During the first half of 2012 many of our asset allocation and equity positions have paid off handsomely and as a result, gross fund performance is ahead of the CPI +4% benchmark both over 12 and 36 months to the end of June 2012. Performance has also improved markedly versus peers in our category (Targeted Absolute and Real Return) with us moving into the 1st quartile over 12 months and middle of the pack over 36 months. The positions that have helped us achieve this result include our decision to be overweight listed property, our decision to position in the short to medium end of the bond market as opposed to the long end and finally our share selection, which has been biased to Industrial and Financial as opposed to Resources. This turnaround in fund performance is a pleasing result to us and we hope to our clients as well.

Looking Ahead
Despite the recent performance we continue to believe, based on how asset classes are currently priced, that structurally we may remain in a low return environment and that investors are unlikely to be compensated for excessive risk taking. We therefore believe that investors will increasingly consider both return and risk (prospect of losses) in their investment choices, which speaks squarely to the mindset of Absolute Return funds. Our current fund positions take consideration for the investment environment that we have articulated above and our target during these times remains to preserve client capital during the difficult market environments, there will surely be some, whilst also ensuring that we deliver healthy CPI + returns during the good times. This combination of defence and offense outcomes we believe will allow for the continued compounding of fund returns and over time, the delivery of equity type returns but only with bond type risk/losses.

Fund Review
2012 has started off on a positive note for financial markets especially for Growth assets (equity and property) as poor economic growth concerns recede. Though economic growth concerns in the Euro region remain, the US seems to be gaining positive momentum while China's slowdown appears consistent with market expectations. Financial markets had initially priced in a disappointing global economic growth scenario and as expectations have been revised upwards, Growth assets have rallied. Into 2012, the fund positioning was well balanced between "offense" (i.e. Growth assets) and "defence" (i.e. Defensive assets-fixed income) and fund performance- versus the CPI + benchmark and peers. The fund has underperformed the composite benchmark over 1 month and marginally outperformed over the last six months. Similarly, over 1 year the fund has returned 9.26% versus the benchmark of 11.5%. The underperformance can be attributed to the large blow out of inflation during the second quarter of 2011 due to higher oil price and food prices.

Looking Ahead
At this stage we do not see any reason to change our asset class positions, which as mentioned are well balanced between growth and defensive assets, nor our current equity holdings. Though global economic growth prospects may look better than they appeared a year ago, there are still challenges out there and asset class valuations are not cheap- a level of caution is therefore warranted in our opinion as markets grind higher. However, there are pockets of value emerging and one area to note is in the Resources sector, which now appears to be pricing in a very disappointing economic growth outlook. As opportunities present themselves here we will use weakness to build positions into Q2. We are always consciously aware of the dual nature of the fund mandate- on the one hand we aim not to lose money over the short term while looking to deliver healthy returns ahead of CPI over the medium term- this also influences the tradeoff between "offense" and "defence".