Market Commentary
The heady start to the year felt long forgotten as global equity markets experienced a sharp pull back over the 2nd quarter. The MSCI World fell 5.8%(USD) as developments(or arguably non developments) in Europe dominated news resulting in changes in leadership in France and a pro Euro coalition in Greece. Spanish banks came under pressure, forcing the Spanish government to seek a 100bn Euro bailout in return for stronger austerity measures but over a protracted period. European equity markets fell 7%, Japan 7.3% and the US 3% while Emerging markets fell 8.8% (all USD) over the quarter. Locally, equity markets proved resilient, with the JSE ALSI rising 1% (ZAR) over the quarter led higher by Financials(+3.7%) and Industrials(+3.4% ), while Resources fell 3.3% (all ZAR) on renewed global growth concerns.

Market Outlook
Last quarter we raised the prospect of increased market volatility along with slower gains and this still holds true. Europe remains a focal point to investors but increased concerns have been raised on the sustained growth of the US and the economic slowdown in China. Economic datasets have reflected mixed signals, adding to the lack of market direction and volatility. The ECB recently cut its deposit rate to an unprecedented 0% in an attempt to spur bank liquidity and lending. Locally, we have seen domestic inflation abating from its highs and anticipate a downward trajectory, lending support to a potential interest rate cut as growth targets come under threat.

Portfolio Recap
With markets being volatile, the Fund failed to outperform its benchmark over the quarter, driven chiefly by manager selection. Investec Value was a particular detractor from performance due to the manager's bearish outlook for equity markets globally. SIM Equity also detracted from portfolio performance. Sanlam Universal Equity Fund failed to beat its benchmark in a very volatile market driven by investor uncertainty. Our relative underweight global bonds position detracted from performance as global bonds rallied while our overweight domestic property contributed positively as property was the top performing asset class over the quarter. International cash continues to assist the fund as a hedge in a constantly changing risk on/risk off environment.

Portfolio Strategy
Notwithstanding global growth concerns and a possible flareup of the Eurozone crisis, the equity risk premium currently on offer makes equities attractive over the longer term. While the risk-on risk-off trade will continue to plague investors, large margins-of-safety across both developed and emerging markets suggest there is sufficient fat in valuations to support risky assets. With further quantitative easing expected from the BOE, BoJ, ECB and the US as well as further rate cuts from emerging markets, the PBoC and the ECB, monetary reflation is expected to underpin equity prices in the year ahead. We foresee continued headwinds in the short term for equity markets and with domestic inflationary pressures abating, see support to the nominal bond market with an increased likelihood for an interest rate cut. In light of this, we have trimmed our inflation linked bond position in favour of nominal bonds. With continuous market noise, investors are reminded on the value of a long term outlook.

After a sprightly start to the new year, markets were reined in during March. Global Equity Markets returned an impressive 10.9% (USD) over the 1st quarter. Greece continued to be a focal point of concern, but with austerity measures being passed, produced a basis for renewed optimism. The rally was supported by positive economic data from the US, which continues to reflect modest growth supported by accommodative monetary policy. The US Treasury weakened over the quarter and was the worst performing asset class. Given this backdrop, the local equity market rallied, but not as significantly as its global counterparts. The carry trade continues to be an attractive proposition for foreign investors, with the ALBI and ILBond Index outperforming cash. Property returned 8.0% outperforming all local asset classes. With market returns being positive over the quarter, the Fund managed to outperform its benchmark driven by tactical asset allocation. Our exposure to global equity contributed positively as the Sanlam Universal Equity Fund outperformed its benchmark, the MSCI World. Our relative underweight global bonds position also contributed as global bonds was the poorest performer over the quarter. While international cash was a negative contributor due to the Rand strengthening, we see the value it adds in hedging against market volatility. Locally our domestic equity managers detracted overall with both Investec and SIM underperforming. Exposures to other strategies such as our passive exposure to Inflation-Linked Bonds continue to benefit the portfolio, outperforming their nominal government counterparts. While the rapid rise of the market has surprised investors, we continue to see support for equity markets for the remainder of the year. However, given the continued risks to the global economic recovery, we would caution that gains are likely to slow and become more volatile. Concerns remain in the Eurozone, compounded by geopolitical risk in the Middle East and a potential for a slower growth scenario in China. While US treasuries have weakened over the quarter, they have the potential to weaken even further from these levels, especially in the wake of the door closing for a third bout of quantitative easing. Some market indicators have shown mixed results, with the US exhibiting more positives signs of a recovery than other regions. While fundamentals have marginally deteriorated, valuations are still relatively attractive and we continue to hold the view that equities should outperform other asset classes during 2012. On a relative value basis, we continue to favour global equities over their local counterparts. The FRAs are pricing in a rate hike by the end of the year, but we have maintained our view that domestic interest rates are likely to remain unchanged for the next twelve months. With forward price to earnings multiples and margin-of-safety valuations still generally attractive, we continue to overweight global equities on both an absolute and a relative basis over their local counterparts. The near term pull back in the equity market provides an opportunity to increase our effective developed equity markets exposure. Locally spreads between nominal and inflation linked bonds have narrowed significantly-we still prefer the latter given its insurance mechanism against any potential inflationary surprises. Our deployment of resources to risky assets within the portfolio will be done tactically given the anticipated bumpier ride ahead.

2011 can be characterized as a year of uncertainty in the global economy, which ultimately translated to extreme periods of volatility in global markets. December displayed much of the same volatility, the local market selling off by 2.5%, underperforming all asset classes, both domestically and offshore. Local bonds outperformed local cash marginally, but inflation-linked bonds were the best performing asset class, producing 2.0% in December. MSCI World Index produced a small negative return in USD (but US and UK Equity actually produced positive returns in USD and Sterling respectively), with investors seeking the safety of global bonds.

SMMI's decision to trim its local equity exposure in November and remain significantly invested in offshore equity certainly paid off in December. The exposure to inflation-linked bonds remains favourable for the portfolios, but the asset class has definitely become expensive. Asset allocation was a significant contributor to performance with inflation-linked bonds being a dominant driver of returns. On the manager selection front, SIM Unconstrained and Cadiz Equity produced exceptional returns, outperforming the local equity market. Coronation Equity was the worst performing manager in the equity manager combination, producing a marginal negative return, but still outperforming the local equity market.

We are acutely aware that inflation-linked bonds have become expensive, but the inflation carry over the next few months should provide satisfactory yield for the portfolio. We remain of the opinion that equity market fundamentals remain intact and valuations are still quite attractive, even though earnings are expected to slow in 2012. Policy-makers across the developed world are acutely aware of the delicate economic landscape and have remained accommodative with a low interest rate policy and are committed to policy responses should economic circumstances change for the worse.