Market review
It was a truly tumultuous quarter for global financial markets, with stock markets trawling bear market territory and most economic indicators confirming that at best the world economy, particularly developed countries, are likely to deliver well-below trend growth in the short- to medium-term. A rush to supposedly risk free assets like developed market government bonds saw emerging market equities underperform their developed market counterparts, with the MSCI Emerging Market Index slumping 22.5% versus a 16.5% slide in the MSCI World Index. SA was not as hard hit as other emerging markets, retreating 16.8% in dollars versus a 31% plunge in Russia's stock market (the worst performing emerging market during the quarter). In rand terms, the performance of the FTSE All Share Index looked even better, given the significant and sudden depreciation in the currency during the quarter, which knocked dollar based returns. The headline index shed 5.8%, with resources (off 10%) hardest hit by the decline in commodity prices and the financials and industrials down a similar 3.1% and 3.3% respectively. Fixed interest yielding assets managed to end the quarter in positive territory, with nominal bonds gaining 2.8% and inflationlinked bonds 3%. Cash delivered 1.4%.

SIM Strategy
Local equities: We introduced an overweight position in SA equities towards the end of the quarter in our domestic-only mandates. SA equities relative to other SA assets do appear relatively attractive. The SWIX trades at a current price-toearnings (PE) ratio of 12.5 times and, if earnings forecasts are to be believed, on a one-year forward PE of 10.5. Our bottom-up price to intrinsic value charts show a 10% upside to fair value, which is the biggest margin since the third quarter of 2009.
Local bonds: SA long bonds rallied significantly in August in the wake of a rally seen in the global sovereign bond markets. US long bonds have not been deterred by a credit rating downgrade (to A by Dagong, the Chinese rating agency) or the threat of losing their AAA Moody's and S&P status. As a result, we have introduced a short position in SA long bonds as we believed the news flow at that time did not materially alter our long-run inflation assumption or the real return we require from SA long bonds. In fact, one-year inflation forecasts in SA were, and still are, above our long-run inflation assumption of 5.25%. Since then, SA conventional 10-year bonds have weakened to well above 8%, from about 7.6% a month ago, and we have started to close our underweight position.
Inflation-linked bonds: We reduced our overweight position in SA inflation-linked bonds to neutral. Long-dated inflation-linked bonds (ILBs) traded at real yields of below 2.3%. We believe a real return of 2.5% is appropriate for these assets, taking into account a term premium relative to the yield we require from a risk-free cash investment. Even though the real returns available from cash are currently dismal, these will definitely reprice over the medium term, while holding an ILB offers a fixed real return of 2.3% for the period of the bond.
Local listed property: Property stocks continue to trade close to fair value, given current dividend yields. We therefore retained fair value, given current dividend yields. We therefore retained our neutral position during the quarter. Global equities: Global equity markets have become cheaper and we have added to our overweight position. We continue to prefer Europe, including UK, as they are trading at considerably cheaper levels than, say, the US, if you consider longer term measures such as price-to-book and price-to-normalisedearnings ratios. Although the sovereign debt problems in Europe are concerning, the sovereign debt as a percentage of gross domestic product for the Euro area as a whole is very similar to the US. Instead of buying a basket of European stocks as before, we are now investing specifically in the European Telecoms sector, buying an equally weighted selection of the largest telecoms stocks. These stocks are trading at a current dividend yield that averages about 10%. This looks particularly attractive relative to yields on offer from developed market sovereign bonds.
Global bonds: We retained our underweight position in global bonds. The current real return on offer from developed market bonds does appear too low given our long-run expected inflation in these markets.
Global property: We retained our overweight position in global listed property stocks. High quality developed market property companies are trading on relatively attractive dividend yields of 5.0% to 6.5%, which remains well above those on offer from conventional bonds and the zero yield available from cash deposits.

Risks and opportunities ahead
The sovereign debt crisis in peripheral Europe continues to affect the financial markets. As it is unclear how this is going to be resolved, it has become difficult for companies and governments to plan ahead. A speedy resolution, even if it means an outright default by, for example, Greece, is most likely going to be beneficial to the world economy.

Market review
It was a bumpy ride for financial markets during the second quarter, with investors caught up in Eurozone government debt angst and preoccupied with evidence showing the global recovery could be running out of steam. Towards the end of the quarter, US sovereign bond yields also kicked up as the deadline to lift the US debt ceiling neared and political wrangling continued. Notwithstanding these challenges, developed market equities managed to end the quarter slightly higher, with the MSCI World Index 0.6% ahead in dollars. Emerging markets, however, lost ground, with the MSCI Emerging Market Index shedding 1% for the quarter. At home, the JSE All Share Index slipped 0.6% in rands during the period. A slightly stronger rand versus the dollar alleviated the decline, with the All Share Index easing a mere 0.1% in dollars. In contrast to this weak equity market performance, local bonds advanced a healthy 3.9% during the quarter, as measured by the All Bond Index; inflation-linked bonds gained 3.8% and cash 1.4%.

