Market review
Global equity markets witnessed a downturn in the second quarter, as measured by the MSCI All Countries World Index, which fell 5.6% in dollar terms. The overall return for the period masks June's recovery, with most of the positive performance coming on the last day. Markets were overshadowed during the period by fears of a slowdown in the three main global engines, Europe, the US and China, although it was primarily events in Europe which grabbed the headlines. This was in spite of companies generally reporting good earnings for the first quarter, indicating that the selloff in equities was a 'risk-off' trade, rather than being about fundamentals. Interestingly, volatility as measured by the VIX Index is at lower levels than in 2011, suggesting that investors have learnt the lessons of previous periods and are not as quick to react extremely to events in the market.

Portfolio review
The portfolio underperformed its benchmark in rand terms over the quarter. Technology was the only super-sector in which we outperformed this quarter. In particular, the portfolio was supported by holding overweight positions in the technology stocks Oracle, Nexon and ASML. Software maker Oracle came out with solid results showing better application growth, which is key to long-term growth expectations. The share price of Japanese gaming company, Nexon, rose following a decision to acquire a stake in the Korean gaming company, NCsoft. Semiconductor equipment maker, ASML, continued to perform well, driven by capacity issues at leading-edge semiconductor factories. Although the market saw volatile trading and large swings over the quarter, the key determinant of performance was stock picking. Within the consumer sector, nutritional supplements marketer Herbalife saw a sharp sell-off, following a series of questions about direct selling methods from a prominent short seller on its conference call. Herbalife's sell-off had an impact across the sector, with New York-listed skincare group Nu Skin also falling over the quarter. Not holding Amazon, which performed strongly over the review period, hurt performance. Elsewhere in the portfolio, mid-cap names that experienced negative news were severely punished. These included Express (a speciality US retailer) and the US department store chain, Macy's. Banks also performed poorly and in particular, JPMorgan and the emerging market banks, Banco do Brasil and Sberbank, in which we hold overweight positions. JPMorgan's share price suffered, following the surprise loss within its Chief Investment Office.

Portfolio positioning
Many strong first quarter earners are reluctant to upgrade expectations for the year and there are some cautious statements from managers as to the outlook for the remainder of 2012. This has resulted in many broad 'industry headwind' justified earnings downgrades. The second quarter reporting season will provide an insight into whether this more negative outlook is justified, or whether companies will be able to exceed expectations, as they have managed to do for so many recent quarters. It seems unlikely that a generally better earnings season will be enough to enable jittery investors to look beyond the headlines and focus on bottom-up analysis. However, we believe that individual stock selection will remain key in generating alpha (outperformance). Our message remains positive, with June demonstrating again that at current valuation levels progress can be made, despite an atmosphere of fear. Equities are very attractive relative to bonds and, if margins can be maintained, are intrinsically cheap in an absolute sense. Some positive surprises in the coming earnings season will help to support markets, but focusing on shareholder returns and returning cash to owners should prove the most productive method of attracting money to global equity markets.

Market review
Global equity markets made a strong start to the year as companies continued to report earnings in excess of expectations and the US economy's steady recovery helped improve sentiment toward risk assets. Emerging market and Asian stocks outperformed, while Europe, demonstrating a significant North/South divergence in returns, underperformed. The US market was broadly in line with the global average. Investors focused on the attractively valued sectors that had sold off in 2011, including technology and financials.

Portfolio review
The portfolio performed in line with its benchmark over the quarter. The majority of the returns were delivered by good stock selection across diverse supersectors, including consumers, services and technology. The connecting theme over the period was attractively valued stocks that were executing well, such as Apple, priceline.com and Macy's. Although the materials sector underperformed, owning individual shares that could benefit from the weaker feed stock prices, such as LyondellBasell and BASF, contributed to the overall outperformance of your portfolio. Equally, being underweight some of the large cap defensive sectors also helped, including food & beverages and household & personal goods. Gratifyingly, there were few outright detractors from performance in the quarter. Our overweight position in non-life insurance stocks hurt modestly, as they are less geared to equity market than bond market returns. Overall, it was a positive quarter in absolute and relative terms.

Portfolio positioning
Equities are attractively valued against global government bonds. Global stock markets are also attractively valued in absolute terms relative to history. These would seem to be good enough reasons to allocate capital to equity markets. However, we believe an understanding of the sustainability of the forces behind the strong improvement in margins and returns is needed to round off the case for equities right now. Our focus is on attractively valued stocks demonstrating good operating performance improvement, which we think will sustain returns and underpin prices in any ongoing market volatility.

Market review

Although equity markets produced considerably better returns than those of the dismal third quarter, political and economic news flow continued to cause volatility for much of the period, particularly on developments relating to the euro zone. Whilst investors were initially relieved that measures announced at the October EU summit answered immediate euro-zone funding concerns, peripheral sovereign yields remained elevated, given changes of government in Greece, Italy and Spain. Markets rallied, however, after six central banks extended cheap dollar funding to European banks, and China lowered the reserve ratio requirement for its banks. The European banking sector was also supported into the end of the quarter by the European Central Bank's three-year lending operations.

Portfolio review

The fund experienced a much better quarter, outperforming strongly on both a relative and absolute basis as investors put some risk back into their portfolios. Investors were discriminate, so whilst consumer discretionary stocks generally rebounded, financials and materials-related shares did not, given that there was no fundamental shift in economic growth expectations. The largest area of portfolio outperformance was the resources supersector, due to some excellent individual stock performances (LyondellBasell and Occidental Petroleum), strength in our iron and copper miners, together with no exposure to gold equities. Financials also produced a robust contribution, thanks to a good return from Swedbank. Our continued underweight position in banks also proved to be an effective strategy as many came under pressure again this quarter. Lastly, in services our distributor stocks rallied on signs of improving activity in the US.

Portfolio positioning

In an environment featuring huge amplitude in sentiment and the instantaneous transmission of these sentiment changes to equity prices, we superficially appear to be hostages to short-term macro/political events, where predictability is very low. However, in the long term, company fundamentals will prevail and currently companies are performing well in a challenging environment. Whilst there have been a few corporate casualties over the past few months, quality businesses are still focused on generating strong cash flows and have extremely solid balance sheets. We remain committed to high quality, cheap companies with improving operating performance and as correlations drop, these are the types of companies that should attract investors.