Despite being an historically poor month for asset returns, September saw impressive further gains for risk assets, especially equities, real estate and commodities, rounding off a positive quarter for portfolios in both relative and absolute return terms. A confluence of (a) accelerating global activity with evidence emerging that the recession ended in most developed markets in the third quarter; (b) weak pricing pressures; and (c) continued commitment from Central Bankers to maintain loose monetary and fiscal policies to assure economic recovery and a secure banking system. For nominal assets, while corporate bonds continued to recover sharply as investors sought enhanced yield, government bonds fared less well, hit by concerns about the future and scaleof QE. Nevertheless, by the end of September, despite continuing good economic and earnings news, market momentum for all assets began to fade as investors began to worry about the impact of a withdrawal of extraordinary monetary and fiscal measures.Gold broke decisively through $1,000 and the dollar, notoriously weak during the recovery months began to revive, particularly against sterling.

The portfolio outperformed the benchmark this quarter, benefiting largely from an increased weighting to equity and real estate,as well as to gold. We tilted a proportion of the equities within the fund to stocks with value, leverage and lower quality characteristics, as seen largely in our Corporate Restructuring theme. Corporate Restructuring and Pricing Power both have a weighting of 21% in the portfolio, and have returned 27% and 15% respectively over the quarter. Interestingly, they are the top thematic performers over the year too, having returned 30.9% and 29.7%. The outperformance captured in Corporate Restructuring this quarter can be attributed to the purchase / adding to of a number of laggard financials, such as UBS, Citigroup, Lloyds and Hartford Financial Services, as well as other names including Alcatel Lucent, Fiat, Nissan and Estee Lauder.

Compounding the positive outcome of the decision to increase corporate restructuring was to reduce our exposure to IP&E. Thisproved to be the worst-performing theme over the period, returning 8.1%. Names sold here were Qualcomm, Unicharm, Proctor & Gamble, Merck, Monsanto and Intel Corp. All are good companies but, for the reason expressed above, they are currently too high a quality and too expensive for a market that has been attracted to -and rewarded by -value and cyclicality
We maintained negligible exposure to low-yielding cash and an exceptionally low weighting to sovereign bonds where duration was also kept low. We took the opportunity of a strong rebound in corporate bond prices to reduce exposure to high quality holdings where we considered further upside to be limited. We have maintained low exposure in relative terms to sterling, which we seeasparticularly vulnerable given high UK debt levels and relatively weak UK recovery prospects.

Despite the extent and longevity of the post-crisis rally -now the largest and longest in history -we remain positive about the prospects for further real asset gains until the year end. Although equity valuations have returned in most cases to “fair value”, there is scope for a strong recovery in earnings thanks to high productivity and strong growth due to inventory re-building. Furthermore, exceptional looseness in monetary and fiscal policy is likely to persist into 2010, underpinning recovery prospectsand demand for risk assets, especially with progressive dividends.

Although equities fell in June, the second quarter was the best in performance terms for more than 10 years. The pull back in June partly reflected profit taking, particularly of cyclical and financial equities that climbed the most after the waterfall declines of the winter. It was also a response to widespread capital-raising via rights issues and bond issuance. The key reason though, was theneed for investors to see evidence of an improving economic and company picture to justify the rebound. Confidence in the futurehas grown from excessively low levels, but so far this has not been matched by significant improvements in activity, housing andlabour data. Equity valuations have moved from cheap, oversold territory to fairly valued, but now require validation in terms of better company earnings. Sovereign bond performance in recent months has been poor with yields rising on concerns that vast government bond issuance will ultimately be inflationary.

The portfolio saw a modest overall decline in June. On a relative basis, the fund's equities mildly underperformed due mainlytoour stock selection where we continue to favour the high quality earnings and balance sheet overlay of the portfolio, a characteristic which underperformed early in the month. Having increased the equity weighting up to 69%, an overweight position versus the 60% MSCI World (Net Total Return) benchmark, we subsequently reduced this weighting back down to 63% as markets began to decline in the latter part of the month.

From a Thematic perspective, Intellectual Property and Innovation was the only Theme to add value against the benchmark, driven mainly by the defensive characteristics of companies such as Unicharmand Inverness Medical Innovation.After strong performances we have been reducing energy, industrials and emerging market positions, specifically relating to Russia. We have added to attractively valued defensive positions, which had lagged in recent months, such as Nestlein the Intellectual Property and Excellence Theme (IP&E).

Within fixed interest, we maintained a bias toward corporate bonds, which although susceptible to the back up in sovereign yields, offer attractive yield-enhancement opportunities and the prospect of capital growth from yield spread tightening. The gold position within the fund, which is held for its diversification benefits, had a poor month. Neither its potential as a hedge against inflation and/or protection against a failure of quantitative easing gave it support. Investors' sentiment swung toward discounting a longer more protracted period of loose fiscal and monetary policy in order to insure a recovery in activity has become imbedded. Property also ran into some profit taking, although our stock selection added value versus equities.

