During the month no major changes were made to the fund's asset allocation.
The global rally in bonds continued for a third month. The best performances came from the US and Canada (around +1%), euro zone markets returned between +0.5% and +0.8% in local currency; the UK a touch less, and Japan was just marginally positive. The US dollar was stronger and investing in non-dollar currencies was, therefore, a drag on performance.
The US market was largely range-bound for the first half of the month and rates were left unchanged, which boosted investor confidence.
Japanese bonds traded sideways for most of the month, only moving modestly higher in sympathy with the US market.
The euro zone market followed the US model, rallying only after an indeterminate start. Even without the support of other markets, the fundamentals pointed to lower euro zone yields.
The UK bond market continued to consolidate its recovery after August's rate rise, but September's data indicated that the economy was still robust. By mid-month, bond-negative data had pushed yields around10 bp higher. Gilts were willing to follow the US lead and rallied to end with yields virtually unchanged.
North American equities rallied during September, driven largely by the absence of major corporate profit warnings, and weaker economic data suggesting that the direction of the next interest rate move will be downward. We expect to maintain the portfolio's tilt towards companies that have defensive earnings characteristics with an emphasis on high international sales exposure.
We maintain a positive view on the European equity markets, as noted before: improving economic growth prospects, corporate profits sustainability and valuations. European economic growth forecasts continue to be revised up. Despite the rally in markets this month, valuations remain attractive, especially large caps.
UK economic growth remains robust, but this growth has provided further backing to the familiar pattern of strong earnings and dividend growth.
The Japan market appears to have been a source of funds for foreign investors wanting to participate in the US rally. As the recovery in US and global equities takes hold and risk appetite improves, the resulting divergence is unlikely to be sustained.
Elsewhere in Asia, companies in Hong Kong and Australia are seeing the negative impact of slower growth from China in conjunction with slower US trade. However, renmimbi (Chinese yuan) appreciation continues to attract liquidity to Hong Kong and valuations have been rising.

There were no major changes to the asset allocation of the portfolio. June was a month of two halves, with the first seeing bond prices climb higher, and a sharp sell-off in the second half. The total return in US bonds was slightly positive, but most other markets posted negative returns. Currency movements did not aid US dollar-based investors.

The US market started on a confident note. The ISM survey of manufacturers showed another decline in sentiment and the payroll numbers were soft. The primary cause of the reversal of fortune was the CPI data, where the May headline number was 4.2% year-on-year, up from 3.5% for April and above the consensus expectation of 3.9%. The Japanese bond market started on a firm footing, supported by further falls in the equity market. However, the weaker US bond market was contagious and problems continued to dog Bank of Japan Governor Fukui who has been criticised for an association (pre-BoJ) with a disgraced securities trader. This was negative for the yen and troubled the government bond market. In the eurozone, the rally in the early part of the month was brief. The shorter-dated part of the yield curve suffered most in the later downturn.

Unfortunately, eurozone inflation also remains high at 2.5% year-on-year. In the UK, movement was more even across the curve. The market followed a similar trading pattern to the US. Because the long-end of the curve moved as much as the short end, the return for the total gilt market was worse than other markets. We rate this market as the most attractive. US equities were volatile in June. After falling sharply, the S&P 500 Index recovered to close the month roughly flat. The market continues to focus on marco economic releases.

The Federal Reserve hiked interest rates by 25 basis points at the end of June. After the fall in May, European equities recovered less than 1% in June. We remain positive on equities in general, but cautious on some of the more cyclical areas, such as materials. However, in other areas, notably financials, we believe that corporate earnings will remain healthy and valuations are not demanding. The UK equity market performed relatively well. As market stability was regained we reduced exposure to defensive stocks with weakening fundamental positions and increased our position in large capitalisation growth oriented holdings.

We believe the earnings and dividend outlook remains attractive. Japanese equities closely followed US equities. Areas that previously underperformed rebounded and were reflected in performance. Markets in Asia ex-Japan, exhibited the same trend as other regions, ending broadly flat. Corporations and countries are in good shape, with healthy balance sheets and trade surpluses. The outlook for markets in Asia remains positive over the medium-term

There were no major changes to the portfolio's asset allocation. March was an uncomfortable month for fixed income investors with only eurozone bonds making positive returns for US dollar investors. The US bond market suffered a sharp sell-off at the start of March as key economic data, such as the ISM survey, printed stronger than expected.

