Domestic equities outperformed all other asset classes in Q3 as trailing earnings rebounded 8.8% q/q, commodity prices surged 18.3% in USD's and the leading economic indicator pointed to robust economic growth going forward. Demand for equities was locally driven with net foreign purchases totalling a mere R0.12bn over the quarter. The 13.3% surge in the domestic equity market, fanned by similar rallies in global equities, must be seen against the backdrop of still poor economic data releases, particularly in the currency sensitive sectors where a 10.2% appreciation in the rand/USD exchange rate took its toll on the mining and manufacturing sectors. Strike related action also served as a catalyst for the poor performance from manufacturing although the move in the PMI new orders to inventory ratio back to parity suggests the best of the inventory rebuilding cycle is over. Consumer demand, which is showing signs of improvement, will now be required to underpin manufacturing production going forward.

Domestic bonds yielded 8.0% in Q3 outperforming corporate bonds (5.4%), inflation-linked bonds (4.6%) and cash (1.7%). Long dated bonds (12+ years) were the best performing sector yielding 11.9% over the quarter. Better than expected inflation and still strong foreign demand for domestic bonds (R36bn) contributed to the monthly gains. SMMI expects inflation to bottom out at around 3.4% over the next month or two after which it is expected to rise slowly over the remainder of the year. Corporate bonds, in turn, gained on the back of lower yields and a small compression in spreads as the outlook for corporate profitability improved. Additional catalysts for the positive returns from bonds included further declines in South Africa's sovereign risk premium and a decline in long term expected inflation from 5.9% to 5.29%. SA cash yielded 1.7% in Q3, outperfoming only global bonds (sovereign, corporate and inflation-linked bonds).

Global equities rallied 13.2% in USD's in Q3 (2.8% in rands) as attractive valuations and a recovery in $-metals prices suggested the soft-patch in global economic activity was reversing led by relatively robust growth in the emerging world. Although leading economic indicators continue to point to a slowdown in G7 economic activity, industrial metal prices support the view that there is a decoupling under way between the developed and emerging world. Although PMI indices are still heading lower in the US, peripheral Europe and Japan, China is again showing signs of expansion. Global bonds were the worst performing asset class in Q3 following a 10.2% appreciation in the rand/USD exchange rate. Global corporate bonds were the best performing sub-asset class yielding 8.4% in USD's and -1.7% in rands. The JP Morgan Global Bond Index yielded -2.1% (USD 8.0%) followed by emerging market bonds with -1.2% (USD 8.9%) and inflation-linked bonds with -6.7% (USD 2.8%).

The SMMI Balanced FoF outperformed its peer benchmark for the quarter. The fund's equity exposure was the biggest driver of performance. Of the domestic equity managers, Coronation was by far the best performing manager and their stock selection was excellent. The SIM equity strategy also performed very well over the quarter. The fund had a relatively high exposure to equity when compared to some of the peer funds, which would have contributed to the relative performance. The fund's low exposure to domestic bonds would have detracted from performance.

Global equities were the worst perforrming asset class in 02, declining some 13.3% in USD's and 8.8% in rands. Emerging market equities faired somewhat better declining by 9.1 % in USD's and 4.4% in rands. The catalysts for the sell-off in global equities included more stringent capital requirements for banks by 2012 (Basil III), Eurozone bank stress tests and US financial reform legislation that limits propriety trading, imposes conflict of interest rules and resticts hedge fund and private equity ownership by banks. The negative news flow failed to abate with leading economic indicators globally trending lower coupled with disappointing US housing data and non-farm payroll figures that dipped back into the red as temporary census workers were laid off.

Global bonds were the best performing asset class in Q2 yielding some 1.5% in USD's and 6.7% in rands. Within this asset class, inflation-linked bonds yielded 2.0% in USD's (7.3% in rands) with the bulk of the returns realised in April. Since then inflation concerns have faded on signs of slowing growth momentum and heightened fears of a double-dip recession in the Eurozone. 10-Year inflation-linked bond yields eased, while breakeven inflation (a measure of long term inflation) declined to 1.9% from 2.3% at the end of 01. The gains in bonds were generally broad based with US bonds yielding 4.8% (in US D's), UK bonds 3.9% and Japanese bonds 3.4%.

