June was a positive month for global equity and bond markets. Japan had a particularly strong month, clawing back some of this year's earlier losses amid news that the impact of the consumption tax rate rise was not as bad as had been expected and Prime Minister Shinzo Abe's announcement of a new growth strategy. Emerging markets also rose. The Chinese economy appeared to have bottomed by the end of June following the mini stimulus packages announced in the Spring. Monetary policy took centre stage in Europe, as the European Central Bank (ECB) announced targeted long-term refinancing operations aimed at stimulating bank lending and credit growth in the region. European equity market returns were negative in June, with financials being particularly weak. However, the latest Eurozone composite purchasing managers' index reading suggested that the region's peripheral states are making good progress in catching up with the core countries. In the US, investors began to question the Federal Reserve's dovish stance given the falling unemployment rate and slowly building inflationary pressures, and what this means for interest rates. Real bond yields have already begun to price in more normal policy settings ahead.

The Nedgroup Investments Global Cautious Fund's core investment themes remained little changed from the previous month. By region, we continued to favour the US, where economic data is improving. Our long Europe ex UK failed to add value as the market fell slightly, while our small short position in Japan was negative as the region was the strongest performer in local currency terms. The core themes within stock selection, which performed strongly, remained little changed. Our significant exposure to healthcare was the biggest contributor to performance, while we also had a large allocation to UK homebuilders.

In fixed income, we were short duration in the US, which was negative for performance as the regional bond market rallied. We held a bias towards Italian duration, which initially performed strongly after the ECB announcement but gave back some of these gains later in the month. We remained long Australian duration as real yields are positive and this trade is sympathetic to our view that the serious imbalances in the Chinese economy could result in a much sharper slowdown in growth than currently anticipated.

We maintain a constructive view on risk assets, but our conviction level remains relatively low. Asset prices have moved a long way: equity valuations have expanded while real bond yields have already begun to adjust to more normal policy settings ahead. The start of a US rate hiking cycle is now just a year away, a different type of monetary regime than the one we have grown used to. We continue to look for an acceleration in global growth, led by stronger activity in the US and Europe. At the same time reliance on extraordinary monetary accommodation will decline as we progressively move away from zero interest rates. Regional variations in the speed of normalisation will have implications for asset prices, with relative value decisions likely to assume greater significance. Fundamentals remain supportive of equities. Earnings growth is bottoming across regions and while equity valuations are now only around neutral on equity-only metrics, they remain attractively valued relative to bonds. We maintain a preference for developed over emerging markets.

We maintain conviction in the US and Europe ex UK, and at the sector level, continue to have a bias towards healthcare. Despite the recent uptick, we remain neutral in our view on emerging markets. In fixed income, we expect to maintain low levels of duration.

The net effective equity exposure (delta) of the portfolio at 30 June is 33% and is a function of

- Physical equity exposure
- Plus option/future strategies (could increase or decrease net exposure)
- Plus convertibles exposure (could increase net exposure. This is not the same as actual convertible holdings)

J.P. Morgan

December proved a positive end to the year in global markets. Sentiment was lifted by the US Federal Reserve's decision on tapering its asset purchase programme and the improving economic outlook globally, but most notably by the end of the eurozone recession.

The Fed announced it would start to reduce the pace of its asset purchases from January 2014, from USD 85 billion to USD 75 billion per month. The Fed's decision is ultimately a positive signal about the strength of the US economy and a return to more normal conditions. Fixed income investors were less enthusiastic, with the 10-year treasury yield rising to 3%. The Fed also reinforced its message on forward guidance, meaning short-term interest rates will stay low for longer. In Europe, the eurozone composite purchasing managers' index ended the year at 52.1, a three-month high and well into expansionary territory. The period of relative financial calm and economic stabilisation in the region has led to increased capital flows. In contrast, emerging markets recovered some of the losses from earlier in the year but the picture is far from rosy. Investors took some comfort from signs of stabilisation in China and proposed reforms announced in the Third Plenum. However, in the near term China faces many obstacles.

The Nedgroup Investments Global Cautious Feeder Fund delivered a positive return in December. In equity, we remained biased towards the US and Japan, which contributed positively to performance as both markets posted strong returns. In Europe, we were short Spain and Italy, but closed the latter position mid-month. At the sector level, we remained long global financials (particularly in Japan), European healthcare and added to European insurers.

In fixed income, we were long German Bunds and short US Treasuries and European Bunds, which contributed positively to performance. Not holding Japanese government bonds was also beneficial. In currency, we made some modest gains. We were long the US dollar versus a basket of other currencies that should react negatively to US tapering of asset purchases, such as the South African rand and the Australian dollar; our short position in the latter was the strongest performer in December. We were also long the New Zealand dollar.

Having reduced delta to year end, we have begun increasing equity exposure again. Our macroeconomic views broadly remain the same; we expect business cycles to continue to pick up in the US, which should help boost global growth, while Abenomics is having a positive impact on the Japanese economy. We remain concerned, however, about low inflation globally, the potentially negative impact of asset purchase tapering on emerging market debt, and the credit situation in China. We maintain modest levels of duration, and are taking more risk in relative value equity positions and currency to express our core asset allocation views. Our preferred equity regions are the US, Japan and Europe ex UK. Within those regions we continue to have a bias towards healthcare and financials.

