It was a rough quarter for global stock markets. Fears of a Greek default ran high culminating in a plunge in early August. Shares gyrated wildly thereafter, ultimately ending off near quarter lows. Weak data releases (manufacturing, confidence, employment) made markets question whether we were headed for another global recession and the negative impact this would have on corporate profitability. In reality there was a mixed bag of economic data, but the dour mood of the markets dominated. Ultimately we believe weak political leadership to be the core problem - US political bickering and the inability of eurozone leaders to take decisive action have severely dented market confidence. The All Share Index was down sharply (-5.8%) for the quarter, with resource stocks particularly hard hit. Interest rate sensitive asset classes continued to climb with the market focusing on growth concerns likely keeping interest rates lower for longer; income (+3.0%), bonds (+2.8%) and property (+2.2%) did well over the quarter, despite foreign investors dumping emerging market bonds in September. Cash returned 1.4%. In rand terms, global equities were down (-2.6%) with the loss mitigated by rand weakness; global bonds were up strongly (+19.4%) mainly due to rand weakness.

At quarter end, on a see-through basis, we were cautiously positioned in equities, gaining the bulk from our real return fund. We had sold some direct equity toward the start of the quarter. Our exposure to property is also being held in our more defensive flexible property fund. Given its outperformance over fully invested property alternatives for the quarter, this position benefited the Fund. We gained additional exposure to the fixed interest market by holding much of our cash exposure in our absolute income fund. This tilt was value additive over the quarter with the absolute income building block outperforming the cash fund by around 0.4%. The bulk of our global exposure is now via global equities as we believe this to be the most attractive asset class in our investable universe over the next 12 months. Global equities are currently trading on a 14x historic PE which we see as attractive relative to its long term average PE of 19x. We recently repatriated Dollar cash at R/$8.00 as we believe the currency has depreciated on "risk off" grounds and not on fundamentals.

The Fund produced a flat return for the quarter, in line with the average of its peer group. Over the past 12 months, the Fund delivered a positive return of 4.2%, albeit lagging its CPI + 3% targeted return of 8.3%. While over time we expect to achieve our targeted return, there will be periods when under performance occurs. This is to be expected during times of stock market weakness and this coincides with rising inflation, as we have experienced over the past 12 months.

A flat quarter for global stock markets masked significant intraquarter volatility. Markets seem to be caught in a tug of war between persistent sovereign debt concerns juxtaposed to strong corporate profitability, solid balance sheets and appealing valuations. Weak US employment and manufacturing data, and a return of Greece's debt woes sent markets into a plunge in June, but markets surged in equally dramatic fashion in the last week of the quarter as Greek Parliament passed austerity legislation. The All Share Index was marginally down (-0.6%) for the quarter, with losses in large caps and resource stocks outweighing gains in small/mid caps and industrials. Property posted a strong gain (+5.0%) boosted by a drop in local bond yields. Bonds ran hard (+3.9%) aided by substantial foreign purchases on the belief that rate hikes will begin later and be more muted than previously forecast. Income (+2.2%) and Cash (+1.4%) also gained with the short end of the curve underperforming. Both global equities (+0.3%) and global bonds (+3.2%) gained in rand terms.

We sold local equities into strength during April and May; purchasing more back around the June lows. We also added to our Real Return Fund in early April and near the June lows. We opportunistically switched our investment from our fully exposed Property fund into the defensive Flexible Property fund around the SAPY's June highs, after a trough to peak gain of around 11 %. We initiated a 12% investment in our Absolute Income Fund, which we believe will deliver a superior return than cash on a 12 month view. The flexibility of the fund allows for low duration where managers feel necessary. We switched from foreign cash into foreign equities around the June lows, with valuations becoming attractive.

The Fund produced a positive return for the quarter, in line with the average of its peer group. Over the past 12 months, the Fund delivered a return of 9.1 %, ahead of its CPI + 3% targeted return of 7.6%.

It was a positive quarter for global stock markets (aided by solid corporate earnings), despite a mid-March blip arising from panic selling triggered by the Japan earthquake crisis. Developed markets outperformed their emerging market counterparts, with a shift in investor focus from the growth prospects of the latter to the better value offered by the former. The All Share Index gained (+1.1%) for the quarter, with the rally led by large caps and resource stocks. Property was negative (-2.2%) being adversely impacted by a rise in local bond yields. Cash (+1.4%) and income (+1.3%) produced positive returns with the long end of the curve underperforming; bonds (-1.6%) were dragged down by investor concerns that we are at the bottom of the interest rate cycle. Global equities gained (+4.5%), as did global bonds (+1.2%); due to rand weakness, the rand returns were stronger at +6.6% and +3.3% respectively.

Over the quarter we topped up local equities into weakness. We reduced our exposure to our Real Return fund by around 15%. We restructured the Real Return fund by removing OMIGSA, with the remaining 3 managers being reweighted into an optimal blend. Our local cash position was increased to raise the defensiveness of the portfolio. We increased our offshore exposure to around 15%, liking the prospects of global equities relative to local equities and with a view that the rand is currently trading above fair value. We opportunistically switched our investment in our defensive Flexible Property fund into our fully exposed Property fund, after a peak to trough correction in the SAPY property index of around 7.5%.

The foreign component delivered diversification benefits during the quarter, providing the portfolio with protection during the mid quarter blowout of the Rand from around R6.60:$ to R7.30:$. The Fund produced a positive return for the quarter, ahead of the average of its peer group. Pleasingly it is ahead of the mean peer by 4.5% over the past year

Global stock markets ended the year with a strong quarter, continuing their run from September. Investors reacted positively to both solid and weak economic data releases, with the latter increasing the likelihood of a second round of quantitative easing (money printing), which became refenred to as QE2. The Fed delivered QE as expected on November 3rd. The All Share Index gained (+9.5%) for the quarter, with the rally led by small caps (and then large caps) and resource stocks. Property lagged (+3.1%) with the benefits of low inflation / interest rates already largely priced in. Income (+1.8%), cash (+1.4%) and bonds (+0.7%) produced positive retums with the middle of the curve outperforming. Global equities ($) gained (+8.7%), but global bonds lost ground ($) (-1.3%); due to rand strength, the rand retums were weaker at +3.7% and -5.9% respectively.

Over the quarter we trimmed local equities but boosted our exposure to our Real Retum fund preferring to access exposure to equities in a protected manner. We increased exposure to our FlexProp fund. Our foreign exposure decreased due to rand strength; however within this component we increased the global equity exposure (mainly at the expense of U.S. dollars) and sold out of global bonds after the significant drop in yields.

Overall, there was not a large change in the local see through allocations of the Portfolio over the quarter. We increased exposure to global equities due to the natural hedge a declining rand would provide in the event of a market correction. Looking forward, we will continue to look for opportunities to tactically tilt the Portfolio to favourably positioned asset classes, with the objective of enhancing portfolio performance.