Market review
Equity markets rose steadily over the quarter, with the MSCI World Index returning 6.8% in US dollars, the S&P 500 Index gaining 6.4% and the Nikkei 225 Index adding 1%. The MSCI Emerging Markets Index returned 7.9% over the review period. Yields on 10-year government bonds were barely changed at 1.64% in the US and 1.72% in the UK, but fell to 1.46% in Germany and 0.77% in Japan. Spreads on 10-year government bonds relative to Germany fell to 371 basis points in Italy and 433 basis points in Spain. Spreads on investment-grade and, especially, on high-yield corporate bonds relative to government issues fell, while yields on local emerging market debt also declined. The US dollar fell 2.9% against sterling and 1.4% against the euro. The return on the Citigroup World Government Bond Index was 3% in US dollars. While economic growth in the second quarter was weak, data for the second quarter points to an improvement. Mario Draghi, President of the European Central Bank, fulfilled his promise to do "whatever it takes" to save the euro by pledging to buy unlimited amounts of short-term European government bonds, but this has encountered stumbling blocks. Meanwhile, the benefit of the third programme of quantitative easing in the US is likely to be, at best, ineffective - yet data releases have generally been better than expected. The recovery in the US housing market promises continued credit expansion, while concerns about China should not detract from an improving outlook for emerging economies. In the euro zone, however, there is no light at the end of the tunnel with the outlook continuing to worsen. The Brent oil price rose to $112.4 per barrel, $5 below the September peak while the gold price recovered to $1 772 per ounce. The CRB Commodities Index rose 1.4%.

Portfolio review
The Investec Global Strategic Managed Feeder Fund's global equity portfolio added to returns over the quarter. Asset allocation, including currency and non-core positions, detracted from performance.

Portfolio positioning
The steady uptrend in equity markets since the market low in early June looks set to continue, so we are resisting the temptation to take profits. Investors assume that it is time to reduce equity exposure near the top of the recent trading range, in anticipation of a renewed sell-off caused by problems with the US economy, China, the euro-zone or any other issues that overhang markets. However, we believe this is premature. The market does not look overbought. There is no euphoria, no rush of investors to pile in and no outbreak of sudden optimism. Investors remain cautious, nervous of the risk, and funds have seen only modest inflows. Although the evidence points to a slowing rate of global growth and continuing downgrades of corporate earnings forecasts, economic data has been better than expected. We believe this trend looks likely to continue. The pace of downgrades to corporate earnings has slowed, with many more upgrades and fewer downgrades in recent months. Forecasts now look too pessimistic, especially as the cut in forecasts for US companies was largely the result of dollar strength that has now reversed. As a result, 2012 forecasts should prove too cautious, with high single digit earnings growth likely. This, and the prospect of similar or better earnings growth in 2013, can justify higher market valuations. Equity markets are a leading, rather than a lagging, indicator of the global economy so analysing economic data for evidence to justify a more optimistic view of markets is unwise. However, a sustained upward trend will need to be supported by a better economic outlook. Without evidence of improvement by the year end, the rally will stall or reverse and forecasts for corporate earnings growth in 2013 may start to be reduced. We are positive, but not complacent.

Market review
Equity markets declined throughout April and May, but recovered some ground in June. Over the quarter, the MSCI World Index fell 4.9% in dollars, the S&P 500 Index returned -2.8% and the Nikkei 225 Index lost 7.9%. The MSCI Emerging Markets Index returned -8.8% over the review period. Yields on 10-year government bonds declined to 1.64% in the US, 1.73% in the UK, 1.58% in Germany and 0.84% in Japan. Spreads of government 10-year bonds relative to Germany rose to 423 basis points in Italy and 471 basis points in Spain. Spreads on investment grade and high yield corporate bonds relative to government issues rose, but yields on local emerging market debt declined. The dollar gained 1.8% against sterling and 4.7% against the euro, but fell 3.1% against the yen. The return on the Citigroup World Government Bond Index was 0.9% in dollars. Economic data in the second quarter of 2012 was generally weak and below expectations, raising hopes of further monetary easing by central banks around the world. A plan to recapitalise the Spanish banks had to be hastily revised to inject euro-zone funds directly into banks, rather than lending more money to the already overburdened Spanish government for the purpose. By the end of the period, the Brent oil price dropped sharply to $95.44 per barrel, the lowest for over a year, while the gold price fell to $1597 per ounce. The CRB Commodities Index dropped 7.8%.

Portfolio review
The Investec Global Strategic Managed Feeder Fund's global equity portfolio had a negative impact on performance. The global bond portfolio and asset allocation, including currency and non-core positions also detracted from returns.

