September was, above all, a month of central bank intervention. The European Central Bank announced its outright monetary transactions (OMT) programme, buying up short maturity bonds and relinquishing any claim to seniority as a bond holder. Not far behind, and as anticipated since last month's Jackson Hole speech, the US Federal Reserve announced an open-ended quantitative easing programme, pledging to buy financial assets until the domestic labour market improves substantially. The Bank of Japan also jumped on the bandwagon, increasing its existing asset purchase programme. While monetary intervention is not without consequences, the central banks of the developed world appear to be responding with conviction to the worsening global economic environment.

However, we appreciate the comfort of having some exposure in safe haven government bonds even though the return is uninspiring. Elsewhere, we maintained exposure in subordinated debt issued by financials such as Barclays and certain peripheral European champions such as ENEL, which provided positive returns.

Equities also reacted positively to the ECB's measures. We maintain a full position in Google (Intellectual Property & Excellence), which continued to perform strongly. This was joined by Samsung, Jardine Matheson and SES (the European satellite company), which has completed its investment programme and its Security of Supply characteristics can now take hold as the key driver. Within Strong get Stronger, we introduced two companies; Ebay with its strong competitive position and online payment system Paypal, which we believe will be hard to disrupt and Associated British Foods with its strong balance sheet and the potential for Primark's european expansion. Elsewhere in the Fund, Property was disappointing, in contrast to the strong performance earlier in the year.

Moving into the fourth quarter, we are cautious about the level of corporate bond spreads (the excess yield over government bonds) following the recent strong performance of credit. A consequence of the QE liquidity driven world is the temptation not to price risk correctly, and we continue to monitor our risk budget carefully. Equity valuations remain attractive versus government bonds on a long term view, and policy tail risks have materially fallen with recent announcements by the Fed and ECB. This should encourage further long-term capital flows into equity assets.

With Europe still in search of a solution, government bonds, equities and currencies behaved in an unpredictable fashion for yet another period under review. However, on Friday, 29 June after 12 hours of talks, the leaders of the 17 euro countries at least grew closer to solving the immediate crisis. They dropped the requirement that governments received preferential creditor status (on crisis loans to Spanish banks) and in time, this should restore confidence within the investor community. As usual, the devil is in the detail, but the stressed peripheral debt markets recovered on the news. Safe haven German Bund yields climbed up from their lows and equity markets responded positively.
Whether these gains extend into the summer will depend upon European leaders not declaring victory too soon. Despite the positive EU Summit and a commitment to spend €120 billion on infrastructure, there is still no common view on long-term strategy. The peripheral European economy is in a dire state, led by Greece with 22% official unemployment and rapidly falling living standards and this is impacting the earnings of companies worldwide.

We are underwhelmed by conventional government bonds, which are as expensive as they have been for 50 years. We remain underweight. The corporate sector is on the whole in better shape financially than most governments, which is why on a selective basis, we hold corporate bonds and are reassured by the relatively attractive valuations of cash rich global equities. Despite the difficult market environment, a number of companies have performed exceptionally well for us and we mentioned previously the sale of Essilor - ophthalmic lens manufacturer - because the thematic drivers looked priced in. More recently, we have sold our holding in Central Japan Railway (CJR). We believe that a number of expensive high-speed government projects CJR is involved in overseas may be reviewed.

Elsewhere within equities, we maintain relatively full positions in Wal-Mart Stores and the US home improvement retailer Home Depot. Residential construction continues to recover in the USA as a share of GDP. Whereas Home Depot is held with our Corporate Restructuring theme another beneficiary of the slow and steady recovery in the US economy is Pearson, which also performed well both relatively and absolutely during the period under review. Pearson forms part of our Strong get Stronger theme, alongside Coca-Cola and HSBC.

In March 2012, markets seemed to distance themselves from macro-economic events. The momentum of the US economic recovery began to slow; inflation appeared to be levelling off in the emerging world; while the UK Chancellor's budget contained little to surprise. In the US, the battle for the Republican Party nomination continued despite 'market friendly' Romney's general lead in the contest, while Obama's campaign continued to gain traction. Meanwhile, as Spain's public deficit figures were ramped up for 2011-12, and its bond yields rose to 5.5%, there was consent across Europe to expand the bailout mechanism beyond its current €500 billion limit.

