Downside risks to global economic growth have increased in recent months on the back of faster than expected slowing down in the Chinese economy. The Chinese do have some firepower through both fiscal and monetary policy means. Recent rate cuts and potential for further as inflation has declined, indicates the Chinese will support their economy if it worsens relative to their expectations of 7.5% growth for the year. While fixed investment is recovering, property related investment is expected to remain weak which may impact commodity prices in the short term. The US appears to be relatively better positioned than its European peers with the consumer potentially surprising on the upside. The bottoming of the housing market together with growth in real disposable income could see robust household expenditure in the coming years. The major uncertainty remains around the "fiscal cliff" which has the potential to push the US back into a recession in 2013, should there be no appropriate compromise and solution reached by the politicians. The introduction of QE3 will pump money into the system with financial markets and commodities potentially benefitting with no significant impact on the real economy. Europe remains under pressure and is unlikely to recover meaningfully with a mild recession anticipated for 2012.

Despite the increased risks to global GDP growth, equity markets have had a relatively strong run during 2012 as central banks reiterated their commitment to maintaining sufficient liquidity in the capital markets. These stimulatory measures have continued to support market valuations despite the fact that structural sovereign debt issues remain unresolved. In our view, these structural headwinds are likely to result in relatively volatile equity markets. However, while headwinds and downside risk to the global economy persist, equity valuations continue to trade at a discount to their long-term averages. Furthermore, while sovereigns face budgetary headwinds, high quality companies have continued to consistently generate strong cash flows and strengthen their balance sheets. Given an environment where we believe that macro risks to global economic growth persist, while on the flip side we see large cap high quality companies sitting with relatively strong balance sheets, we remain convinced in our philosophy of investing in companies which have distinct competitive advantages, healthy balance sheets, strong cash flows and the ability to generate a relatively higher level of sustainable Return On Equity (ROE) through the economic cycle - a strategy which we believe creates long-term shareholder value while minimizing portfolio volatility in the short to medium term.

A key underpin to our investment philosophy of minimizing volatility stems from the relatively higher level of dividend yields of the companies in our portfolios. With global interest rates hovering close to zero, dividend yields have become increasingly important. Our focus on high quality, market leading companies which have strong balance sheets ensures that they continue to pay out dividends even when economic conditions are tough - providing very valuable downside protection. In our view, stimulatory measures by central banks have done little to address the structural issues facing the global economy. While the US Fed has re-iterated their stance of maintaining low interest rates for the foreseeable future, we feel such a move is unsustainable over the long-term and liquidity conditions will eventually normalize. Given this long-term outlook, we believe that small companies which have high gearing levels will struggle to compete whenever interest rates do rise, leaving their larger and healthier peers to capitalize on their weakness. We remain confident that our focus on large-cap companies which have sustainable competitive advantages in terms of their scale, their brands, their low-cost positions on the cost-curve and their financial muscle, is likely to create real shareholder wealth over the long-term while minimizing volatility in the short to medium term.

The global economy is slowing with growth anticipated at around 3.3% for the year. The US has been resilient and has showed signs of improving growth year to date. This has been on the back of improving domestic demand (rising employment, rising asset prices, etc) and robust industrial production. Europe is the major drag on global economic growth this year, anticipated to experience a mild recession. The financial crisis is resulting in significant public expenditure cuts while the consumer is under pressure due to rising unemployment and pressure on real disposable income. Developing markets have slowed in recent months, particularly China, impacted by weak exports and decline in infrastructure related growth. The Chinese authorities, who have been focused on controlling inflation over the past 2 years, have cut interest rates for the first time since 2008, signalling an intention to provide some support. However, the Chinese government has indicated that stimulus of the magnitude seen in 2008/9 will not be forthcoming. Downside risks have increased in recent months which points towards another round of quantitative easing in the near future. The potential break-up of the Euro and failure to effectively address the financial challenges of the European banks and sovereigns such as Spain, Greece, Italy and Portugal would have global ramifications, driving down global economic growth.

