In our June 2012 commentary, we encouraged investors to build up equity positions in dividend rich sectors such as those contained in the three Marriott International Funds. Valuations were relatively modest and sentiment was low as a result of sustained weakness in most global economies. The third quarter of 2012 has rewarded such an approach, with a return of 7% from global equities in US Dollar terms lifting gains for the year to date to 13.4%.

Strangely, not that much has really happened on the ground to justify the swing in confidence which we have experienced in recent weeks. Globally, unemployment remains a serious problem, most notably in the Eurozone, where one quarter of the workforce in Greece and Spain are now out of work. Nor, too, is there ample evidence of green shoots of recovery in any major market. Economic data readings are erratic and suggest that most markets are bumping along the bottom and will continue to do so for the foreseeable future as governments continue to search for a mythical silver bullet to end their respective debt crises.

One 'solution' was presented to the market in September in the form of QE 3 or 'QE Infinity', the title given to the latest round of monetary pump priming from the US Federal Reserve Bank. Like most movie sequels, subsequent rounds of QE have been far less convincing than the original. Nonetheless, the promise of low interest rates at least until 2015 together with the determination to improve the cost and availability of credit led to a sharp rally in risk assets, including precious metals, as investors (ourselves included) deduced that higher inflation was a likely consequence of this latest policy move. Whilst we welcomed the market rally which extended into credit markets as well as a predictable (if short lived) rally in raw commodity producers, the fact remains that repaying years of accumulated debt is going to take a considerable time and will not necessarily coincide with any political election cycle.

Amidst all of the economic noise, it is easy to forget that a number of businesses continue to go about their work efficiently and profitably. Whilst these businesses are not immune from market cycles, the diversity and quality of their product portfolios means that they can ride out short term volatility, often using their cash flow to enhance earnings by accumulating rivals along the way. Whilst the International Growth Fund has a mandate to invest across a range of asset classes, including fixed interest, the low redemption yields on offer, especially from US, UK and leading European government issues means that this remains an area where we are exercising caution. As a consequence, our asset allocation remains heavily tilted towards quality international equities where net yields remain far higher than equivalent bond yields, with the built in prospect of future growth

The second quarter of 2012 was another difficult investment period for investors. Global equities fell as the recovery in the US faltered and the prospects for the Eurozone worsened. Once again, despite appalling fundamentals, government bond yields continued to sink as investors turned to what they considered to be the ultimate safety parachute. The International Growth Fund fell by 2.4% over the second quarter taking the gain over the course of the first half of 2012 to 2.3%.

The reason for this latest bout of uncertainty was, one again, Europe. Although some progress appeared to be made at the latest European Summit in June, the fundamental problems remain unresolved. All Eurozone member states currently enjoy the ability to arrange their own tax budgets. As is now widely known, many Eurozone members, for e.g. Greece, have abused this arrangement. The establishment of a central Eurozone fiscal arrangement has been put forward as a way of restoring confidence to the financial system in the longer term by allowing countries to pool risk. This would theoretically reduce borrowing costs for the weaker members as the risk of default would shrink allowing governments to begin repaying debt at more affordable rates. It would also lift equity markets and, by definition, lead the way to a more sustainable economic recovery. There are, however, a number of barriers to this welcome solution. Firstly, some countries, notably Germany, are reluctant to concede fiscal control to, in their view, a less effective central European agency. Secondly, because such a move would involve a change to the original European Treaty of Maastricht, it would almost certainly require individual countries to hold a referendum.

Despite Germany's reticence, it is difficult to see how the currently broken Eurozone model can be repaired without fiscal union. For as long as Germany remains unwilling to move in the direction of a federal Europe, we believe that equity markets will remain choppy at best and there may be no quick solution to Eurozone problems. The catalyst to a solution will probably be when Greece completely collapses under the twin burdens of debt and austerity and is forced out of the Eurozone altogether. Greece may be followed by one or two of the other peripheral countries such as Spain and Portugal in quick succession. An alternative is that Germany, unable or unwilling to shoulder responsibility for Southern Eurozone countries, leaves the Eurozone itself and returns to the shelter of the Deutschemark.

Whilst in the short term, it is hard to see much evidence of recovery, longer term there remains compelling reasons for building up equity positions in dividend rich sectors. As both the UK and US government embark upon another round of Quantitative Easing, the pressure on government bond yields will, we believe, subside and subside quickly. If there is one major risk to the market today, then we do not believe it rests with equity markets, but with leading government bond yields which we fear will soar once investors decide to move back into riskier assets. In many sectors, wide discounts to underlying asset values persist in the market. These anomalies, whilst frustrating, are part and parcel of equity investing. Dividend payouts take away some of the sting whilst a recovery is awaited and selling at rock bottom prices is rarely the best way of creating wealth in the longer term. On the other hand, government bonds and cash deposits guarantee a depletion of capital in real terms at current prices and we remain underweight in bonds whilst continuing to advocate a balanced portfolio of income orientated equities and property shares.

