During the third quarter, the MSCI World Index posted a gain of 4.6% in US dollar terms. Global equity markets recovered sharply following May's market correction.
All of the major regions, with the exception of Japan, made good gains during the quarter. The best performer was Europe ex UK, which rose by 6.4% in US dollar terms. The region has benefited from a pick-up in economic activity as well as improved business confidence, and the market was able to make progress despite a further interest rate hike from the European Central Bank. Following closely behind was the US, which rose by 5.4%. While the economy is slowing, investors were encouraged by an easing in inflationary concerns and the prospect that the Fed had finished tightening monetary policy. Japan was the laggard, as it lost 0.7% in dollar terms. However, this reflected the yen's strength against the dollar, as the market posted a gain of 2.6% in local currency terms. In fact, the dollar was weak across the board, as the currency fell on the world's foreign exchanges due to diminishing scope for further US interest rate increases.
Reflecting the more upbeat mood amongst global investors, all of the MSCI World sectors posted positive returns, with the exception of energy and materials. The energy sector fell on the back of the retreating oil price and the materials sector fell as commodity prices also came under pressure. Amongst the gainers, telecommunication services and utilities were the strongest performers.
In our view, the economic outlook remains favourable for equities, but the global interest rate cycle remains delicately poised. In the US, the top of the cycle may well be upon us, but in Japan and Europe further interest rate increases are likely. Economic growth continues to flow through to strong corporate profits growth, while, despite their strong gains during the quarter, equity market valuations remain compelling.

Old Mutual Global Fund (OMG) will appeal to those investors seeking a fund that steers away from big share and regional bets. OMG's portfolio is spread over about 400 shares and has regional weightings that are varied only marginally compared with those of its benchmark, the MSCI World Index of 23 developed equity markets. Despite this seemingly mundane style, OMG has consistently outpaced the MSCI index over the longer term and put many focused funds to shame.

Financial Mail - 01September2006

During the second quarter, the MSCI World Index posted a 0.3% decline in US dollar terms. However, the figure disguises a significant market correction during May, which at one point saw some of the world's major equity markets down by around 10%, as a combination of inflationary fears and US interest rate worries sparked a rapid reversal in global investor sentiment. It was only late in the period following the Federal Reserve's policy meeting on 29 June - where they raised rates for the 17th consecutive time to 5.25% - that the market gained clearer insight, prompting a modest rally in global equities that left them only modestly lower over the quarter as a whole.

In dollar terms, the best performing major region over the quarter was the UK, which rose by 4.9%. However, the dollar's sharp decline on the world's foreign exchanges meant that in sterling terms the market fell by 1.6%. Japan was the worst performing major region, declining 4.6% in dollar terms, with its recent strong run finally coming to an end and officials hinting that they were nearing the end to their long-running zero interest rate policy.

At a sector level, the best performing sectors were the more defensive areas of the market, with utilities and consumer staples leading the way. With oil and metals prices remaining relatively firm, the energy and material sectors also did well. In contrast, industrials and interest rate sensitive financials were laggards, as were information technology counters, which suffered from issues relating to options backdating.

The recent correction in world equity markets has left equity market valuations appearing more attractive than at the start of the quarter. Profit growth should also continue to support equity prices, given the relatively favourable global economic backdrop, as should the favourable supply/demand situation and ongoing merger and acquisition activity. Meanwhile, the outlook for global interest rates is encouraging, with many investors believing that the US Federal Reserve is now very close to the peak in the cycle and history suggesting that the end of monetary tightening should herald further strength from equities.

The World Index returned over 7% in dollar terms for the quarter, buoyed by a good global economic growth, robust corporate balance sheets and continued high levels of merger and acquisition (M&A) activity. In regional terms, all markets ended the quarter in positive territory, with Europe ex- UK leading the gains with a dollar return of 13%, followed by the UK (10%), Japan (7%) and the US (5%). By sector, the strongest performance came from energy and materials, whereas the laggards included defensive areas, such as healthcare and consumer staples. Commodities ended the quarter broadly higher, with oil up 13% to $66 a barrel, gold breaking through $580 an ounce to trade at a 25-year high and other precious and base metals all enjoying strong gains to end the quarter at multi-year highs.

Europe benefited from strong company results, high levels of M&A activity and positive comments from US Federal Reserve Chairman Ben Bernanke. The UK was also buoyed by takeover activity, both actual and speculative, with acquisition targets including a number of high profile companies and bidders. After several months of outperformance, Japan gave up some gains to produce a quarterly return in line with that of the World Index. The Livedoor scandal prompted domestic selling to meet margin calls, while foreign investor demand also waned, although these proved to be short-lived amid mounting evidence that the economic recovery is gaining traction, enabling the Nikkei 225 to breach the 18 000 level for the first time in six years. Meanwhile the US continued to be the laggard.

Global equities remain attractively valued and the key factor will be the extent to which profits can keep growing. Of the major markets, Japan appears the most extended and given the strength seen during 2005, further consolidation is likely. In terms of the monetary cycle, interest rates should also be supportive. US rates are expected to peak this year. In contrast, Japan appears at risk from rising rates, although the authorities have been hinting that a normalisation in interest rate policy is imminent. Given that this would signal an end to deflation, it should not have a significantly negative effect on the equity market - of more interest would be the impact on bond prices and the yen.

The fund aims to be regionally neutral, with an index weighting in each region. It is even more formulaic than Investec's fund, as there is no fundamental research overlay, yet it has been even more successful. It uses six factors, having recently introduced research and development spending as one of them. Others include positive share and sector momentum as well as favouring companies that undertake share buybacks and avoid issuing new shares.

Financial Mail - 10 March 2006

After a disappointing start to the quarter, as global markets succumbed to profit taking and concerns over rising US inflation and interest rates, equities rebounded strongly in November and December, with the MSCI World Index posting a local currency return of 4.5% for the quarter as a whole, equivalent to a dollar return of 3.2%. By sector, the strongest performances came from materials, industrials and financials, while the laggards included telecoms and energy, the latter weakening as the oil price slipped back.

The best performance came from Japan, where the market reached a five- year high as exporters benefited from the dollar's rise against the yen to its highest in almost two and a half years. Overseas buying interest remained strong and may have reached the highest ever annual level in 2005.

The US advanced on mounting optimism that monetary tightening may be coming to an end, as it was thought that some policymakers believed that further rate rises could impede economic growth. Hopes that the peak of the rate cycle was near led to increased consumer confidence and raised expectations for a strong holiday shopping season.

The UK posted a strong performance in sterling terms, reaching a new four-year high on continued mergers and acquisition activity, although the dollar gain was less pronounced due to the greenback's strength against the pound. European markets also made good gains, benefiting from dollar strength and optimism over higher corporate earnings, with expectations of corporate earnings growth of 20% in 2005, twice the level predicted a year ago.

Among precious metals, gold was a key focus, trading at a new 25-year high on strong speculative interest, notably from Asia and Japan, and bullish sentiment. Gold price strength benefited the precious metals complex, with silver and platinum also making progress. While among base metals, the main area of interest was copper, with the price trading at a new record, as a Chinese government trader was under house arrest after opening short positions on 130,000 tons of copper at a price around 20% below the prevailing market price.

Within the energy complex, the oil price softened as mild weather on the US north eastern seaboard led to lower demand and rising inventories, while the natural gas price almost doubled on supply concerns.