the Federal Reserve raising rates (at the beginning of May) to 3.0% and further rate rises are in prospect at the next two FOMC meetings. The US economy remains dependent on consumer spending, which in turn seems reliant on escalating house prices to engender the wealth effect necessary to encourage further credit-based purchasing. Yields in the US indicate that the market is anticipating a greater slowdown than the Fed has written into its economic forecast.
The UK's Monetary Policy Committee decided to leave base rates unchanged in April as, on balance, the economic picture had not altered sufficiently to justify a move. There is also little likelihood of a rate change in either the Eurozone or in Japan.
The JP Morgan Global Government Bond Index is now showing a 2.0% total return for the year in local currencies. This is a steady performance and given the uncertainties that lie ahead, we would expect more volatility going forward.
Equities under-performed and asset allocation and stock selection hurt the portfolio's performance.
The US market was able to turn its attention to the first quarter earnings season during April, providing some relief from inflation and growth concerns. Once again, corporate America delivered very strong results. This is welcome news, as the market continues to balance fears of slowing growth and a potential soft patch, with faster than expected inflation, and hence interest rate, increases. Economic and earnings growth are slowing but in the case of the latter, the slowdown has proven to be less than forecast thus far. With a fundamentally healthy corporate backdrop, and relatively inexpensive valuations, the market has some support at these levels, however the S&P 500 index is likely to be event and data driven in the short-term.
European equities retreated in April, registering the sharpest monthly fall in local currency since September 2003. Nonetheless, we retain our positive view towards continental European equities, as valuations remain attractive and earnings are expected to be driven more by ongoing restructuring efforts rather than the top-line this year.
UK equities were dull during April and Japanese equities were down sharply as anti- Japan protests in China added to concerns over the health of the economy. Markets in the Far East ex Japan declined as concerns over the health of the global economy weighed on sentiment. The future direction will be dictated by this sentiment and may cause markets to trend downwards.

No major changes were made to the portfolio's asset allocation. The overweight cash position aided performance, but was offset by the overweight equity position.
Bond and currency markets had contrasting performances. Eurozone bonds produced the best overall return in local currency terms, but the euro was weaker against the US dollar and sterling. The yen was weaker, negating a healthy bond performance, if not hedged. Bond prices traded sideways or down, in a tight range, for most of the month but rallied in the last week.
The Federal Reserve raised interest rates at its March FOMC meeting. The Fed noted that output growth was "solid" (previously "moderate") and that inflation pressures had picked up (previously "well-contained"). They repeated the phrase that policy remained accommodative, indicating further rate hikes to come. The reported US economic data presented a mixed picture. Consumer activity appeared to be strong, while manufacturers were less optimistic.
The Budget was the key feature in the UK. Overall, the fiscal stance was fractionally tighter. Government finances look set to deteriorate, so further giltedged issuance seems likely.
In the eurozone, there was a fairly parallel downwards shift in the yield curve from the 5-year point onwards, producing a 2.4% total return at the long end. There was an even larger downwards shift in Japanese yields, returning a 3.2% return for 30-year JGBs.
Equities under-performed. Positive stock selection in Japan and Europe and the Far East was more than offset by the overweight position in Europe, UK and Japan.
Continental European equities finished almost flat in local currency. The divergence in performance between sectors was small, with declines in information technology and basic industries (primarily steel), offset by gains in cyclical and non-cyclical consumer goods. We retain our positive view based on attractive valuations and respectable earnings growth driven by corporate restructuring.
The UK equity market traded broadly sideways. Consumer stocks tended to be weak and the firm oil price was a constraining influence on the market as a whole. However, there are growing signs of large-cap corporate activity. This, combined with generally strong corporate earnings and dividend growth, leave us feeling optimistic.
Japanese equities rose slightly, the yen fell and oil reached new highs. Economic releases were volatile, with a positive revision to the negative reading of GDP for the fourth quarter and a slight retrenchment of gains in other releases. The Far East ex Japan had a more difficult time with equity markets declining, driven by general outflows from emerging markets following strong performance.

