In dollar terms global bonds (2.7%) got the better of equities (-0.9%). This, coupled with the weaker rand, helped the portfolio gain 3.5% (now ranked 1st in its sector over 3 years). South East Asian markets (9.2%) were the best performers as they rebounded from the sell off of Q2. This naturally resulted in the SEA fund being our top performer. An overweight position in Japan detracted from returns, as it was the laggard this quarter, declining 9.7%. The Japan smaller companies fund fell 13.6% to be our worst performer. Fortunately the Japan fund, which is a much larger holding, offset some of the relative underperformance by beating the benchmark. We remain overweight Japanese equities as economic news has been strong & we expect positive earnings surprises. US equities (-1.8%) underperformed, so the portfolio's underweight position in the US added to relative returns. Due to the uncertainties surrounding the level of employment and consumer spending in the US we have actually increased this position. Although the America fund was marginally positive thereby outperforming the benchmark, the American Growth fund detracted from returns by underperforming. We are looking at adding another fund to the US portion to decrease risk (US weighting in the MSCI currently at 54.9%). The bond portfolios generally have a focus on quality with more than half in AAA rated credit. They also have exposure to higher yielding BBB-rated bonds, which continue to outperform as the world grows at its fastest pace in 30 years! Managers are however taking profits on the corporate bonds as they believe current spread levels do not compensate investors for the additional risk. The portfolio is overweight equities at the expense of bonds due to equity valuations being more attractive on a relative basis.

Global equities re-rated significantly during the past 12 months (MSCI up 50% since March) thereby benefiting the fund - equity weighting is 52% of total portfolio. Given the rebound, equity gains for the quarter were muted (+2.6%). The Japan and Japan smaller companies funds were the top performers gaining 12.5% & 20%. The region (Japan and South East Asia) is benefiting enormously from the increased demand in China. Over 12 months the South East Asia fund is up 77% vs. MSCI, which is up 41%. All European funds outperformed their respective benchmarks adding to relative returns. Global bonds were also marginally higher but towards quarter end started selling off. Fiscal and monetary stimulus has finally permeated into the US jobs market and there are tentative signs of a turnaround. This coupled with evidence of rising inflation has increased global bond risk as it has led to speculation that the Fed might start hiking rates. We are therefore slightly underweight bonds.
Global growth is accelerating and may surprise on the upside, providing fuel for an extended rally. Corporate earnings have also been robust with most companies beating forecasts. Looking ahead recent developments in international politics, such as the attacks in Madrid and the continuing situation in Iraq, remain concerns. The strong rand continues to detract from absolute returns (it was the best performing currency against the dollar in the world over the last quarter) but we think it is 13% overvalued against a basket of our main trading partners. Volatility is an inherent nature of investments. Last quarter the euro was the 3rd best performing currency against the dollar in the world. This quarter it was the 3rd worst. US bond yields started the quarter yielding 4.3%, declined to 3.6% and at the time of writing are back up to 4.4%. Equity volatility is well documented so diversification across all asset classes is a necessity and this fund does exactly that.

Due to the STANLIB amalgamation (27 Feb 2004), the Standard Bank International Balanced Fund of Funds will be renamed to the STANLIB International Balanced Fund of Funds.

The bear market came to an end with a ferocious growl last year. Global equities moved from being the worst performing to the best performing asset class as the MSCI gained 30.8%. NASDAQ's gain of 50% was its third largest in its 33 year history, while advancing issues exceeded declining issues by 7 to 1 on the NYSE (best annual breadth performance in 20 years). With over 90% of stocks in the S&P 500 rallying, 2003 proved to be an ideal environment for stock pickers like Fidelity. Bonds spent the first half of the year rallying to record lows on deflation concerns but eventually succumbed to the global recovery. US and UK bond yields rose for the first time in four years but coupon payments helped them eek out positive returns. Japanese bonds experienced their worst year since 94 (down 0.7%). During Q4 the funds corporate bond exposure helped the bond portfolio outperform as high yield bonds experienced their best run since 91. They are considered less vulnerable to rate hikes, while increasing consumer confidence maintained demand for lower rated debt. The holding also meant a portion of the portfolio's bonds were "positively exposed" to the corporate rebound. Furthermore the portfolio's global bond fund is inversely correlated to the USD/EUR exchange rate due to the high weighting of the non-dollar denominated debt. This helped tremendously as the euro gained 7.7% over the quarter. The best performing fund was the Euro Blue Chip fund (up 20% in USD terms) as large caps returned to favour. The portfolio's other two European funds also contributed to relative returns although they lagged the blue chips due to their small and mid cap bias. The American Growth fund added 12.6%, bringing YTD gains to 35.1%. The portfolio's largest equity holding, the America fund was up slightly more gaining 13.9% compared to the S&P 500's gain of 11.6%. Both Japan funds outperformed the Nikkei. The above has resulted in the fund outperforming its benchmark. For the quarter it was also first in its sector.
It is an election year in the US and since 1900 presidential election years have registered average annual gains of 9.2% on the DJIA (11 of the last 15 produced positive returns). On the downside the equity unit trust cash/asset ratio remains at a relatively low level of 4.6% (meaning little buying power on the side lines). From a bond perspective the Fed is expected to remain "accommodative" for a considerable period providing support to the market. Rate hikes in the UK also seem to be priced into gilts. In conclusion the global recovery appears firmly entrenched and the consensus view is that global equities will continue to rally in 2004. This would keep a lid on government bonds but aid corporates. The contrarian view is that world growth will falter and the current rally is a bear trap. The fund manager's are holding a "barbell" of government and high yield bonds creating an aggregate bond portfolio that should benefit either way. The asset allocation is also relatively neutral providing additional security.