The potential for monetary tightening in the US in the near term saw several sharp moves in asset class prices in the month.

In equity markets, developed outperformed emerging in the month, with the S&P 500 up 2.3% and the MSCI Europe ex UK Index rising 2.6%. Japan's TOPIX was the biggest laggard (-2.5%) following what had been an extraordinary start to the year. Developed bond markets performed poorly in May, with the JPMorgan Government Bond Index hedged to euro recording its worst monthly return in over five years. A rate cut from the European Central Bank at the start of the month provided some support to bond markets, but not enough to offset declines triggered by concerns that asset purchases in the US would be tapered later this year.

A statement by the Federal Reserve (Fed) chairman Ben Bernanke caught markets by surprise as he suggested that a reduction to the USD 85 billion of monthly asset purchases could begin 'over the next few meetings'. While there has been a growing chorus of Fed committee members arguing for a reduction in the level of purchases in recent months, this was the first real indication of a potential timeframe.

US Treasuries sold off 45 basis points (bps) and German ten-year Bunds fell 30 bps. Against this backdrop, the Fund maintained a slightly lower average delta than in previous months. This was largely due to our decision to reduce equity exposure in the middle of the month, taking profits in markets that had made strong gains, and our decision to reduce exposure in Japan and increase exposure in Europe. While the easing measures announced by the Bank of Japan should provide a backstop for the Japanese equity market, the unanticipated volatility in the Japanese bond market has been a concern for market participants.

We retain a negative bias on Asia, where we are concerned about slower-than-expected growth in China, the impact of the shadow banking system and the impact of Japanese monetary easing on other Asian exporting nations. Our stock selection marginally outperformed the MSCI World in May. We had significant exposure to European financials, where valuations look very attractive; UK homebuilders, which are likely to benefit from government efforts to stimulate the housing market; and European healthcare.

In fixed income, we maintained a core position in European Bunds and added US Treasuries as yields pulled back, taking overall duration to around three years. The initial reaction of the bond market was to adjust yields upwards given that asset purchases in the US may be reduced. However, inflation is falling and economic data has shown little improvement; moreover, a reduction in liquidity would lower inflation expectations further and could negatively impact growth. In convertible bonds, we reduced our allocation from 20% to 16% and anticipate taking further profits.

We maintain a positive bias towards equity markets in the medium term and see recent moves as a short-term correction. We are still assessing the potential impact of US monetary tightening, which would mark a new phase in the ongoing crisis that started in 2007. Whether stimulus is removed early remains to be seen, but the reality that it could happen by the end of the year is now in the market, which represents a significant change in previous assumptions that loose monetary policy would remain in place for many years.

The Global Cautious Fund recorded a 2.2% return in September versus returns of 3.6% for the MSCI World Index (total return) hedged to USD and 0.7% for the JP Morgan GBI Global Index hedged to USD. Global stock markets had a strong month in September.

Fixed income gains were largely driven by two events. First, the withdrawal by Larry Summers, the former US Treasury Secretary and White House economic advisor, from the list of potential candidates to succeed Ben Bernanke as Federal Reserve chairman. Summers' policy stance was relatively unknown but he was expected to represent the greatest change compared to other candidates, so the removal of that uncertainty saw US Treasuries rally. Second, and perhaps more importantly, the Fed decided not to begin tapering asset purchases, which came as a surprise to markets. The US 10-year led developed fixed income market yields lower, finishing the month at 2.6%, having started September at 2.8% and reaching 3.0% intra-month.

Equities benefited from the prospect of looser monetary policy, with the MSCI Europe Index up 6.9%, outperforming the US return of 3.0% (in USD terms). Emerging markets, which have underperformed this year largely on the potential impact of tighter global liquidity, saw a relief rally and the MSCI Emerging Market Index rose 6.2% in the month (in USD terms).

Against this backdrop, we maintained a constructive view on equities in the fund, with an average delta of 47% for the month. We continued to favour financials, where stock selection in Japanese names performed well, and consumer non-durables, in which salmon farmers rose particularly strongly, and we also held a bias towards homebuilders. These stock selection decisions led the fund to outperform the broader index. We used futures to reduce the fund's overall equity exposure, adding to our short positions in Canada, Hong Kong, Australia and emerging markets, where we still see challenges despite improved sentiment as a result of the Fed's decision not to taper yet. Our equity investment decisions benefited the overall performance of the fund in the month.

In fixed income, we continued to hold relatively low levels of duration. Similarly to the market, we were surprised at the Fed's decision not to taper yet, but we maintained our view that yields in core fixed income look relatively unattractive given the momentum in the global economy. We continued to favour duration in core Europe, as we believe the European Central Bank may provide further support either in the form of additional liquidity or a rate cut.

We maintain a positive outlook for global growth. Monetary policy remains accommodative, with the balance sheets of major central banks continuing to expand and rate increases in 2014 appearing unlikely. While we are concerned about the debt ceiling in the US, fiscal austerity is easing. Improving growth, moderating inflation and an accommodative policy environment should be positive for risk assets and we remain positioned to benefit from a rise in developed equity markets.