ASHBURTON
The month end performance for global equity markets masks incredible volatility. The world of structured finance, whether in the form of mortgage backed securities or otherwise, is putting incredible strain on banking operations. Even though equity markets have rebounded, banking operations have yet to resume as normal. Our European investments have served us very well in recent months, but earnings momentum is waning and exposure to securitised debt is probably larger than most realise. Conversely, we have significantly increased our US exposure. While it appears that the root of recent volatility is within America, it is precisely this volatility that generates opportunities. We remain optimistic on Asia.7

Bond prices ended a topsy-turvy month much where they started it. The bond market surged in the early part of the month, as the deepening credit crunch fed expectations of dramatic economic slowdown and a general easing in monetary policy. Our currency strategy worked well for us during the month, having increased our weighting outside base currency for both our sterling and dollar services. Our long positions included the Canadian dollar and Norwegian krone, both of which rallied strongly during the month.

The PSG International Flexible Fund of Funds changed its name to the PSG Advance Wealth International Flexible Fund of Funds on 01/10/2007. The fund retained it's history.

ASHBURTON
Bonds are usually at their best when investors are generally miserable. After all, interest rates usually get reduced when the economy is in trouble. Bonds' last day in the sun came in the second half of 2006 when the markets were dogged by concerns about the US deflating property market and what it might mean for the American consumer and the health of the financial system itself. As those fears have dissipated, so bonds have sold off, continuing a negative trend that began as long ago as 2003 in the case of the US bond market. This trend continued in the early half of June as investors finally abandoned all thoughts of US interest rate reductions at least in the near future.

Although equities remain cheap relative to bonds, they can only ignore the bond market for so long. Once the rate of change in bonds reaches a certain level, the uptrend in share prices tends to stall. We saw this in February 2007, May 2006 and several times before that. As equity markets levelled out and worries about the US sub-prime mortgages returned, bonds stabilised and recovered a little. Most bond markets finished the month underwater, however.

'Carry' remained the dominant theme in the foreign exchange markets, with currencies backed by high/rising interest rates strengthening against those with low/stable interest rates. The big winners were the New Zealand dollar the Australian dollar and, once again, the big loser was the Japanese yen.

In the past couple of years, all the major regions have experienced buoyant economic conditions. Even Europe, for so long the economic laggard, has seen unemployment fall to its lowest levels for years. During the first quarter, there were the first signs that this period of unusually high synchronisation may be coming to an end. Peaking property prices and stress in the sub-prime mortgage market have clearly taken their toll on the American economy, which has slowed noticeably as a result.

Just a few years ago the US consumer was a lone bright light in a troubled world - with that light now dimmed, is the world once again heading for troubled times?

In our view, Europe and most particularly Asia are well placed to take up the slack from the US consumer. However, this is still just a theory and in the first quarter, markets took fright that this would not be the case. After a promising start to the year, equity markets dropped spectacularly in late February, with the S&PSOO registering its biggest one-day decline since 2003.

Meanwhile bonds briefly enjoyed their moment in the sun as investors started to sense that a peak in American interest rates might be at hand. Overall, both markets finished the period marginally in positive territory.

The US economy was boosted by rising exports and reduced imports and the US trade deficit was down from USD64.3bn to USD58.9bn. The US economy grew at an annual rate of 2% inthe third quarter. Homebuilding showed the biggest decline in 15 years. The European Commission forecast that Euroland growth should slow next year. In the UK, manufacturing demand appeared to be lower. Industrial production had its biggest monthly decline since August 2005.

Most stock markets posted gains in December. The MSCI World Index returned 2%, in dollar terms, for December while the Dow Jones reached 12 500. Equities in Europe performed well over the month. Japanese stocks rose and then came down later in the month. Equities in the UK also posted solid growth, particularly the FT250. Most Asian indices rose strongly over the month but Thailand's market was one of few that declined in December.

The US Federal Reserve kept interest rates on hold at 5.25% for the fourth successive month, while the Bank of England kept its benchmark repurchase rate unchanged at 5%. The Bank of Japan left the overnight call rate unchanged at 0.25%. The European Central Bank raised its interest rate by 0.25% to 3.5%, the sixth increase since December 2005. European government bonds fell on speculation the European Central Bank will raise interest rates at least twice next year to fight inflation. Colombia's central bank raised its benchmark interest rate to 7.5%, the highest since March 2002.

Most major currencies lost ground against the US dollar over the month. Sterling dropped only slightly over the month. Bond yields rose across the board. The yen was down to a record low against the euro. Columbia's peso rose to its highest in almost five years.