Global markets continued their rally despite renewed concerns surrounding Europe on the back of bailout demands punishing Cyprian deposit holders. The MSCI World Index returned 7.2% (USD) over the quarter, led higher by Japan (11.7% USD) where Prime Minister Abe has embarked on doubling the Japanese monetary base in a bold attempt aimed at catapulting the Japanese economy out of its recession. The USA (10.7% USD) was not far behind, with both the Dow Jones and S&P500 hitting new highs. The local market (ALSI) returned 2.5% (ZAR), with Industrials (6.6% ZAR) and Financials (5.4%) up whilst Resources (- 6.0% ZAR) fell as gold and platinum counters took a beating. The Rand came under pressure, mainly due to US Dollar strength and Euro weakness resulting in a 9% drop in the currency value over the quarter.

With mixed data and consumer confidence low, markets are questioning whether the sustainability of a US led recovery and a bold Japanese monetary base expansion will be sufficient to offset Eurozone weakness. While we have seen rotation into defensive asset classes, our view is that market risk premia sufficiently compensates investors seeking inflation beating returns. Indications from the latest FED minutes reiterates the view that an orderly unwinding of QE3 will only occur once evidence confirms that a recovery has traction. Fundamentals are still supportive of risk assets even if some normalisation in interest rates occurs during the coming year. With US QE linked to a reduction in unemployment to some 6.5%, we do not see this as a material risk. Therefore, the rotation into more defensive assets towards quarter end is likely to be short-lived.

The Fund outperformed its benchmark over the quarter on the back of positive asset allocation. Our preference for foreign equity over their local counterparts benefited the fund and this was amplified with the Rand depreciation over the quarter. Similarly, our preference for Inflation Linked bonds relative to their nominal counterparts proved beneficial while our underweight positions to global bonds and SA cash also assisted the fund. Within our domestic equity manager blend, all our equity managers beat the benchmark with the exception of Investec Value which suffered on the back of a selloff in the Resource sector. On the international equity front, Sanlam Universal Equity Fund underperformed its benchmark. Within the fixed income category, both Investec and Prescient outperformed the All Bond Index.

While the recent run-up in equity markets has been rather accelerated, we still see attractive margins-of-safety and price-to-book discounts thus maintaining global equities as our favoured asset class. While the Eurozone remains a headwind, the QE programme by Japan will be supportive of global equity markets. Relative to other domestic asset classes we expect equities to outperform. Within fixed interest, our base case view is that rates will remain unchanged given the weaker Rand limiting the SARB's ability to raise rates at the cost of growth as well as their acknowledgement that inflation risks remaining to the upside. We maintain our preference to inflation linked bonds given the insurance on offer. The Rand remains volatile and the diversification benefit further lends to our offshore bias.