We recognise markets could continue to drift sideways until there is greater clarity about the pace of recovery. However, this is a healthy consolidation characteristic of post waterfall market recoveries and should provide a base from which markets can grow in coming months. Equity markets are well supported by valuation both in historic terms and compared to bonds and also by short-term interest rates, which we also expect to be kept at ultra low levels. Commodities and real estate will increasingly be sustained by abundant money supply and provide attractive investment opportunities for the portfolio.

Equity markets ended the quarter strongly despite economic news pointing to weak activity levels and near term prospects. This followed renewed concern about bank bad debts and capital adequacy in February and early March that sapped investor confidence and drove equity and corporate bond markets to new period lows. Prompting the month end equity bounce were a series of unprecedented fiscal and monetary measures undertaken by several governments and central banks, in particular quantitative easing in the US, UK, Switzerland and Japan in advance of the G20 meeting. While largely experimental and uncertain in outcome, they demonstrated a strong and co-ordinated resolve to reflate global economies. These interventionist measures served to drive sovereign bond yields sharply lower and thereafter, attract money back into risk assets such as equities with highly attractive valuations.

During the second half of the month, the equity market rallied strongly, driven principally by financials, but also by more cyclical areas of the market such as materials and energy. The fund's low exposure to financials was somewhat mitigated by larger weightings in mining and industrial companies. Selected purchases of those financial equities that we perceive to have increasing transparency post write-downs, has allowed some traction to be gained in a very aggressive move upwards for the sector.

As the equity rally gathered momentum, we took the opportunity to deploy some of the cash reserve built up over previous months, by selectively building up exposure to risk assets such as equity and quoted property. This had the effect of increasing the equity exposure of the fund up to a peak of 62% at month end from a previous underweight position. Areas that were targeted included increasing exposure to emerging market economies, which have continued to outperform developed markets on a relative basis in Q1. Over the month the fund's equities mildly underperformed the equity benchmark returning 7.2% versus the MSCI World (net total return), which posted a 7.5% gain. However, we chose not to chase the market rally aggressively as we have doubts about its sustainability given the poor outlook for corporate earnings.

The fund's fixed interest holdings outperformed the benchmark over the period under review. This was driven by corporate bonds where credit spreads tightened as investor's risk appetite increased toward the end of the month. Notably, bank Tier 1 capital staged a strong recovery having posted unprecedented loses earlier in the quarter.

Within the alternative asset allocation, gold produced a negative return over the month which drove the fund's underperformance relative to the composite equity and bond benchmark. We continued to hold exposure to gold as insurance against a failure in quantitative easing, but also as a hedge against the more medium-term inflationary prospects of increasing the monetary base. Other commodities have begun to tick upwards such as Platinum where we have been increasing the weighting.

Our central case is for a bottoming and revival in activity and confidence in the third quarter, so we continue to add tentative additional positions in equities with strong capital and cash flow support which exhibit attractive valuations. As we do not envisage a deflationary outcome, increasingly we see less merit in sovereign bonds with yields around 3% as there is little or no scope for capital appreciation.

A characteristic year-end squeeze meant that 2008, the worst year in performance terms for several decades, finished nevertheless, on a positive note. In spite of renewed hostilities in the Middle East which drove the oil price higher, the absence of significant economic and company data in the final 10 days of 2008 and thin trading volumes, allowed equities and other "risk" assets to regain some poise after a slew of negative data and news reports in early December. These included widespread weak consumer and company activity reports, accelerating unemployment data and further evidence of weakening real estate prices. It was encouraging, though perhaps testament to the forward looking nature of equities, that much of this bad news was already discounted in prices. The prospect of lower interest rates in all regions for the foreseeable future, further support for the banking system and quantitative easing measures that promised fiscal incentives meant that the worst outcome was averted.

The portfolio performed well in December with cash and government bonds providing strong gains in the face of weak data and the spread of different risk assets - equities, commodities, real estate, corporate bonds - providing diversification benefits and in the case of equities, some strong returns. A significant holding in gold, together with weightings to euro and yen benefited performance as the dollar continued to weaken against these currencies.

Our new theme, the "Strong get Stronger" performed the best out of all our themes in December, a pleasing result as we believe that in an era of capital rationing, those companies with strong balance sheets and high levels of free cash flow generation will be well placed to reduce costs and target demand against a slowing macro economic backdrop. "Corporate Restructuring" was the worst performing theme, due mainly to the theme containing lower quality companies that are initiating self-help measures, but are naturally finding it difficult to operate in the current climate.

Within the fixed interest element of the portfolio, we continue to see credit spreads widening. Conditions continue to be driven purely by technical hedging, however, the large levels of issuance seen in November normalised as liquidity dried up by the Christmas period.

It is certain that global economies will face a hard landing, directly attributable to the financial crisis and the adverse wealth and liquidity problems this wrought. However, it is our contention that this is largely reflected in valuations, and the monetary and fiscal measures taken by governments to avert a second round effect will mean stock markets can begin the healing process. The portfolio comprises a diversified blend of attractively valued high quality, well capitalised company holdings with attractive yields that provide strong capital growth potential, together with sovereign bonds and cash that provide stabilisation characteristics and scope to add to opportunities as they arise. The fall in volatility encouragingly allows holdings to be protected.