Market review
Developed markets outperformed emerging markets over the last quarter. In the US, further recovery in housing and employment data, plus continued quantitative easing, provided the backdrop for a 9.8% rally in the total returns delivered by US equities. European equities rallied towards the end of 2012 following the European Central Bank (ECB) pledge to do "whatever it takes" to preserve the Euro. During the last quarter, European equities consolidated last year's gains notwithstanding weak economic growth, the inconclusive Italian election leading to a political stalemate and the poor handling of the Cypriot bail-out which added to uncertainty. While a moderate economic recovery is under way in China, policymakers surprised investors with their renewed focus on select tightening measures to moderate property prices. Commodities underperformed on the back of this development. In Japan, markets performed strongly on the new strategy to drive economic growth and inflation through liquidity stimulus and currency weakening. Equities outperformed bonds in both developed and emerging regions, with investor rotation into equities from bonds, cash and commodities. The rand was the weakest currency globally during the quarter, depreciating 8.2% against the US dollar. Lingering mini-strikes in the coal sector, disappointing fourth quarter current account deficit dynamics, weak January retail sales numbers and a generally stronger dollar have been the main contributors to rand weakness. The JSE All Share Index returned 2.5% for the quarter. Defensives such as beverages (24%), tobacco (19%) outperformed, buoyed by the weak rand. The worst performing sectors were gold mining (-18%) platinum mining (-14%), industrial metals (-12%) and retail (-11%). A combination of high valuations and slowing earnings momentum lead to the general and food retail sectors falling 10.7% and 11.0%, respectively. The rally in risk assets sparked a significant liquidation of gold ETF positions, leading to a sell-off in the gold price. The platinum miners retraced earlier gains on poor operational results and weak European auto demand. Industrial metals were soft on China's surprise property market tightening measures combined with the end of restocking in China. Copper and iron ore prices, both important earnings drivers for resource counters, ended the quarter in the red.

Portfolio performance
The JSE RAFI 40 Index delivered a total return of 2.12 % during the first quarter of 2013, which was slightly below the market return (All Share) of 2.5%. With the RAFI 40 yearly index constituent review during March, Murray and Roberts, Telkom, Arcelor, Aspen and Sebanye Gold were replaced by Lonmin, Netcare, Spar and MMI. Major contributors to this performance came from overweight positions in Old Mutual, Sasol and the underweight exposure to consumer-related shares in general. Negative contributions came from Anglogold, Goldfields, Anglo, Telkom and MTN. For the 12 months to March 2013, the return of this Index was a very commendable19.1%

Outlook
From a global macro point of view, a number of risks remain. Europe's ability to sustainably address the debt crisis will be a major determinant of market volatility during the period ahead. The economic recovery in the US is still fragile. Judging from the price of risk, as expressed by the volatility index, global markets are fairly optimistic on the outcome of these events. Domestically the economy is working through a period of lower growth and the combination of the budget and current account deficit is likely to be negative for the level of economic activity going forward. Future rand weakness is likely, not only based on the performance of the SA economy versus the world, but a further rotation from bonds into equities may prompt capital flows out of the SA bond market. In the current environment where markets are not pricing in some of the tail risks - and where significant valuation opportunities are few and far between - index tracking, from a risk perspective, seems to be one of the better routes to go. The JSE All Share Index is trading on a forward PE of just above 13 times, which is above its long-term average. We expect earnings growth of around 20% over the next 12 months. Amongst the main sectors, industrials, with a forward PE of 15 times, are most overvalued.