Negative sentiment on global equity markets continued to infect the domestic bourse in 02 with the JSE All Share Index declining some 8.2%. Resource stocks gave up 11.9% over the quarter followed by financials with -9.1 % and industrials with -5.1 %. Domestic equities underperformed almost all other asset classes with the exception of the MSCI Global Equity Index that fell 8.8% in rands. Although the domestic economy is showing signs of recovery on a broader front, market sentiment deteriorated further with the release of the Kagiso Purchasing Managers Index (PMI) that showed contraction in the manufacturing sector in June.
Despite a flight to safety over the quarter, domestic bond market returns lagged well behind those of their global and emerging market counterparts. Domestic bonds returned a pedestrian 1.1% while global and emerging market bonds returned 6.7% in rands. 3-Year and 10-year breakeven inflation ticked up to 6.25% and 5.9% respectively, in all likelihood fuelled by wage settlements well ahead of inflation. Inflation-linked bonds in turn yielded 5.1 % over the quarter followed by corporate bonds with a 2.6% return.

The SMMI Balanced FoF performed very well during the second quarter, outperforming the peer group by quite a margin. The fund's relative outperformance can be attributed to both low exposure to foreign equity which came under pressure, as well as good performance from the domestic equity managers. All three domestic equity managers beat their equity benchmark. The best performing underlying equity manager was Allan Gray, with their stellar performance following on months of relative underperformance. They have been very defensively positioned for some time now, a position that was ideally suited to the past quarter's risk aversion. Low exposure to domestic bonds also contributed to performance, while some foreign bond exposure albeit small, would also have contributed to performance.

The fund changed sectors from Domestic--Asset Allocation--Prudential Medium Equity to Domestic--Asset Allocation--Prudential Variable Equity on 01 July 2010. It retains its history.

Domestic equities yielded some 4.5% in Q1, underperforming only corporate bonds. Despite the gains in $-metal prices, resource counters returned a pedestrian 2.1% lagging behind the financial and industrial sectors. A surprise 50 basis point cut in the repo rate saw renewed interest in banking stocks which resulted in financials gaining 9.9% over the quarter. Although the domestic economic recovery is trailing that of its global counterparts, growth in exports offset pedestrian domestic demand for manufactured goods. Foreign demand for domestic equities also remained buoyant with foreigners net buyers of some R10.5bn in equities.
Domestic sovereign bonds yielded 4.5% in Q1, much in line with the returns yielded by domestic equities. Relative to inflation-linkers and corporate bonds, the All Bond Index outperformed the former (-0.2%) but underperformed the latter (6.9%). Rand strength, a sharp decline in inflation back to within the target range and an oversubscribed offshore bond issuance all aided the bond market. Furthermore, a reduction in the country's sovereign risk premium and a further cut in the repo rate also supported the market. A narrowing in corporate bond spreads over the quarter accounted for the relative outperformance from this bond class, while the sharp decline in the consumer inflation rate acted as a drag on inflation-linked bond returns. Foreign demand for domestic bonds also underpinned the market with foreigners net buyers of some R13.9bn in bonds, slightly higher than the R11.1bn the previous quarter.
SA cash yielded 1.8% in Q1, outperforming domestic inflation-linked bonds and all offshore asset classes with the exception of emerging market bonds. Following the surprise interest rate cut in March, the FRA's are pricing in no further interest rate cuts in the current cycle. Of interest is that the breakeven inflation rate over the next three years is pricing in an expected inflation rate of around 6.1%.
Global equities yielded 2.7% in USD's in Q1, outperforming global bonds (including inflation-linkers) and emerging market equities but underperforming domestic asset classes. Rand returns were more muted, however, given a 1.5% appreciation in the rand/USD exchange rate. Although USD returns were quite disappointing over the quarter, they surged in March (5.9%) fuelled by ongoing signs that the global recovery was gaining traction with PMI indices trending higher in the US, China and the Eurozone. Global bonds were the worst performing asset class in Q1 yielding a disappointing -1.1% in USD's. Inflation-linked bonds in turn yielded 1.3% in USD's, still well behind the returns delivered by equities or emerging market bonds. The latter returned some 3.6% over the quarter. Although inflation is generally benign in the developed world due to excess capacity and negative growth in private sector credit demand, breakeven inflation is pushing higher across the yield curve. The SMMI Balanced FoF came under some pressure during the third quarter, underperforming the peer group by a small margin. The fund's relative underperformance can be attributed to a higher exposure to foreign assets than many peers, while foreign assets underperformed for the quarter. Over six and twelve months the fund compares very favourably against its peers. The fund's exposure to the underlying asset classes did not change significantly over the quarter. The best performing underlying equity managers were Coronation and SIM who gave similar returns for the quarter. Allan Gray underperformed them both, with their very defensive positioning causing them to underperform the broader equity market for the quarter.

