The fund's asset allocation was left unchanged.

Bonds made further gains and currency played a major factor in returns. For US dollar-based investors, the strength of the euro, which gained 4.4%, made eurozone bonds the best performer. Sterling strengthened by more than 1% and the Japanese yen by slightly less. The US component of the JP Morgan Global Government Bond Index was up just 0.51%.

The US yield curve ended barely unchanged from the 10-year pointonwards. Shorter-dated Treasury yields were around 15 basis points (bp) lower. The Federal Reserve cut both its Funds rate and Discount rate by 50bp. Long bonds lost what ground they had gained prior to the decision.

Movement in the Japanese Government Bond market was minor. Long-dated bond yields rose 9bp and shorter dates less than this. There was no policy move from the BoJ. Prime Minister Abe announced his resignation.

The ECB did not raise rates. They continued to add abundant liquidity to the money markets. Short-dated euro benchmark bond yields were unchanged, but 10 and 30-year issues rose around 8bp respectively.

The Bank of England left rates unchanged at its monthly MPC meeting. On the month, the UK gilt curve dis-inverted, with 2-year yields falling 29bp, while 30-year yields rose 10bp.

US equities rallied sharply following the Fed Funds cut by 50 basis points. The equity market is favouring large capitalisation companies. The S&P 500 trades on a 2008 PE of 15.4X.

UK equity returns were essentially flat. In a sense this was not surprising given that the underlying fundamentals still appear to be sound. Economic growth expectations remain robust.

In Europe the UK equity market was in the firing line with the severe troubles at Northern Rock adding further woes to the financial sector. After the slow reaction to Northern Rock's funding crisis, the Bank of England was criticised. In contrast, the ECB had injected liquidity into the financial system at an earlier stage in the crisis and European equity markets are up almost 2%.

The foreign selling of Japan continued. The prolonged sell down has now left Japan exposed to the possibility of a short squeeze, which should provide a good catalyst for stronger performance. The effective yield on Japanese equities, including share buy backs, now exceeds the yield on bonds, providing further support to the equity market.

During the month under review, there were no major changes to your asset allocation. December was an exceptionally difficult month for bonds, other than in Japan. Here a positive return was hurt by a sharply weaker yen. The US dollar rebounded during the month, retracing most, but not all, of November's losses. As a result, for dollar-based investors, local currency losses were amplified when translated. However, viewing November and December together, the JP Morgan Index in dollar terms was still ahead. December's total return from US government bonds in the index was -0.87%. The dollar return for euro zone governments bonds was-1.67%; for UK gilts -2.26%; for Japanese government bonds -2.77%.

Yields in the US rose 25 basis points (bp) across the curve from 5-year maturities onwards. The 2-year bond rose 20 bp to 4.82%. The yield rise was a persistent move throughout the month, with added impetus from the employment data, which was stronger than expected, and retail sales, which also surprised on the upside. Volatility increased as price ranges on the day tended to be large - for example on the day CPI data was released the T-bond future traded through 1¼ points (40 ticks) even though it ended virtually unchanged (up 1 tick). Market behaviour of this kind reflects less confidence that the economy will turn out as forecast.

The Japanese market also saw more volatility, although the overall direction was sideways. Economic data was largely in line with expectations, including the BoJ's Tankan survey of business conditions. A few days later the BoJ left interest rate unchanged, which, by then, had become the consensus view. The trade balance was stronger than expected but industrial production was disappointing. On balance, the market decided that little had altered in the fundamental backdrop and yields were left unchanged during the month.

Euro zone yields, like the US, rose around 25 bp. However, unlike the US, there was little volatility, more modest but persistent attrition. There were 13 "down" days compared to 3 "up" days (4 were unchanged). Germany remains the workhorse of Europe and the Ifo Survey of the German business climate continued to surprise to the upside, reaching its highest level since 1991. By comparison, momentum in France and Italy seems to have been lost, at least for the time being. Benchmark euro zone yields at the end of the month were 3.90% at the 2-year point; 3.95% at 10years and 4.05% at 30 years.

The UK market followed the euro zone model. At the start of the month there was a straight 9-day losing streak, which is very unusual. Yields rose most in the middle of the curve - the 5- to 10-year area rising23 bp. The "wings" fared slightly better. The 2-year gilt rose 17 bp to 5.21% and the 30-year gilt rose 16 bp to 4.21%. The inversion of the curve is the steepest since 2001, when the debate about pension fund liability matching was at its height. We believe that this is unsustainable in the long run, but is probably buoyed by the prospect of a further rate rise from the Bank of England, which now looks more likely than not.