Global and local equities took a smack in the 3rd quarter. The primary driver was a reassessment of the global growth picture, which now looks "significantly worse than expected" according to the Fed in its late August review. Whilst more recent statistics look more encouraging to us, the Standard and Poors downgrade of the US fiscal prospects and the lack of political leadership in Europe, which threatened to convert a spiralling European Debt crisis into a global recession, also contributed to the dramatic fall in equities. There was much uncertainty and weakness in risk assets as evidenced by the depreciation of the rand and other EM currencies relative to the Dollar, the drop in the US 10 year Treasury yield to below 2% and ultimately the 5.8% fall in the JSE All Share index for the quarter. The beneficiaries were SA bonds (+2.8%), property (+2.2%), income (+3.0%) and cash (+1.4%) - the interest rate sensitive assets geared to "lower for longer" interest rates. The fund produced only a small negative return for the quarter, which was pleasing in the context of the All Share return.

The Funds ranking has slipped a little in the short term because we don't hold a structural weight to global assets in our portfolio and some of the peers do. Clearly recent returns from the sector have been driven by Rand weakness. In recognition of this risk we did put 1% of the portfolio into dollars at R/$6.62 in late July, which would have softened the blow. This was subsequently sold out at R/$8.00 as we believe the Rand has depreciated on "risk off" grounds rather than on fundamentals. At a manager level, ABSA Absolute was again a strong performer actually managing to produce a positive return for the quarter. This was however offset by the structurally higher exposure to equity within the Coronation portfolio, which resulted in negative returns for the quarter. In total the fund had around 32% exposure to the fixed interest side of the market (bonds, ILB's and income assets excluding cash) which benefited returns, particularly Prescient and ABSA.

Looking forward, inflation is hovering at the top end of the target band (5.7% y-o-y to September). With global growth slowing, impacting local growth, the market has priced in a chance of a 0.5% cut in rates in the next 6 months. This would be nice if it transpired, but is not our base case as we don't think things are as bad as they seem and inflation expectations need to be kept down. We think equity is attractive on valuation grounds but recognise the macro risks in the current global picture, and are hopeful that some meaningful leadership in the fight against the European Debt crisis will emerge in the 4th quarter.

South African equities were essentially flat for the quarter, despite significant volatility, and have not advanced since the beginning of the year. Markets grappled with deteriorating macro-economic news relating to a soft patch in global growth and the looming sovereign debt crisis in Europe. As such, expectations for higher interest rates appear to have been shifted to 2012, in SA specifically, but also the US. This was beneficial for interest rate sensitive assets and yields dropped as the global growth outlook deteriorated. SA Bonds were up 3.9% with property (+5.0%) and income (+2.2%) also benefiting from this trend. Cash produced a 1.4 % return for the quarter, whilst inflation registered a 4.6% y-o-y gain.

In this environment, the Fund had a pleasing quarter, producing a positive return and ranking in the top half of its peers. This outcome was even more pleasing given the recent manager changes implemented in Q1 where we up weighted ABSA Absolute and removed OMIGSA from the portfolio. Over the past year the Fund produced a 9.7% return and remained in the top half of peers. The Fund is a top quartile performer over 3 years where it has performed in line with its CPI plus 5% objective per annum.

As our most defensive manager, ABSA Absolute was the best performer for the quarter. A light weighting to equities and high exposure to fixed interest assets, like inflation linked bonds, helped in this regard. Manager weighting remained unchanged for the quarter however the Fund invested 1 % of AUM initially into dollars and then into global equities as a hedge against having no foreign in the Fund relative to the peer group. This is likely to have a more meaningful impact toward the end of the year when we expect the environment for equities to improve.

Inflation is back on the rise again having bottomed at 3.2% in September 2010. We believe that inflation will be well behaved and if so, only breach the top end of the band by a small margin at its cycle peak. What is perhaps more worrying is that equity valuations and solid earnings growth are being overshadowed by macro-economic factors. This makes for turbulent equity markets and typically favours fixed interest assets over equities. This abnormal environment may persist for some time given the current headwinds, but at some point global yields will need to normalise and equities prices should catch up to profits. In this regard, we are expecting a better 2nd half to the year.

