September was another extremely volatile month for risk assets with the MSCI World Index returning -6.2% hedged to USD and the JPMGBI +1.2% hedged to USD.

This was against a backdrop of a continued decline in European sovereign debt markets that threatened to morph into a broader rout of European banks that are still heavily exposed to periphery debt. This is perhaps best illustrated by the index of European banks that recorded a fall of 8.2% for the month, despite the sharp relief rally in the final week of September that masked an intra-month fall of 22%. The French banks, in particular, suffered with names such as BNP Paribas and Credit Agricole down over 35% by mid-September, before recovering some of the losses as the month closed. This weak environment for risk assets saw the volatility Index (VIX) remain elevated, closing the month above 42 while emerging market equities saw sharp losses underperforming developed markets for the month. The USD and JPY remained well supported, while investors continued to flock to AAA rated government debt with the US 10-year Treasury yield remaining below 2%.

Operation "twist" was announced by the Federal Open Market Committee (FOMC), which will see short-dated debt on the balance sheet sold with the proceeds used to buy longer dated maturities, a move designed to reduce longer term borrowing costs. Equity markets took little comfort from the announcement with the size of the programme larger than the market expected with bank interest margins likely to be under pressure. Although longer term funding costs in debt markets may be lowered as the programme takes effect the reaction of the credit markets, where spreads have widened significantly, has yet to see that transmission mechanism compress yields. A policy response from Europe is urgently required and while talk of a leveraged European Financial Stability Facility (EFSF) fund, further IMF involvement and the passing of the existing EFSF legislation through national parliaments (including Germany and Finland) provided some support at the end of the month, the situation remains extremely fluid with nervousness evident across all markets.

Against this backdrop, the portfolio's delta averaged 11% for the month ranging between 8% and rising as high as 14% towards the end of the month as markets rallied. We also maintained a positive stance on fixed income with the portfolio averaging around 4 years of duration. This low delta is also combined with a conservative stock selection module that has little in the way of financial exposure, although we did add some Japanese bank names at the end of the month. While the macro backdrop in Europe remains extremely weak, we are conscious that much of this has arguably already been priced in with the Eurostoxx Index down over 23% year-to-date, but the S&P 500 Index down just over 10%. Geographically, the portfolio is positioned to be long Europe versus the S&P, captured by Dax and Eurostoxx futures, with our US equities hedged with S&P futures. Given the stress currently being exhibited in markets, we think that any equity rally will be led by Europe, while our conservative stock selection, low delta and downside hedges will protect the portfolio in any sharp falls.

Within fixed income, the portfolio maintained a constructive view on UK 10-year gilts, which contributed significantly to performance and we took profit on some of the position as yields dipped below 2.4%. While we still believe that gilts will rally further, with the minutes from the Bank of England (BoE) suggesting that further quantitative easing (QE) was likely, our risk management process indicated that the trade was contributing significantly to overall risk in the portfolio. With yields so low, we reduced the size of the trade. We remain long Australian index-linked bonds and have some limited exposure in the US via cash bonds.

Moving forward, there are clearly risks on both the upside and downside. Clearly the most pressing issue is a meaningful resolution around Europe, but against this backdrop there have been signs of more positive macro data from the US including stronger capital goods orders. Monetary policy will remain ultra-stimulative for the foreseeable future with further QE from the BoE highly likely with rate cuts from the ECB combined with extensive liquidity provision. Operation twist will flatten the yield curve and will aim to reduce longer term funding costs, although the follow through to credit markets and general risk appetite has not yet been seen. In this environment, we anticipate keeping risk low to preserve capital and note the volatility of the portfolio remains very stable.

June was another volatile month for all risk assets and a 6% rally in the final four days could not prevent the MSCI World Index hedged to USD recording a loss of -1.8% over the month. Fixed income provided little diversification with the JPMGBI Index hedged to USD ending the month broadly flat. The catalyst for the volatility was the continued uncertainty around Greek sovereign debt with the government only narrowly passing deep austerity measures that allowed the release of EU and IMF funds thus avoiding short-term default. This came against a background of a very uncertain macro outlook with joblessness in the US remaining at elevated levels and weakening PMI surveys. Much of the weakness has been attributed to Japanese supply chain disruptions post the earthquake, particularly within the electronics and automotive sectors. Markets have reached a critical juncture and improvements need to be seen for the mid-cycle thesis to be confirmed. The June ISM survey may provide the first chink of good news on this front.

The portfolio was positioned with a delta level that averaged around 20% for the month with bond duration around 2.1 years. Stock selection remains defensive at the core with a handful of our top picks within cyclical names, with the geographical positioning of the portfolio biased towards the developed markets as the emerging world continued to underperform. Maintaining a positive delta detracted from the performance of the portfolio and this was a main driver for the losses over the month.

Within fixed income, we maintained our short at the front of the two year part of the US curve, and maintained our long position in gilts. The gilts initially performed very strongly in the overall flight to quality bid and was helped by the release of the Monetary Policy Committee (MPC) minutes that suggested that further bond purchases under an extended quantitative easing programme was still possible. However, our position detracted as bonds sold off in the last week of the month as equities viciously squeezed to the upside. We retain the position: seeing a significant loss of momentum in the UK economy and the government paying more attention to austerity measures, which despite high headline inflation, is likely to be beneficial for the bond market.