Global equity and bond markets were broadly flat over the last month, but on a regional basis, the US remained strongest, with the S&P 500 making fresh post-Lehman highs due to supportive domestic data. Pfizer, Coca-Cola and Home Depot were among our best performers in this environment, but European stocks in our Intellectual Property & Excellence theme, like Essilor & ASML, also did well, despite their generally weaker domestic markets. Security of Supply was our weakest theme over the period due to lower oil prices and exposure to the Elgin gas leak through Total. We sold Proctor & Gamble and took some profits on Home Depot, reinvesting the proceeds into Nissan and Rakuten (the online Japanese retailer) and topping up Polar Capital Technology Fund.

Recent actions show the world's central banks are still happy to hold down interest rates, making consumption more attractive than saving in an attempt to support economic growth. However, longer term, there are still questions about how developed countries will reign in their bloated debt levels, and episodes of risk aversion are likely to return if recently raised expectations are disappointed. Despite this, and while the rest of the year will likely see more moderate equity returns, we feel thematic equities remain attractive over the longer term, especially with recent moves in gold and government bonds serving as a reminder that there are no longer any truly 'risk-free' assets.

There were signs of optimism as the year drew to a close. The US saw indications of decent components for recovery, particularly in housing and manufacturing and GDP expectations for 2012 are also improving slightly. In the euro zone, the ECB announced a three-year €489 billion bank liquidity programme, and the EU (excluding the UK), showed some unity in its conviction to solve the on-going crisis. In the emerging world, Chinese inflation fell back to pre-stimulus 2008 levels, allowing policy makers the potential to engineer a soft landing; while elsewhere in the emerging world the slowing pace of the Indian economy was a cause for concern.

After quite a tumultuous second half of 2011, December proved to be relatively calm, with most equity markets realising their lowest volatility since July. Despite this apparent sign of some risk appetite returning, there was no corresponding fall in safe haven sovereign bond markets, with the government debt of the UK, Germany and the US all rallying into the year end to post some of their best annual returns since the 1990's. We took advantage of this rally by increasing our underweight further by selling a number of gilts during the month. Corporate bonds also performed well, with some of our senior bank paper in particular, staging a recovery and enabling the portfolio's fixed income exposure to outperform the benchmark during December.

Within the equity exposure, US stocks led the way in returns with some strong performances from individual holdings such as Altria and Home Depot. Overall, the equity performance was slightly behind the benchmark as a number of stocks such as Oracle (which missed earnings expectations), disappointed. To position ourselves for 2012, we began to reduce our financial underweight, a positioning that worked well for us during late 2011. We began buying UBS and PNC financial, a US listed bank, both of which are attractively priced and we feel offer good prospects for positive price appreciation should global economies and sentiment begin to recover. Unsurprisingly, European stocks disappointed on the whole as macro concerns continued to spook investors.

We took advantage of relatively sanguine markets by writing a number of options on stocks such as British Land, BP and BHP Billiton to generate returns in the form of immediate option premium, and also allow us to select potential entry points at which we would be happy purchasing the stock should the options be exercised.

Thematically, the top-performing theme was Corporate Restructuring, with the market rewarding those firms (such as Home Depot and Pfizer) that are making internal changes to enable them to continue to improve in a low growth environment. Our largest weighted theme, Intellectual Property and Excellence, was somewhat more disappointing, declining overall during December despite strong performances from the likes of IBM.

We remain confident in our underweight to government bonds, with short and medium-term yields now too close to zero to maintain last year's momentum. While 2011 served to remind investors that capitalism depends on confidence to work, there are signs that the measures recently taken by the ECB have restored some faith in the global financial system and increased the chances of recovery. Though, as expectations increase, so does the risk of disappointment and we feel a premium is still to be recognised for thematic companies that can combine superior earnings visibility with the support of conservative valuations.