While the global economy continues to face several challenges over the short-term, investors need to focus on the longer term opportunities. History has proven that while global equity markets might be volatile over the short-term, they have continued to create real shareholder value over a long-term horizon. Currently, the Equity Risk Premium (ERP) remains elevated close to peak levels while all traditional valuation metrics are at a significant discount to their long-term averages. High quality large cap companies are leaner and have significantly strengthened their balance sheets. This puts them in an excellent position to capitalize on the financial woes of their smaller peers, while also providing them with the ability to increase dividends or return cash to shareholders through share repurchases. Given a backdrop where we see long-term value and short-term volatility, we remain convinced in our investment philosophy of investing in companies which have distinct competitive advantages, healthy balance sheets, strong cash flows and the ability to generate a higher level of sustainable Return on Equity (ROE) through the economic cycle. This is likely to ensure that we create real value over the long-term while trying to minimize the volatility of our portfolios. In a world where interest rates have moved to near zero levels, we feel dividend yields have become increasingly important. Our focus on companies which generate a relatively higher level of profitability through the economic cycle also leads to sustainability of the dividend yield of our portfolios. Strong free cash flow generation and the relatively low gearing of companies within our portfolios ensure that these companies will continue returning cash to shareholders even if economic conditions were to deteriorate. This provides a very solid underpin to our investment philosophy which aims to provide real wealth creation for our clients while ensuring that downside risk is limited in the case of any adverse economic shocks. In our view, stimulatory measures by central banks have allowed several weaker companies to survive the economic downturn by allowing them access to cheap debt. However, this strategy is not sustainable because eventually liquidity conditions will normalize and interest rates will increase. Companies which do not have sustainable competitive advantages are likely to fall by the wayside allowing the higher quality companies with strong balance sheets to make further market share gains. Despite the fact that these large cap high quality companies have historically proven their ability to generate a higher level of sustainable ROE through the economic cycle, they are currently trading at a significant discount to their long-term average valuations. This anomaly has given us an ideal opportunity to continue increasing our exposure to such high quality companies. At the same time, we also remain convinced in our relatively high exposure to sectors such as communications, healthcare and technology - our companies within these sectors provide a sustainable earnings stream and high dividend yields while maintaining strong balance sheets.

The slowing down of the global economy in recent months has contributed to economic growth forecasts being downgraded for 2011F and 2012F in the developed economies and some developing economies by the likes of the IMF and OECD. The unravelling of the Eurozone debt crisis has been a major contributor to this and will take some time to resolve as the implementation of the austerity measures and low consumer confidence will impact demand for products and services. The US has not taken as much strain as their European counterparts but faces a challenging few years ahead on the back of the rising government debt levels and high budget deficit. While politics has been a hindrance to effective decision making in both the US and Europe, implementation of austerity measures are a necessity and will impact economic growth over the next few years. The developing world, which has been the "engine of growth" for the global economy over the past few years, has slowed recently. China and India, the major economies of the developing world, do face some headwinds in the short term but should continue to deliver robust growth over the next few years.

Equity markets have had a rather dismal performance during 2011, with most of them ending the year in red. Risk aversion was high with funds moving into relatively low risk assets which has been reflected in the relative outperformance of developed versus developing markets. However, while markets have had a turbulent year, corporate profits and balance sheets have remained robust. High quality large-cap companies have continued to deliver superior profitability on the back of their diverse geographic exposure, their market leadership positions along with strong balance sheets and robust cash flows which have allowed them to enhance earnings through share buybacks. Given the uncertain macro environment, these high quality companies are currently trading at a significant discount to their own long-term averages as well as relative to smaller peers, providing us with an excellent opportunity to buy into high quality names at relatively cheap valuations. Two key advantages larger unleveraged companies have over their smaller peers is the ability to pass on cost-price inflation due to their market leading positions and secondly, the ability to raise debt at significantly lower rates compared to their leveraged peers. We feel these abilities are likely to bode well for protection of shareholder wealth during inflationary times while allowing these companies to grow relatively easier compared to smaller leveraged peers. Our portfolios' valuations reflect this investment theme of buying into such high quality companies (higher ROE) which offer substantial value relative to the market (cheaper valuations compared to the market) while taking on relatively lower risk (lower beta for our portfolios).

