Fund review
The portfolio rose by 9.1% in rand terms during the period under review, which was in line with the composite benchmark. Within equities our GEM position contributed to returns but this was offset by our large cap bias. In the growth/value derby, no clear leader has emerged so our growth tilt was neutral. The overweight exposure to spread products added alpha as higher yielding sectors of the bond market posted strong returns. Currency allocation added value with the portfolio having tilts to euro & sterling, which rallied sharply against the dollar. On aggregate the offshore holdings continue to outperform, however the fund benchmark has 5% in rand cash & we were fully invested offshore. This masks some of the things we got right as the rand continued to strengthen from being the worst performing primary currency in 2008 to being the best this year. Relative to peers we remain in the top quartile over 5 years. Looking ahead As we enter the last quarter of the decade its worth reflecting on the past 10 years. It's been an incredible period of volatility with bubbles & busts everywhere. In years to come we will probably marvel at all that went on.

Looking ahead
We continue to believe stocks began a cyclical bull market in March. We say a cyclical, rather than secular, bull market because its unlikely equities will reach record highs before the next bear market sets in. Following the 66% rally since the March lows we believe the market is vulnerable to a correction. We noted in March investors were so pessimistic that all that needed to happen for stocks to rally was for the world not to end. The outlook from here is much more heavily dependent upon the strength of the economic recovery & corporate profits. Rising unemployment remains a clear headwind, while lower than expected ISM data recently reminded investors the recovery path may not be a smooth one. We currently have a neutral weighting to equities, having taken profits prematurely in July following the decision to go overweight in February. On the fixed income side government bond yields have been pushed around by a series of contrasting forces - increased issuance & signs of economic recovery on the one hand, & accommodative central banks plus falling inflation on the other. Raising rates while unemployment is high & inflation low will be difficult to justify so our view is monetary policy should remain highly accommodative through most of 2010. As such we will continue to take advantage of the volatility & opportunistically increase bond exposure from an underweight position.

Market overview
Over the second quarter of 2009, increased risk appetite resulted in a sharp rally in corporate bonds, high yield assets & emerging market currencies. Equity (MSCI US$ +20.7) and property (EPRA/NAREIT +35.9%) markets in particular rebounded strongly delivering their best quarterly performance in 20 years. Better than expected economic news globally provided support for risk assets whilst sovereign bonds, particularly in the UK & US tended to lag as the two economies were the first to show improvement having been most aggressive with fiscal & monetary stimulus.

Fund review
The portfolio posted a dollar return of 19.8% during the period under review, outperforming the benchmark by 306 bpts. Attribution shows the aforementioned was largely due to an overweight emerging market position, with the Fidelity Emerging Market fund outperforming its developed market peers by 11.8%. Similarly the GEM debt position outperformed developed sovereign debt by over 13%, while our overweight exposure to spread products also contributed to returns. Currency allocation added value with the portfolio having tilts to euro and sterling, which rallied sharply against the dollar. Unfortunately the large cap bias within the equity composite detracted. Finally the benchmark has 5% in rand cash and we were fully invested offshore. This masked some of the things we got right as the local unit rebounded 19% against the dollar from being the worst performing primary currency last year to being the best this year.

Looking forward
Earnings momentum is improving and there are now as many upgrades as downgrades. Companies reacted swiftly to the recession as shown in the first quarter results so despite limited visibility in the short term; earnings should not act as a drag on equity markets. However, over this quarter, attention will be focused on the relatively weak condition of the global economy. The question being asked is whether Central Bank action and fiscal stimuli will be sufficient to encourage growth? Or will deleveraging continue as the private sector continues to build up savings at the expense of renewed consumption? In an environment where growth will remain below potential, bonds offer value, especially if economic indicators face temporary weakness. We believe there is likely to be some consolidation in the short term as investors wait for the economic data to catch up with the dramatic recovery in valuations. As such we have trimmed back our overweight equity and high yield bond exposure.

