Market review
Developed world growth concerns took hold in the second quarter, alongside ongoing fears that Greece would leave the Euro-zone and a growing political aversion to austerity measures in the region. Against this gloomy backdrop, the MSCI World Index slipped 4.9% in total dollar-based terms and the MSCI Emerging Markets Index an even steeper 8.8%. At home the JSE managed to keep in positive territory, gaining 1%, with financials and industrials still outpacing resources, which retreated in the face of falling commodity prices. A weaker rand against the dollar saw the dollar-based investors experience a 5.9% decline in returns during the quarter. Bonds had a bumper month on strong foreign investment inflows, delivering 5.2% during the quarter compared with the 1.5% gains notched up by both inflation-linked bonds and cash. Listed property outshone all the other domestic asset classes, climbing 8.7% during the quarter.

SIM strategy
Local
Local equities: We maintained an overweight position in SA equities in our domestic-only, multi-asset class mandates. The market's current rolled price-to-earnings (PE) ratio is 12. During the past 50 years, investors who bought the SA equity market when it traded at around a 12 PE ratio received real returns of around 10% a year on average for the next five years. We find the resource sector, with the top 15 shares trading on a current PE ratio of 8.5, particularly cheap, while we believe that the industrial shares, with the top 25 shares trading on a current PE of 15.5, to be expensive.
Local bonds:
We retained our underweight position in SA bonds. This position was introduced at the end of January this year. At that stage SA long bonds had rallied in response to the US Fed's statement that investors or savers into developed market interest-bearing instruments, more specifically cash, would have to be satisfied with negative real returns until 2014. The 10-year SA government bond currently offers 7.5% nominal. Using a long run inflation assumption of 5.25%, a real yield of just over 2% is on offer from SA long bonds. Given the risk to inflation over the next 10 years, we believe the real return on offer should be higher.
Inflation-linked bonds:
We currently have a neutral holding in SA ILBs. The 10-year ILB is trading at a yield of around 2.0%. Although this does seem expensive relative to our long-run real required returns, the rates on offer should also be considered in perspective to the US, UK and German 10-year ILBs, all trading at yields well below zero.
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
We maintained our overweight position in offshore assets, even though the rand has weakened to levels closer to purchasing power parity, as we continue to believe that selected global equity and listed property markets are considerably cheaper than the SA market. Global equities: We retained our overweight position in global equities. In terms of long-run valuation metrics, such as, for example, the Shiller price-to-earnings (PE) ratio, calculated as current price divided by the average earnings of the past 10 years, developed world equities are at a 25-year low, apart from 2008. Our global equity overweight position remains skewed towards Europe where the Shiller PE ratio is at a 35% discount to that of the developed world. Global bonds: We retained our underweight position in global bonds. Benchmark 10-year sovereign bonds in the US, Germany and UK offer negative prospective real returns given the implicit inflation targets of the central banks, as well as long-run consensus inflation forecasts. Global property: We have a significant overweight position in international property through an investment in listed REITs. Currently our holdings have an average dividend yield of approximately 7%, which is attractive compared to the 6.8% dividend yield offered by SA listed property.

Risks and opportunities ahead
It is evident that we are entering a period where the real returns available from developed market sovereign debt are going to be lower than what we have experienced on average over the past 200 years. This is partly the result of the near zero interest rates offered by central banks on cash deposits, as well as the quantitative easing programmes followed by them. The low real government rates can be seen as a tax on savers to fund government debt. There is a risk that we might underestimate the duration of these low real yields in our investment decisions by misinterpreting these as cyclical rather than secular or structural. This concern has tempered the magnitude of the underweight positions we have taken in both local and global bonds.

Market review
After getting off to a good start, it was another mixed quarter as Greek debt issues continued to attract the attention - and fears - of investors, particularly towards the end of the quarter. However, financial markets did manage to keep well in the black on broadly more positive sentiment around the US economy's fortunes and slightly less panicky fears about Europe's debt woes. Thus the MSCI World Index ended the three months 11.7% ahead in dollar -based total returns and the MSCI Emerging Markets Index achieved an even stronger 14.1%. At home, the JSE All Share Index gained 6% in rand terms and 11.6% in dollars, given a 5.3% appreciation in the currency. Financials led the pack, increasing 12.8% in local currency terms during the quarter, while industrials rose 10.5% and resources lost 3.3%. The All Bond Index advanced 2.4%, slightly behind the 2.7% gains achieved by inflation-linked bonds but ahead of the 1.4% delivered by cash.