Our long positions in Australian and UK inflation continued to add value, while our convertible bonds detracted value over the month and we continue to trim names, particularly at the higher end of the credit curve.

Our long-term strategic view that equities offer value remains a central part of our investment thinking in the current environment. This view is based on our quantitative analysis that shows that stocks are still an attractively valued asset class and our qualitative research that indicates there is still significant money that could be switched from lower risk assets such as liquidity funds into equity holdings.

Our macro view is that the recent soft patch of global data is just a temporary slowdown aggravated by the disruption stemming from the Japanese earthquake. We anticipate a reacceleration in the global economy aided by loose monetary conditions in the US, with Asia coming towards the end of its rate hiking cycle. Although bond valuations are stretched, we think that there are still pockets of value where curves are steep, allowing investors to collect the 'roll and carry' within the yield curve. We anticipate keeping a significant equity content in the portfolio within a strategy of low beta stocks, with futures hedging the portfolio. Although both bonds and equities were down this month, we still see diversification benefits in owning both asset classes, while acknowledging that a key risk to this view is the sustainability of the US fiscal position.

March was marked by three major events.

First in line was the dramatic earthquake in Japan, along with the subsequent nuclear crisis and its potential economic consequences. The Bank of Japan has responded swiftly to the disaster by providing liquidity to the banking sector, increasing quantitative easing, and leading the first G7 foreign exchange intervention since 2000.

Secondly, tensions in the Middle East intensified further with NATO's intervention in Libya, and large demonstrations in Bahrain and Syria.

Finally, the European sovereign crisis also remained centre-stage. Indeed, not only did the EU deal on the bailout package fail to calm market fears, but the Portuguese government fell, fuelling expectations that Portugal would seek financial assistance sooner rather than later.

Against this backdrop, and despite nascent signs that the manufacturing sector is losing momentum, G3 central banks hinted at starting their exit strategy soon, with the ECB notably hinting at a rapid rate hike.

Early in the month, we took the decision to reduce the equity exposure in the face of waning market sentiment, the spread and escalation of demonstrations in the Middle East, and elections in Europe. We sold Delta and FedEx(two stocks we felt were negatively exposed to the rising oil price) and then, using futures, quickly reduced our exposure by a further 5%. This meant we were more defensively positioned when the Japanese tragedy occurred, and were able to protect value as the markets fell some 6-8% in response. We had a minor overweight to Japan, which we chose to maintain; given the international focus of our companies, we do not expect their revenues to be impacted, and the portfolio did not unduly suffer. As the crisis unfolded and (in our opinion) a larger scale nuclear disaster looked less likely, we re-built our equity exposure at these lower levels. This month, we introduced MTN-a telecommunication company operating predominately in Africa and the Middle East, as well as taking the opportunity to reduce our bond weighting further.

Equity markets (and risk assets more generally) have been remarkably resilient given the conflux of recent events. In particular, there has been some recovery in the emerging markets (the best performing area globally during March), which has benefited the portfolio's relative equity performance. At the same time, while government bond markets increased in value during the period of risk aversion, the gains were not significant and have subsequently reversed, remaining negative since the turn of the year and giving us increased conviction in our overweight equity stance. We believe the forthcoming earnings season will again prove that companies are in bad health and that valuations are attractive both in isolation and against other assets. And so while it is somewhat a consensus opinion (which makes us nervous), we continue to believe that equities will advance over the coming months.

The portfolio maintained an average delta of 18% during the month. Our asset allocation models still remain constructive on risk assets, with valuations, momentum and liquidity all looking favourable. From a qualitative perspective we felt there were still many investors that remain on the sidelines and valuations in fixed income markets look extremely stretched. We, therefore, favoured a modest risk position with some relative value geographical plays -notably remaining long in the US where, with the exception of the employment numbers, the economic data has shown some improvement. This is in contrast to Europe where we still feel the systemic problems within the periphery will continue to play out into 2011.

We remain constructive on Japan where we think gradual outperformance against a backdrop of a slowly improving global picture is likely. Our convertible holdings and dividend positions continued to add modestly to performance and within our equity positions we took profits on some of our long standing exposure to technology and consumer staples and added to miners and some copper stocks.

Our headline duration position for the month was modest, but our market and curve positioning aided performance. We were short US 10-year Treasuries for most of the month, against longs in Japan, the UK and US 5-year Treasuries. For portfolio diversification we remain reluctant to take headline duration down to zero and maintained an average duration of around 1.3 years. While our market positioning added value, any duration risk was going to detract in a broad bond market sell-off and we estimate that our fixed income positions were broadly flat although they did provide some diversification to the overall portfolio.

Looking ahead we remain constructive on risk assets but recognise there are significant headwinds that will need to play out.These include the likely effect of Chinese tightening; the ongoing funding issues in the periphery of Europe and the fiscal consolidation that requires; the likely continued weakness within the US housing market with relatively high US unemployment and further ahead, the long-term effects of the extraordinary monetary policies pursued over the last two years. None of these issues mean that risk assets cannot benefit, but the need to remain flexible and isolate pockets of value remains key. We areless sanguine in fixed income markets where we think that we may be towards the end of a secular bond bull market and with real returns already stretched it is hard to see how yields can stay at their current low levels. However, we remain confident that we can continue to produce positive returns with our disciplined approach and our multi-asset approach.