Market overview
Global property & equity markets fell sharply over the first two months of 2009, providing no relief for investors after the pain of last year. Worsening economic data, downward earnings revisions & fears of possible bank nationalisations were among the factors driving values down. In March however, risky assets staged a rally & recovered some of their YTD losses as proposals from the new Obama administration to support the economy helped to steady sentiment. Despite the March increases, equities (MSCI ACWI) still recorded a loss for the 1st quarter of 11.3% in US $ terms, while property (EPRA NAREIT) fell just over 22%. Not even bonds managed to post positive returns with the Barclays global aggregate bond index declining 3.3%.

Fund review
Attribution shows that within equities our marginal overweight emerging market position (+1%), which outperformed developed markets (-11.8%) added value while our growth bias also contributed to returns (Value -16% vs. Growth -8%). Corporate bond exposure helped relative returns but this was offset by the large cap tilt within the portfolio. Most of the underperformance vs benchmark came from cash. In this regard the offshore cash benchmark is 100% dollars. We have a more diversified spread of currencies implying the "mismatch" of holding sterling & euro's vs a dollar only benchmark resulted in the portfolio lagging in a strong dollar environment. Similarly the benchmark has 5% in rand cash and we were fully invested offshore. This masks some of the aforementioned things we got right as most assets classes declined in dollar terms while the local unit rebounded 5.2% from being the worst performing primary currency last year.

Looking forward
The global economy will struggle in 2009. Most economies are already in recession & the downturn in output is turning out to be severe. An upturn towards the end of the year, followed by a broader global recovery in 2010, now seems to be the more likely outcome. The unprecedented amounts of monetary & fiscal stimulus unleashed may ultimately create an inflation problem, while increased debt issuance to fund fiscal deficits could also be a negative for government bond markets. Within fixed interest markets however, corporate bonds look particularly attractive, with spreads wide relative to historical averages & likely default rates. We do expect defaults to rise materially, probably to the highest levels seen in several credit cycles, but current spreads more than fully discount this scenario. Similarly equity markets have discounted an enormous amount of bad news. I am firmly bullish on the longer term prospect for equities. My base case scenario is for equities to outperform all other asset classes over the next 3 - 5 years (especially from current levels) hence the overweight equity position at the expense of bonds & cash.

In a dire year for equities, the final quarter of 2008 provided little relief for investors with the MSCI ACWI falling 22.4% in dollar terms (bringing YTD declines to -42.7%)! As economic data continued to deteriorate, central banks & governments enacted measures to stimulate growth & restore confidence. In this regard president-elect Obama announced the largest public construction program since the 1950s. On the monetary policy front the ECB radically changed its analysis of the economic situation & cut rates by 0.75%, the most in its history, while the BOE slashed rates to a 57 year low of 2.0%. Clearly global fixed interest markets (USD +5.3%) benefitted from the above & were also buoyed by risk aversion due to the sub-prime contagion & associated credit crunch propelling flows into the safe haven of sovereign debt. Another tail wind for bonds was crude oils continued decline, now down by more than two thirds from its peak of around $146 per barrel! Fund review The fund underperformed its benchmark during the period under review. Attribution shows most of the underperformance came from cash, where the benchmark is 100% dollars. We have a more diversified spread of currencies implying the "mismatch" of holding sterling & euro's vs a dollar only benchmark resulted in the portfolio lagging in a strong dollar environment. Corporate bond exposure also detracted from returns & masks some of the things we got right. To this end the large cap bias in the portfolio added value. In rand terms the fund also benefitted from the rand finishing the year as the worst performing primary currency in the world - down a massive 28% for the year. Looking forward Markets have already incorporated lots of bad economic views & unless the economy turns into depression, which is fairly unlikely, then technical & sentiment indicators deserve a strong focus at this stage of the cycle. In the short term equities will continue to be undermined by consensus earnings expectations, which remain too high & there will need to be downward revisions. After the sharp & very quick rally in long term interest rates over the last 2 months, government bonds look expensive/overbought. Corporate credit spreads are close to the record levels seen in the 1930's. However, the implied default rate priced into credit spreads is not realistic unless the economy collapses. We believe the current structure of the portfolio (overweight corporate bonds) is well positioned to outperform as unprecedented government efforts to shore up financial markets gain traction.