It was a turbulent time for investors as markets digested the timing of the inevitable increase in global interest rates and the tragic events of the Japanese earthquake and resulting tsunami. Initially up, equities plunged over 8% from the peak in February to the trough in March, only to recover the majority of these losses going into quarter end. Portugal's credit de-rating and cry for help, political and social turmoil in the Middle East and North Africa and the rapid rise of the oil price were other negative macro factors which were counterbalanced by the increasing evidence of a sustainable recovery emerging in the US. Ultimately the SA equity market (+1.1 %) was marginally up for the quarter, whilst bonds (1.6%) and property (-2.2%) suffered as global and local yields pushed higher on the threat of raised inflationary expectations. Inflation crept up to 3.7% y-o-y in February, with consensus starting to suggest a rate hike in the 4th quarter.

Despite the volatility and weakness in the fixed interest markets, the Fund produced a positive retum for the quarter. Tactical asset allocation was a key contributor to this positive outcome. Going into the March conrection the Portfolio had a low beta, which provided protection as the market fell. We used this market weakness as an opportunity to up weight the beta (read equity) of the portfolio and this gave us greater participation in the recovery.

During the quarter we removed OMIGSA from the portfolio reducing the number of managers to three. This followed a thorough review of (a) the investible universe of real return managers and (b) the overall construction of our Portfolio. Whilst we continue to rate the skills and strategy of the OMIGSA team, we felt that the remaining three managers in the portfolio provided sufficient protection qualities to investors, whilst allowing it to participate more freely in the upside. Efficient access to markets is the comer stone of multi-strategy portfolios and we feel this is now well reflected in the new structure. Exposure to ABSA Absolute was increased during the quarter. We are very excited about the portfolio construction and look forward to working closely with the underlying managers in providing investors with optimal risk and retum outcomes on a continuous basis

The STANLIB Multi-Manager Real Return Feeder Fund will change it's name to STANLIB Multi-Manager Real Return Fund, effective from 11 March 2011

Equities continued their rally in the 4th quarter on the back of subdued inflation and lower interest rates. The equity market (+8.1%) outperformed the property (+3.1%), income (+1.8%), cash (+1.4%) and bond (+0.8%) markets for the quarter. This environment was positive for the Portfolio, which produced a near 3% retum for the period. Over the past year, the Portfolio retumed 11.5% (CPI + 8%) and was ranked 10th best fund out of 46 funds in its category, which was pleasing. Over the past 5 years, the Portfolio is ranked 7th out of 27 with a retum of 10.8% per annum, which is very much in line with our long term guidance to investors and 1.3% p.a. ahead of the average peer.

Whilst there was not much change in equity exposure (29.9%) during the quarter, we noticed that the bond and property exposure was reduced in favour of cash. This is having a positive effect on the Portfolio as global yields have started to rise on the expectation of higher inflation in 2011. Of the managers, Coronation had the most exposure to equities during the year and this benefited their performance significantly. The majority of their bond exposure is inflation linked bonds and this also contributed positively to relative retum for the quarter. ABSA also produced strong relative retums due to good stock selection and a high exposure to ILB's. OMIGSA enjoyed a welcome retum to form in the quarter, albeit that they lagged the other managers for the year. Prescient didn't lose money for the quarter (or the year) but was the worst performing manger in the Portfolio for the quarter due to their defensive equity positioning.

The big theme for 2011 will be the interplay between economic sensitive assets (global growth recovery) and interest rate sensitive assets (rising inflation and interest rates). Emerging markets like South Africa are generally pregnant with inflation, but strong cunrencies are masking the effects. Global shocks are negative for the Rand and therefore the cost of imported goods, which together with higher food and oil prices could result in a virtuous circle of inflation. Interest rates would have to rise and this would be negative for interest rate sensitive assets but also economic sensitive assets ultimately, a scenario we feel the selected managers are best placed to navigate.