December was positive for bond markets, particularly the US, which recovered some of its recent underperformance against the eurozone. Yields appeared to be driven lower more by cash being invested than by macro-economic issues. However, the US dollar continued to lose ground, falling a further 2% against the euro, 0.3% against sterling and 0.6% against the yen.
There was some good news on the oil price, which hit its lowest level since July, but by the year-end was starting to rise a little. Markets continued to focus on the US current account deficit with the consensus, but not universal, view that this was unsustainable. Meanwhile, US GDP growth was revised upwards to 4.0% annualised rate. All these factors were potentially bond-negative, but the market was well supported.
The eurozone bond market continued its sustained rally. Economic data was mixed and GDP growth appears very weak. On the other hand, December saw German and French retail sales exceeding expectations, as did German consumer and business confidence surveys. However, it will take more than the occasional piece of good news to convince the market that there is any kind of vigour in the economy.
There was no move from the UK's Monetary Policy Committee on base rates in December. The gilt market benefited from large cash flows from maturing bonds. Despite a surprise sell-off in the quiet period between Christmas and the New Year, yields were largely down on the month.
The Japanese market barely moved over the month. Yields were between 2 bp and 5 bp lower. This reflected a further downward revision to GDP, which is struggling to stay in positive territory. We continue to believe that the best prospects remain in the eurozone market and intend to retain our overweight position in this area.
Equities outperformed over the month, positive stock and sector selection in UK, Europe and US outweighed a negative contribution from Japan and the Pacific Basin. Sentiment remained positive, boosted by broadly positive economic data releases and a lack of negative earnings pre-announcements. Consumer sentiment remains upbeat. The predicted end of year rally has borne out, with investors happy to ride the market higher in this seasonally strong period. We continue to profess a more stock selective approach to equity investment for 2005.
Continental European equities finished the year strongly. The markets were led by utilities, Insurance, Pharmaceuticals and Telecoms, while information technology and oils underperformed. We remain optimistic on the prospects for European equities.
The UK equity market continued to make progress, supported by solid fundamentals and a benign international background. Market returns are expected to be positive for the year as a whole.
Japanese equities ended on a positive note, due mainly to dollar strength. Market focus will be upon the degree of economic slowdown, during which returns are likely to be mildly positive as the economy avoids recession. Markets in the Far East ex Japan continued to rise over the month. Going forward, direction is likely to be dictated by trends in the global economy and global trade.

There were no major changes made to the asset allocation of the portfolio. Performance was held back by stock selection in US and Europe.
The key feature in the bond markets was the sharp differential in performance between the US and the rest of the world. The return on US treasuries was -1.4%, in local currency terms. In addition, for sterling-based investors, the dollar fell by 4%. By contrast, the major euro-denominated markets rose a little over 1%. The euro was hardly changed against the British Pound, so the sterling return was the same. The return from UK gilts was 1.3%.
In the US, attention continued to focus on the monthly jobs data. The latest data covered the October period and it was suggested that the employment number was flattered by additional workers hired in the Presidential election campaigns, and by the clear-up work after the hurricanes in the south-east of the country. The Federal Reserve raised official rates a further 0.25% and the accompanying statement was no less hawkish.
The euro was the beneficiary of dollar weakness. In addition, economic data for the eurozone continues to show stagnation in the major economies. The ECB left rates at 2.00%. The market sees the currency strength as a de facto tightening of monetary policy and believes that official rates are more likely to be cut than raised.
In the UK, the MPC left base rates at 4.75%. Given that the UK economy has been largely propelled by the consumer, and the consumer has financed a significant part of his spending through mortgage equity withdrawal, retailers are concerned that lower house prices may spell a period of lacklustre sales.
The Japanese economy continues to show some recovery but the monthly data appears inconsistent. Japanese bonds were little changed on the month.
Equity performance was held back by stock selection in the US and Europe, and asset allocation in Japan, partially offset by asset allocation in the UK and US.
The US election produced the result the market was looking for, an incumbent Republican victory. As anticipated, the removal of this uncertainty allowed the equity market to make significant headway.
European equities recorded gains, yet again driven by the oil price. Our positive view
on European equities remains unchanged, both on an absolute basis and relative to
most other equity regions.
The UK equity market has continued to make gentle progress, responding to the realisation that the economic background is relatively benign and that there is little threat from substantially higher interest rates. Corporate earnings growth remains firm, as does dividend growth. The weak US dollar will have some negative impact on earnings and dividend growth in 2005 but we do not expect this to be sufficient to materially alter our expectation for positive returns over the next twelve months.
Japanese equities were volatile, ending slightly up over the period. The yen also proved volatile and strong. Corporate results were encouraging displaying strong profit growth for the first half of the fiscal year. However, economic growth was somewhat disappointing.