Domestic equities gained 11.4% in Q4 2009 outperforming all other asset classes. Further gains in $-metals prices, up 16.5% in USD's, and better than expected advances in US ISM and global PMI indices all underpinned the equity market. Resources outperformed the other broad sectors gaining 16.7%, while industrials rose 9.5% and financials a more pedestrian 6.5%. Net foreign purchases of equities totaling R12.6bn, although modest in relation to the previous quarters R24.8bn, reinforced the positive mood on the domestic equity market Sentiment was also buoyed by the rise in the Kagiso/BER PMI index to above 50 index points signaling expansion in manufacturing market. points, production. The new orders to inventories ratio increased from 1.02X in September to 1.12X in November, indicating that the domestic inventory rebuilding cycle is gaining momentum. This along with huge infrastructural expenditure supports the sustainability of the economic recovery that became evident in Q3 2009. With economic growth estimated at around 2.3% this year, there will be a sufficient underpin for growth in earnings. Indications are that the earnings cycle has finally bottomed and that earnings will grow some 29% in 2010 (consensus estimate). Further gains in commodity prices, including precious metals, are also expected in light of recent signs that the global recovery is becoming sustainable. Although valuations point to equities as being in expensive territory on a 12 month view trading on a forward multiple of some 14X earnings, on a two year view the market is attractively priced trading on a forward multiple of around 10.6X earnings.

Domestic bonds yielded 1.1% in Q4 2009 outperforming both global and emerging market bonds. A meaningful decline in the country's sovereign risk premium from 189 basis points to 143 basis points helped offset the sharp rise in US treasuries over the quarter. Net foreign purchases of bonds totaling R11.1bn added some stability to the local market and represented a turnaround from the net outflows in Q3 of R2.7bn. Investor demand for short duration bonds saw the 1 to 3 year area of the yield curve gain some 2.0%, whereas the long end of the curve yielded 0.5%. Breakeven inflation held relatively steady at 6.5%, still ahead of the 6% upper limit of the target range. Inflation is expected to ease to a low of around 5% in Q1/Q2 before rising back to around the 6% level by the end of 2010. In 2011, inflation is expected to push back up to over the 6% upper limit of the range, limiting the scope for further interest rate cuts. Possible upward revisions to the fiscal deficit and funding requirement in the February National Budget will however remain a headwind for the bond market.

The SMMI Balanced FoF came under some pressure during the fourth quarter, underperforming the peer group. Over six and twelve months the fund compares very favourably against its peers. The main detractor of performance for the 4th quarter was the 15% exposure to foreign assets, mainly equities which underperformed domestic equities. The SMMI Balanced FoF also decreased its overall equity exposure during the quarter, while domestic equities continued to perform well. The only major change to the strategy of the fund was the sale of the fund's entire holding in the Stanlib Value Fund in favour of exposure to Allan Gray.