With market volatility expected to remain high in 2012, we have also positioned our portfolios to ensure downside protection. We have a high exposure to communication and healthcare stocks - the inelastic nature of demand for these services and their high dividend yields make them ideal picks during a tough economic environment. The consistent application of our investment philosophy where we have always opted for high quality companies which offer growth while taking on relatively low risk is reflected in our portfolios' historic track record. Our global equity fund reflects higher Sharpe and Sortino ratios compared to our average peers; indicating superior returns at relatively lower volatility. We believe our portfolios are well positioned to benefit from the growth in developing markets while still prioritizing capital preservation during tough economic conditions. In the current environment, without any further stimulus from the government, smaller leveraged companies are likely to struggle to grow their businesses as funding becomes more difficult and costly. In contrast, high quality large-cap unleveraged companies have the opportunity to capitalize on their cash flush balance sheets to grow their businesses. We feel that as investors shift focus towards higher quality assets, the relatively high quality and cheap valuations of our portfolio should result in outperformance against our benchmarks and real wealth creation over the long-term.

The global economic environment remains challenging with increased risks around the slowing down of the major developing economies in the short term. China has slowed significantly in recent months but has started to ease its monetary policy, which should continue in the year ahead. A faster than expected slowdown in China will have a negative impact on global economic growth and a ripple effect on commodity prices and risky assets globally. The US has gained some upward momentum with some of it being attributed to re-stocking. A better than expected recovery in the US consumer and the housing market will make a significant impact on US economic growth expectations for the year ahead. Europe remains in distress, albeit that the recent bailout packages have reduced the financial risk in the short term. The implementation of the austerity measures will impact economic growth in the region over the next few years. The global economy is therefore anticipated to grow at a slower rate in the year ahead than the average levels realized over the past decade.

After a relatively weak performance in 2011, global equity markets have had a relatively strong start to the year as positive economic data out of the US and continued liquidity injections by the European Central Bank (ECB) have provided a boost to equity valuations. Risk appetite picked up quite materially with investors increasingly shifting focus towards relatively poor quality and highly geared companies, leading to their relative outperformance over the short-term. While global equities continue to offer value from a long-term perspective, we feel volatility is likely to continue as most of the developed world battles with austerity while developing markets also witness a moderate slowdown due to their export exposure to the developed world. Given this volatile backdrop, we remain convinced in our investment philosophy of investing in high quality companies which are market leaders within the sectors they operate in, have healthy balance sheets and have the ability to generate a higher level of sustainable Return on Equity (ROE) through the economic cycle.

In our view, continued quantitative easing in the developed world has provided a lifeline to poorer quality companies by allowing them access to funding which they would not have been able to secure under more normal circumstances. The lower interest rates have also transpired into earnings momentum for lower quality companies as it pushed their finance costs lower - a situation which we feel is unsustainable over the long term. As liquidity conditions eventually normalize, the higher quality companies which have strong balance sheets and robust cash flows are likely to outgrow their smaller peers as they effectively deploy their balance sheets for value enhancing acquisitions or earnings accretion through share buybacks. During the current economic conditions, we feel that the stronger are likely to continue gaining market share and increasing their profitability while the smaller players struggle to survive as liquidity conditions normalize. Our investment philosophy comes through quite clearly whereby the companies in our portfolios have proved their ability to sustainably deliver relatively higher ROE's through the economic cycle while trading at a significant discount to the market on a cash flow basis.

During turbulent times, we feel it is also equally important to focus on companies which offer a high level of sustainable dividend yield. Companies with strong balance sheets and robust cash flows not only have the ability to maintain current cash pay-outs to shareholders, but it also improves the likelihood of higher dividends in the future through an increase in the dividend pay-out ratios. We do feel that the strong cash flow generation and dividend yield of companies in our portfolios provides a strong underpin to our investment philosophy of providing real wealth creation while ensuring that downside risk is minimized during volatile market movements. This strategy has continued to serve us well over the long-term where our portfolios have on average captured only 75%-80% of the market downside. The current valuation anomaly whereby high quality companies are trading at a significant discount to the market, despite having proven their ability to sustainably generate a higher level of ROE's has provided us with a unique opportunity to increase exposure to such high quality companies. We remain confident that our portfolios are well positioned to provide real wealth creation over the long-term. At the same time, our defensive positioning through higher exposure to sectors such as communications and healthcare should ensure downside protection in case of any significant negative macro-economic shocks.