PORTFOLIO REVIEW
- Inflation Protected bonds increased in UK, US and Europe to approx. 10% exposure overall early in Q3
- New Cash inflows added selectively to Equities after market weakness
- Increased weightings to Energy, Food and latterly Utilities.
- Residual Real Estate exposure reduced to zero.
- Overall equity exposure retained at 70% - 75%, equally split US, Europe and UK.
- Yield Comparison: MGIIF 4.14%, Yield target 2.74% (JPM Global Gov Bond 3.66%, S&P 500 1.82%)
- US CPI 2.0% year-on-year (2.1% excluding Food & Energy)

EQUITY MARKET REVIEW
- Markets recover in September as Central Banks act to stabilise money markets
- Re-pricing of risk will remain a feature and markets remain wary as uncertainty persists
- Fed action sparks rally amongst interest sensitive sectors as market looks for lower rates to offset slowdown in economy
- Emerging markets hold up surprisingly well as weight of money flows outweighs increase in risk aversion, but valuations looking more stretched
- Financials underperform due to uncertainty over the extent of exposure to sub-prime sector and poor quality loans - Q3 reporting from early October onwards should go someway to quantifying losses and alleviating uncertainty
- US outperforms relative to rest of world, including UK and Europe, despite being centre of economic and financial concerns
- Sentiment likely to remain nervous in short term until clearer picture emerges of extent to which broader economy impacted

BOND MARKET REVIEW
- Bond markets remain volatile as extent of impact from sub-prime remains unclear
- Q3 flight to safety into government bonds begins to ease post mid-September Fed cut of 50 bp in both Discount and Fed Funds
- Corporates start to see some recovery as credit spreads narrow from widest levels, but nervousness remains
- High yield likely to remain under pressure and spreads wide as extent of economic slowdown uncertain
- Fewer high profile hedge fund casualties in September - but extent of liquidations at quarter end yet to be confirmed
- Weaker employment data and consumer confidence indicates potential impact for broader US economy
- Expectation of further action from the Fed, benefits short end, but yield curve steepens as longer term impact unclear
- Bank of England belatedly acts to ease liquidity shortage as Northern Rock seeks emergency assistance
- Upward pressure on UK rates abates in short term. Talk of near-term cut appears premature and will depend on impact of higher energy and food costs on inflation data
- ECB retains tightening bias as inflation close to target ceiling and money supply robust, but unlikely to act in short term
- Central Banks alert to sub-prime issue, liquidity injections ease overnight rates but 3-month Interbank rates remain elevated, albeit off highs

The funds continue to generate above-inflation income growth in US dollars, mainly as a
result of recent strong economic growth, particularly in the United States. The current
forward yield of 4.5% compares favourably with the 2.7% yield generated by averaging
the S&P 500 dividend yield and the yield on the JP Morgan Global Government Bond
Index.

The fund continues to focus on investing in companies (whether industrial, financial or
real estate) in the US, UK and Europe where the current dividend yield and future income
growth prospects will ensure that the fund not only produces a distributable income
stream, but also provides capital growth in excess of US consumer inflation in the longterm.
While average market dividend yields remain low (although they have been rising
for the past 3 years) we believe there is currently an opportunity to lock in good dividend
yields from some of the world’s leading companies. As a result, the fund’s exposure to
equities remains high at 75%, while exposure to bonds has increased slightly to 14%,
property exposure remains low at 5% with the balance in cash.

Based on the current income yield of 4.5% (pre-tax), an expected yield in 5 years time of
between 3.5% and 4.5% and income growth in US dollars of between 4% and 6% per
annum, we are forecasting total returns of between 9% and 17% per annum.