Portfolio positioning
A modest rally in equities followed the sell-off in May, but markets have since flattened out. May's sell-off was on a considerably smaller scale than in 2011, suggesting that investors have become less inclined to overreact to market setbacks, since this could make them vulnerable to whip-back rallies. They remain resolutely sceptical of attempts by the authorities to respond to the euro-zone crisis, so a sustained move upwards is unlikely. However, there is also recognition that, although US growth looks pedestrian by historical standards, and some emerging economies are struggling, global growth is reasonable. This means that, while earnings forecasts are now being downgraded again, earnings growth is relatively strong, with prospective valuations not much above the lows seen in early 2009. Nevertheless, it also means that government bond yields, which discount economic contraction for the next decade, remain very expensive and vulnerable to a sharp rise when economic and market confidence returns. We believe that the status quo in the euro zone is unsustainable. While a full fiscal, monetary and political union seems politically impossible, an unravelling of the euro zone is a real possibility. Continued patience is required until the outcome emerges, but investors are unlikely to have long to wait. We see an unravelling of the euro zone as a positive outcome for economies in the long term, and for markets much more quickly, although there could be some turbulence in the very short term. Our strategy remains to be neutrally positioned in terms of risk, but we are ready to increase our risk exposure as soon as our positive long-term outlook becomes more timely. We remain strategically positive on the dollar. Having raised exposure to Asian and emerging market currencies on a tactical basis, following their sharp falls in May, we have now reinstated a preference for the dollar.

Market review
The strong momentum of January and February faded somewhat in March, but the MSCI World Index still returned 11.7% in US dollars over the quarter, the S&P 500 Index returned 12.6% and the Nikkei 225 Index (Japan) rose 11.5%. The MSCI Emerging Markets Index gained 14.1% over the review period. Yields on 10-year government bonds rose to 2.21% in the US and 2.21% in the UK, but edged down to 1.82% in Germany and were flat at 0.99% in Japan. Spreads of government 10-year bonds relative to Germany fell to 329 basis points in Italy and 118 basis points in France, but rose to 355 basis points in Spain. Spreads on investment-grade and high-yield corporate bonds relative to government issues fell sharply, as did yields on emerging market debt. The dollar fell 2.7% against sterling and 2.5% against the euro, but rose 6.9% against the yen. The return on the Citigroup World Government Bond Index was -0.5% in US dollars.

The favourable trend of economic news earlier in the year faded in March with data only in line with expectations. This led to some concern that US economic growth might decelerate without more quantitative easing. The breathing space for the euro zone, provided by the European Central Bank's long-term refinancing operation, showed signs of coming to an end with the Greek default, serious problems in Portugal and mounting fiscal difficulties in Spain. A slowdown in the Chinese economy is also evident, but the overall picture of sluggish growth in developed economies and better growth in emerging economies is unchanged. The Brent oil price rose to $122.9 per barrel by the end of the review period, having peaked at over $126 in early March. Meanwhile, the gold price rose to $1662 per ounce, despite a 6% drop in March. The CRB Commodities Index rose 1.1% during the period.

Portfolio review
The Investec Global Strategic Managed Feeder Fund's global equity and global bond portfolios contributed to performance over the quarter. Asset allocation also added value, while currency positions, alternatives and cash detracted from returns.

Portfolio positioning
March was a quieter month for equity markets as earlier gains were consolidated and the euro-zone crisis deteriorated again. Investors remain cautious and fund flows have been poor. Normally, a rising market attracts retail investors, but they have continued to sell. However, with modest issuance, rising dividends and continuing buy-backs, cash flow into the market is healthy and a pick-up in fund flows is likely. With earnings momentum improving and valuations very attractive, equities should again perform well in the second quarter.

Government bond markets have been dull and we expect this situation to continue. However, we do not anticipate a major jump in yields, given sluggish growth in developed markets, falling inflation and the addiction of central banks to quantitative easing. Euro-zone bond spreads are likely to continue their recent rise, increasing the attraction of 'safer' havens. Although we expect the return from corporate bonds to be modest, it should be positive and significantly better than cash. Consequently, we are leaving the asset allocation of our portfolios unchanged. We have an overweight allocation to risk assets and a broad range of thematic tilts. While many investors are agonising over top-down factors and market volatility, we believe that the best strategy for 2012 is to focus on the potential for bottom-up alpha in individual equities, credits, themes and funds. In our view, 2012 will be a good year for investors who are patient and prepared to ride out the inevitable uncertainty. However, it will be another difficult year for those investors who simply react to the ebb and flow of news and data.