The first quarter of 2012 marked a return to relative normality for international markets. This time, it was corporate rather than geopolitical issues which finally gave equity markets a genuine reason to rally. However, the macro background was significantly helped by the European Central Bank whose latest Long Term Refinancing Operation eased the pressure on Europe's liquidity starved banks in a stroke. The International Growth Fund gained nearly 5% in Dollar terms against a backdrop of broadly rising global stock markets. On the other hand, international bond markets suffered as yields drifted higher, depressing prices as investors sold down low yielding Government bonds. It is 30 years since bond investors on both sides of the Atlantic have experienced a decade of negative returns and for much of this time bonds have outperformed equities, defying the general history of stock-market investing. Perhaps more interesting is the fact that so many major pension funds have become obsessed with bond investment at the expense of equities and few bond traders will have ever experienced a deep bond bear market. From an economic perspective, initially it does not appear to make sense that bonds should start to under-perform at a time of lacklustre economic growth. Markets are, of course, nothing if not forward thinking. If one was to use history as an example, the economic stagnation of the 1930s proved to be far more lucrative for equity investors than for bond investors. Historically, longer term equity rallies begin when equities look cheap, not when economies are robust and today, the yield comparisons between bonds and equities make the argument for equities quite compelling.

Since the start of the century, traditional measurements of equity valuations have been distorted by one major crisis after the other. Whilst this is all part of the risk element of equity markets, investors cannot be blamed for suffering fatigue from the Eurozone crisis, the banking crisis, the housing crisis, 9/11 and so on. The Eurozone crisis has, of course, yet to be fully resolved and we expect more turbulence as the year progresses. Nonetheless, the backdrop for equity markets looks a little better than the same time last year and we remain overweight in equities (including quoted property companies) relative to bonds. To a greater extent, this position is determined by low bond yields and the negative real returns on offer here after the impact of inflation is discounted. On the other hand, equity yields are generally good to excellent. Corporate cash balances in our core sectors are healthy meaning that dividend cover is improving and companies are already pricing in dividend increases which, in a normal cycle, provides protection against inflation. The downside of a high equity approach in the near term is volatility. The Fund's concentration on high yielding blue chip companies does, however, dampen this volatility whilst the resulting cash flow from dividends smoothes returns over the medium and longer term.

In terms of regional exposure, the Fund maintains a higher weighting to the US and UK at the expense of Europe. We still expect GDP growth in the US in 2012 to outpace all other major markets whilst the relatively low level of exports which the US sends to Europe will provide some insulation from the fallout in the Eurozone. In the absence of so many credible alternatives, we remain of the view that high yielding blue chip equities across a range of diversified sectors remains the investment of choice in the current climate.

The International Growth Fund gained 0.9% in Dollar terms in 2011 against a backdrop of broadly declining global stock markets. The MSCI World Index fell by 6.9% during the year due to slowing economic growth and the impact of the Euro zone crisis. After two years of under-performance, value and yield orientated blue chip companies had a good year in relative terms, which translated into positive returns for the Fund for the whole of 2011.

The Fund remains overweight equities relative to bonds (fixed interest). Whilst we do not expect interest rates to rise in the near term in any major market, Government bonds are well priced and the scope for gains is small whilst the threat of a correction is high. Investors should be wary of any market which has been driven higher purely on grounds of fear and the heights to which the US Government market has been propelled (as well as the Dollar) suggests a level of risk aversion which can be reversed very quickly.

We do not, however, expect the Euro zone crisis to abate any time soon. Greece appears to be edging towards an exit and this will mean further volatility and protracted pain for Europe's banks where we have virtually no exposure. The Fund instead tends to concentrate on holding companies in staple businesses such as food, property, drink and telecommunications. Such sectors are often dominated by higher yielding companies, in part because they have been steadily increasing dividends over the past few years whilst their share prices have remained static. The Fund is now yielding 4.6% gross and is edging towards 5% as we look to lock in attractive yields on lower days for the market (of which there have been plenty in 2011).

In terms of regional exposure, the Fund has a higher weighting to the US and UK at the expense of Europe. We expect GDP growth in the US in 2012 to outpace all other major markets whilst the relatively low level of exports which the US sends to Europe will provide some insulation from the fallout in the Euro zone. Emerging markets, on the other hand, had a bad 2011, falling on average by 20% in sterling terms as investors reduced risk. Whilst we do not have any direct exposure to such markets, all of the underlying constituents of the Fund have important subsidiaries in these regions which we expect to drive growth in the medium terms as the balance of economic power continues to shift eastwards and, in the case of America, towards the south.