SIM strategy
Local equities:We retained our neutral weighting to SA equities during the quarter. Using consensus earnings forecasts, the market is trading at a reasonable price-to-earnings ratio of 11 in one year's time. However, we do prefer to look at longer term discounted cash flow valuations in conjunction with normalisation arguments. Based on this, we believe the market is fairly priced.

Local bonds: We introduced an overweight position in SA bonds early in March this year as ten-year bonds then weakened to 8.80%. Long bonds have rallied since then and we decided to cut our overweight position at around 8.50%. The real return on offer from long bonds is still slightly above our long-run real required return of 3% assuming that long-run inflation will be within the inflation target range.

Inflation-linked bonds: We reduced the size of our overweight position in SA inflation-linked bonds. Long dated South African inflation-linked bonds have now rallied to real yields of about 2.5%, which we consider as a fair prospective return given the risks inherent in the investment. Even though we believe inflation-linked bonds are fairly priced in their own right, we do still have an overweight position funded from cash.We believe the real yield on offer from cash is currently too low and that it is highly likely that an inflation-linked bond investment will give a better relative real return.

Local listed property: Property stocks continue to trade close to fair value, given current dividend yields. We therefore retained our neutral position during the quarter.

Global equities: We maintained our overweight position in international equities, primarily expressed through an overweight position in Europe. We consider Europe as a relatively attractive market on a number of measures, despite the sovereign debt problems in some of the smaller European countries. Simplistically Europe trades on a price-to-long-term trend earnings of about 10 times, while the US trades on a price-to-long-term trend earnings of 20.

Global bonds: We retained our underweight position in global bonds. The current real return on offer from developed market bonds does appear too low given our long-run expected inflation in these markets.

Global property: We retained our overweight position in global listed property stocks. High quality developed market property companies are trading on relatively attractive dividend yields of 4.5% to 5.5%, which remain well above those on offer from conventional bonds and the zero yield available from cash deposits.

Risks and opportunities ahead
Real returns on cash and near-cash investments have been close to zero and negative in the developed worldsince the beginning of 2009 as a result of the very low official policy rates of the central banks.

Given that investors do not carry any inflation risk investing in inflation-linked bonds, but only credit and term risk, it is not surprising that real yields available on inflation-linked bonds have rallied globally, and in the US, France and Germany inflationlinked bonds are currently trading below 1%.

The current developed market central bank policies are resulting in very low and even negative real yields on fixed income investments globally. This benefits borrowers and is to the detriment of investors/savers. Savers/investors are currently giving up real purchasing power to bail out the over indebted lenders, which were initially the financial institutions, but have now been replaced by the Western governments (or taxpayers) who bailed them out.

Market review
After starting the year off on a strong note, the global economy had to withstand several calamitous geo-political events, including upheaval in several Middle Eastern/North African countries and Japan's tragic earthquake and tsunami during the first quarter. Notwithstanding these adverse developments, however, developed and emerging markets managed to make respectable gains during the quarter, with the MSCI World Index ending 4.9% ahead in total dollar terms and the MSCI Emerging Markets Index up a slower 2.1%. Understandably, however, Japan's Nikkei Index slumped 6.7% during the quarter, with most of the decline coming through in March (down 9.2%). At home the JSE All Share Index put in a decent 1.1% return, with financials ahead 0.7%, resources up 2.8% and industrials slipping 0.3%. Of the other asset classes, the 1.4% returns delivered by cash put it ahead in the performance rankings; inflation-linked bonds added 1.2% and the All Bond Index experienced a 1.6% decline during the period.

SIM strategy
Local equities:
We retained our neutral weighting to SA equities during the quarter. An aggregation of our analysts' valuations of the individual companies shows the market is fairly priced assuming a required real return of about 7% from SA equities.

Local bonds:
During the quarter, we introduced a 1% overweight position in SA bonds, funded from cash, when 10-year bonds had weakened to 8.8%. Assuming that long-run inflation will be at the upper end of the formal 3% to 6% inflation target, a real yield of close to our required 3% is on offer. It is, however, reasonable to assume that the Reserve Bank will be able to keep the 2011 average inflation rate below the upper end of the target. Also, by comparing long bonds to inflation-linked bonds, it is evident that the market is implying long-run inflation of close to 7%, if our required inflation-risk premium of 0.5% for conventional long bonds is taken into consideration. So either inflation-linked bonds are mispriced, which we believe is not the case given the 2.65% real return they offer, or conventional bonds are mispriced, which is more likely.

Inflation-linked bonds:
At yields of 2.7% long dated inflationlinked bonds are trading above our long run fair value assumptions of 2.5%. We retained our overweight position in inflation-linked bonds. Inflation-linked bonds do provide a good hedge against currency weakness and inflation.

Local listed property:
Property stocks continue to trade close to fair value, given current dividend yields. We therefore retained our neutral position during the quarter.

Global equities:
We reduced our overweight position in global equities from 1.5% to 1%. We introduced a 1.5% position in Europe in May 2010 which delivered a near 40% total return to date in dollar terms relative to the 30% total return generated by the MSCI Developed World Index. Given the rally in global equity markets, we reduced our overweight position in global equities by reducing our European overweight position by 0.5%. We still see Europe as a relatively attractivemarket on a number of measures. Simplistically Europe trades on a 1.6 times price-to-book ratio versus the 1.9 times of the MSCI Developed World Index and on a 3.7% 2011 forward dividend yield versus the MSCI Developed World's 2.8% forward dividend yield.