The trading pattern of the eurozone market was fairly similar to the US. The hawkish implication of the Fed statement added to the growing worry in European markets that the ECB tightening has some way to go.

The Japanese JGB market was a little different in that government bond prices were little changed in the first half of March. A decline in prices followed later, as investors came around to the view that the likelihood of Bank of Japan rate hikes was greater than had been anticipated at the start of the year.

In the UK market, gilt prices fell in the first half of the month and failed to recover. Although retail spending remained weak, higher energy costs were a concern to the Monetary Policy Committee.

The US equity market recorded positive returns in March. Economic data releases remained positive, however, investors are becoming increasingly confident that the end to the current interest rate cycle is insight. We continue to believe that the US equity market can deliver positive returns.

Continental European equities recorded positive returns, and dollar-based investors were further aided by the appreciation of the euro.Technology was the best performing sector during the month, while healthcare, basic materials and telecoms also performed well. Utilities performed the worst, partly due to rising bond yields, but still managed to achieve a gain. We maintain our positive outlook for continental European equities.

The unfolding prospects for the UK equity market have required us to change some of the emphasis in the portfolio over the last few months.

UK economic growth is likely to be relatively unexciting so we have been refocusing the portfolio on companies with strong international sales growth prospects, companies which are improving their margins through significant corporate restructuring or on stocks delivering relatively inexpensive but dependable growth.

Japanese equities rallied over the month following sustained positive economic news flow. We remain positive on the outlook for the Japanese equity market due to the ongoing economic recovery. In the Far East, ex-Japan markets also displayed strong performances led by continued speculation over renminbi appreciation and economic growth revisions across the region.

Global bond markets rounded off 2005 with a positive performance in December. This brought to a close a year in which all markets have seen yield curves flatten significantly. In the US, Japan and the eurozone, short-dated bond yields have risen, while long-dated yields have fallen. In the UK, yields have fallen at all maturities, but more so with longer dates.
In the US, the FOMC raised the Fed Funds rate for the 13th successive meeting, taking rates to 4.25%. The subsequent minutes of the meeting painted a fairly rosy economic picture with growth described as "solid". Consumer spending was 'vigorous' other than in autos. Nonetheless, the Fed view was that there was no significant weakening in this sector. At the same time, core CPI had remained subdued and, reading between the lines, probably better contained than the Fed had expected. The Fed decision and immediate statement, in which they dropped 'accommodative policy' terminology, was the signal for a Treasury market rally lasting the balance of the month. The market interpretation was that rates were now neutral and although a further hike at the 31st January meeting was likely, the peak in this cycle was clearly on the horizon.
The general price trend in eurozone bonds was a steady improvement. The ECB raised rates to 2.25% on 1st December and the market has discounted two further rate rises by the end of the 2006.
Following a strong rally in November, the US equity market consolidated to finish December broadly flat for the month. Corporate newsflow was light, and the market focused on macroeconomic data releases searching for clearer signs as to the future direction of interest rate moves. The market will now focus on 4th quarter earnings releases, but perhaps more importantly company forecasts for 2006.
Continental European equities finished 2005 on a strong note, achieving a return of 25% over the year. The majority of this rise in 2005 was attributable to the growth in corporate profits of over 20%, far outpacing expectations at the start of the year of low double-digit growth. Consequently, there has been little valuation expansion. This, coupled with a better year for economic growth in Europe and further restructuring from companies, provides a positive outlook for 2006. Nevertheless, it is important to be aware of a number of risks, such as uncertainty regarding US and European interest rates, the US consumer, and potentially a resumption of dollar weakness against the euro.
There has been no significant change to our strategy within your UK equities, as we continue to focus on companies with a bias towards earnings from outside the domestic economy. Overall the prospects for the next 12 months are for ongoing growth in earnings and dividends, and healthy total returns.
The Japanese equity market continued its ascent over the month, rising to levels not seen for over 5 years. Given the extent of the rally that has taken place throughout the second half of 2005, the valuation gap between Japan and the rest of the developed world has reversed with Japan appearing expensive on some valuation measures. This may lead to some short-term weakness, though benefits of sustained economic growth continue to offer upside potential in the long run.