SIM strategy
Local equities: We introduced an overweight position in SA equities towards the end of the third quarter of 2011 in our domestic-only, multi-asset class mandates. Aggregating our analysts' individual company valuations and comparing that with the overall market valuation indicates that the market is currently slightly cheap to fairly valued. The SWIX trades at a current rolled price-to-earnings (PE) ratio of 13x.
Local bonds: Based on the US Federal Reserve's statement at the end of January, investors or savers into developed market interest-bearing instruments, more specifically cash, will have to be satisfied with negative real returns until 2014. In light of this, it was not surprising that risky assets, including SA long bonds, which offered the possibility of a reasonable real return, rallied in response. As a result, we introduced an underweight position in SA long bonds as they were offering an approximately 2.5% real return given our long-run inflation assumption of 5.25%. Although they do look reasonably priced relative to global developed market long bonds, we believe a real return of closer to 3% is more appropriate, given the inherent risks associated with investing in SA 10-year bonds, as well as the prospective real returns on offer from competing local asset classes.
Inflation-linked bonds: We currently have a neutral holding in SA ILBs. The 10-year ILB is trading at a yield of below 2.0%. We believe a real return of 2.5% is appropriate for long dated ILBs, taking into account our required term premium relative to a riskfree cash investment.
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
We maintained our overweight position in offshore assets, firstly because we believe the rand is somewhat overvalued on a purchasing power parity basis, and secondly we do believe selected global equity and listed property markets are considerably cheaper than the SA market.
Global equities: We retained our overweight position in global equities, with specific emphasis on European equities, including the UK. Using longer run valuation methods such as the Shiller PE (which is calculated as the current market level divided by the average market earnings over the past 10 years), the European market is trading at a 35% discount to the U.S. Also, the proportion of companies trading below their book value is around 40% in Europe compared to 10% in the US and 15% in the emerging markets. Our position is consistent with our pragmatic value investment philosophy. We believe market valuation is the best predictor of future stock market performance.
Global bonds: We retained our underweight position in global bonds. Long-dated UK gilts are, for example, at their lowest yields in 250 years.
Global property: We have a significant overweight position in international property through an investment in listed REITs. Currently our holdings have an average dividend yield of approximately 6.5%, which is attractive compared to the 7.2% dividend yield offered by SA listed property.

Risks and opportunities ahead
Our overweight position in equity markets and underweight position in fixed income markets are at odds with the positioning of life insurance and pension funds in the UK and US. These funds are, on average, overweight fixed income instruments and underweight equities. In the US, the allocation to fixed income instruments is at a 30-year high.

Having a "contrarian" asset allocation is risky in that future performance will be different to the average international pension fund. However, it is only possible to outperform if you do take a different stance to the average investor.

Market review
Global financial markets rallied in the fourth quarter of 2011. Notwithstanding the ongoing toing and froing over Europe's government debt woes, the MSCI World Index managed to gain 7.7% for the quarter in total dollar-based returns and the MSCI Emerging Markets Index gained 4.4%. In SA, the JSE All Share Index advanced 8.4%, with the technology and consumer goods and services sectors being the best performers during the period and resources the laggards in the face of falling commodity prices. A marginal improvement in the rand during the quarter saw dollarbased equity market returns end slightly better than rand-based returns. However, for the year a hefty 18% depreciation in the rand against the dollar put a dent in dollar-based returns, which ended up reversing 16% compared with a 2.6% gain in rand terms. Equities were the best performing asset class during the final quarter, while inflation-linked bonds (up 4.5%) outpaced nominal bonds (3.5%). Cash trailed these fixed interest asset classes, delivering 1.4% for the quarter.

SIM strategy

Local equities: We introduced an overweight position in SA equities towards the end of the third quarter of 2011 in our domestic-only multi-asset class mandates. The SWIX traded at a rolled price-to-earnings (PE) ratio of 12.5 and, if earnings forecasts are to be believed, on a one-year forward PE ratio of 11. Even though this is close to our estimate of fair value, SA equities do appear attractive relative to other domestic asset classes.

Local bonds: We closed our underweight position in conventional bonds during the quarter when SA 10-year bonds were trading at yields of about 8.3%, up from about 7.6% at the beginning of September. At that time, we increased our underweight position to 2% under benchmark. Subtracting inflation-linked bond yields from nominal bond yields gives an indication of the market's expectation of long run inflation. Currently both 10-year inflation-linked bonds (ILBs) and 10-year nominal bonds are correctly priced if inflation averages about 6.5% for the next 10 years, assuming that an inflation risk premium is required by conventional bond investors.

Inflation-linked bonds: We currently have a neutral holding in SA ILBs. The 10-year ILB is trading at a real yield of 2.2%. We believe a real return of 2.5% is appropriate for long dated ILBs, taking into account our required term premium relative to a riskfree cash investment.

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
For almost three years we have had a meaningful overweight position in international assets relative to domestic assets. Over the past year the rand has been the worst performing currency against the US dollar, weakening by 17.8%. On a purchasing power parity basis, the local currency is now trading at our estimate of fair value level. As a result, we have been reducing the size of our overweight position in non-rand assets relative to the size of our overweight position in non-rand assets relative to rand assets in our global multi-asset class portfolios.
Global equities: We retained our overweight position in global equities, with specific emphasis on European equities, including the UK, which are trading at considerably cheaper levels relative to the US if you consider longer-term measures such as price-tobook and price-to-normalised-earnings ratios.
Global bonds: We retained our underweight position in global bonds. The current real return offered by developed market bonds does appear too low given our long-run expected inflation in these markets.
Global property: We increased the size of our overweight position in international property by adding to our global listed property basket from cash at the end of November. The basket is largely invested in listed European (including UK) property REITs. Currently our international property basket has a dividend yield of approximately 7.0% compared to "risk-free" US 10-year Treasury bonds at below 2%. The dividend yield of listed property in SA is about 7.6%.

Risks and opportunities ahead
Our equity and property overweight positions are concentrated in Europe and, given the European sovereign debt crisis, you could argue that this is a dangerous strategy. We can, however, safely assume that the details of the European debt crisis are widely known to all investors in Europe and that this is reflected in the market prices. So in our opinion it would be a mistake to avoid Europe unless we can claim to be able to interpret the information better than other investors and, as a result, have a superior understanding of how the crisis is going to be resolved. Our overweight European position is supported by our investment philosophy. Europe is attractive on long run valuation assumptions. We believe financial markets are inefficient because prices overreact due to human emotions.

The B3 class was not closed. There was an errror from Sanlam.