Global bonds:
We retained our underweight position in global bonds. The current real return on offer from developed market bonds does appear too low, given our long-run expected inflation in these markets. There are rising concerns regarding global inflation and the highly accommodative stances by the central banks.

Global property:
We retained our overweight position in global listed property stocks. High quality developed market property companies are trading on relatively attractive dividend yields of 4.5% to 5.5%, which remains well above those on offer from conventional bonds and the zero yield available from cash deposits.

Risks and opportunities ahead
The developed market governments are, in effect, borrowing from future generations given their current policy actions. The huge budget deficits have required increased borrowing by governments, which will need to be paid back by future taxpayers. The effect of this huge increase in government debt has been masked by quantitative easing, which saw central banks buy up the government debt by printing money. These now inflated central bank balance sheets will have to be unwound in the future by selling the debt back to future tax payers. Either very high growth will be required to pay down the debt, or severe austerity measures will have to be implemented.

Market review
Strong South African equity market performance in December, and for the quarter as a whole, saw the JSE All Share Index gain 19% for the year in rand and 33% in dollars. Similar buoyancy was experienced across the globe, with the MSCI World Index's 9.1% fourth quarter performance in dollars resulting in a 12.3% rally during 2010 and the MSCI Emerging Market's 7.4% increase late last year contributing to a 19.2% return in dollars for the year. In SA, Industrial shares were the clear 2010 winners, with the Industrial Index delivering a bumper 24.0% return for the year versus the Financial sector's 16.6%. Resources were the laggard at 12.3% for the year, but the sector did move ahead of the pack in the fourth quarter, gaining an impressive 16.5%. Foreign investors benefited from the rand's broad-based appreciation during the quarter, with the JSE All Share Index delivering 15.1% in dollars in the final quarter of the year, 16.0% in British pounds and 17.2% in euros. Cash outperformed bonds generating a 1.5% return during the fourth quarter versus the All Bond Index's 0.7%. But the two asset classes traded places for the year as a whole, with bonds gaining 15.0% and cash less than half that at 6.9%. Inflation-linked bonds slotted in between, adding 0.9% during the fourth quarter and 11.0% for the year.

SIM strategy

Local equities: We retained our neutral weighting to SA equities during the quarter. The consensus view is that JSE All Share company earnings are due to rise by 30.0% in a year's time. This will put the market on a reasonable price-to-earnings (PE) ratio of 11.5 times, assuming the price index remains at its current level. However it is concerning that the stock market is trading at a real Graham & Dodd PE ratio of 19, which is measured as the JSE All Share Index level divided by an average of 10 year real earnings, when the long run number is closer to 13.5.

Local bonds: We introduced a 1% underweight position in local bonds in August 2010 when SA ten-year bonds were trading at 7.8% and the three-month rates were at 6.5%. Ten-year bonds weakened 45 basis points to 8.3%, while the three-month rate improved by a percent to 5.5%. Given our long run assumptions on inflation, long bonds currently offer a prospective real return of 3.0%, which we believe is fair considering the inflation and term risks inherent in nominal bonds.

Inflation-linked bonds: At yields of 2.7%, long dated inflationlinked bonds are trading above our long-run fair value assumptions of 2.5% and thus we retained our overweight position in inflation-linked bonds. Also in their favour is that inflation-linked bonds provide a good hedge against currency weakness and inflation.

Local listed property: Dividend yields on listed SA property companies continue to trade below SA long bonds, while in most of the developed markets they trade above the respective long bond yields. This is partly due to the higher inflation rate in SA, which results in higher nominal dividend growth rates for SA property companies. Dividends are expected to grow at about 8.0% over the next year and we retain our neutral position, as we believe property shares are on average fairly priced.

Global equities:We retained our overweight position during the quarter, primarily expressed as an overweight position in European large capitalisation stocks. At close to 4.0%, the dividend yields on these shares are attractive relative to the rest of the developed world.

Global bonds: We introduced an underweight position in global bonds in May 2010 and increased it in October last year after US long bonds declined to historic lows. However, US long bonds weakened by more than a percent between October and the end of the year and thus we are considering reducing our underweight position again.

Global property: We introduced an overweight position in global listed property stocks. High quality developed market property companies are trading on relatively attractive dividend yields of 4.5% to 5.5%. This is at least 4.0% above the ten-year developed market inflation-linked bonds that trade on yields of about 0.5%. These yields are also double those of the developed market tenyear conventional bonds. Cash deposits yield zero in these markets. We therefore consider international property as a very attractive alternative to both international bonds and cash.

Risks and opportunities ahead
As is evident from our asset allocation positions, the major asset classes in South Africa are on average fairly priced in relation to our long-term real return requirements, which currently reduces our ability to add value from a tactical asset allocation perspective. We believe that assets can trade well above or below their true value because of the human emotions that drive investment decisions and, as human nature is unlikely to change, attractive opportunities will present themselves again.