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
Our absolute portfolios struggled to outperform their benchmarks in the volatile market. While our domestic equity centric managers detracted most from the risk off environment, our offshore exposure suffered as the rand strengthened. Over the quarter, Coronation Absolute was the best performer, outperforming RE:CM Flexible Equity and performing in line with Prudential Equity which produced very similar returns. Prescient Positive Return posted positive returns, albeit negative real given the cost of portfolio protection. The fixed interest absolute return manager was the best performing manager for the quarter, contributing positively given the rally in the bond market. Global Equity has disappointed over the quarter as well, but the exposure to offshore currency has protected the portfolio from global equity volatility.

Portfolio Strategy
In this volatile environment, we expect the equity centric managers' to battle as they have a significant exposure to local equity. The current fixed interest absolute return manager is quite conservatively positioned and we are currently investigating the inclusion of another fixed interest absolute return manager into the absolute return portfolios in order to capture to upside experienced in the fixed interest market. Should markets rally from here on out, we would expect to equity centric managers to outperform in this environment, while global equity should respond to this environment in a similar fashion.

Market Review
After getting off to a good start, it was another mixed quarter as Greek debt issues continued to attract the attention - and fears - of investors, particularly towards the end of the quarter. However, financial markets did manage to keep well in the black on broadly more positive sentiment around the US economy's fortunes and slightly less panicky fears about Europe's debt woes. Thus the MSCI World Index ended the three months 11.7% ahead in dollar -based total returns and the MSCI Emerging Markets Index an even stronger 14.1%.

At home, the JSE All Share Index gained 6% in rand terms and 11.6% in dollars given a 5.3% appreciation in the currency. Financials led the pack, increasing 12.8% in local currency terms during the quarter, industrials rose 10.5% and resources backtracked, losing 3.3%.

The All Bond Index advanced 2.4%, slightly behind the 2.7% gains achieved by inflation-linked bonds and well ahead of the 1.4% delivered by cash. What we did during the quarter We maintained our overweight position in offshore assets, firstly because we believe the rand is somewhat overvalued on a purchasing power parity basis, and secondly we do believe selected global equity markets are considerably cheaper than the SA market. On the local front, we have been adding marginally to the local property fund as well as to the SIM Active Income Fund. Continuing from the previous quarter, further purchases were made in the SIM Bond Plus Fund from cash. The purchases were more of a risk measure and the Fund remains underweight bonds. The SIM Enhanced Yield Fund that we purchased during the previous quarter has been a good return enhancer within the Fund's cash holding, delivering a return of +0.70% above the cash benchmark (STeFI) for the quarter to end-March.

SIM Strategy
Local equities | We introduced an overweight position in SA equities towards the end of the third quarter of 2011 in our domestic-only, multi-asset class mandates. Aggregating our analysts' individual company valuations and comparing that with the overall market valuation indicates that the market is currently slightly cheap to fairly valued. The SWIX trades at a current rolled price-to-earnings (PE) ratio of 13x.

Local bonds | Based on the US Fed's statement at the end of January, investors or savers into developed market interestbearing instruments, more specifically cash, will have to be satisfied with negative real returns until 2014. In light of this, it was not surprising that risky assets, including SA long bonds, which offered the possibility of a reasonable real return, rallied in response. As a result, we have an underweight position in SA long bonds as they offer an approximately 2.5% real return given our long-run inflation assumption of 5.25%. Although they do look reasonably priced relative to global developed market long bonds, we believe a real return of closer to 3% is more appropriate given the inherent risks associated with investing in SA 10-year bonds, as well as the prospective real returns on offer from competing local asset classes. We are neutral on SA inflation-linked bonds (ILBs). The 10-year ILB is trading at a yield of below 2.0%. We believe a real return of 2.5% is appropriate for long dated ILBs, taking into account our required term premium relative to a riskfree cash investment.

Local listed property | Property stocks continue to trade close to fair value, given current dividend yields of approximately 7.2%. We therefore retained our neutral position during the quarter.

Global equities | We retained our overweight position in global equities. The proportion of companies trading below their book value is around 40% in Europe, 10% in the US and 15% in the emerging markets. Our position is consistent with our value investment philosophy. We believe market valuation is the best predictor of future stock market performance.

Global bonds | We retained our underweight position in global bonds. Long-dated UK gilts are, for example, at their lowest yields in 250 years.

Market Review
Global financial markets rallied in the fourth quarter of 2011. Notwithstanding the ongoing to-ing and fro-ing over Europe's government debt woes, the MSCI World Index managed to gain 7.7% for the quarter in dollar-based total returns and the MSCI Emerging Markets Index gained 4.4%. In SA, the JSE All Share Index advanced 8.4%, with the technology and consumer goods and services sectors being the best performers during the period and resources the laggards in the face of falling commodity prices. A marginal improvement in the rand during the quarter saw dollarbased equity market returns end slightly better than rand-based returns. However, for the year a hefty 18% depreciation in the rand against the dollar put a dent in dollar-based returns, which ended up reversing 16% compared with a 2.6% gain in rand terms. Equities were the best performing asset class during the final quarter, while inflation-linked bonds (up 4.5%) outpaced nominal bonds (3.5%). Cash trailed these fixed interest asset classes, delivering 1.4% for the quarter.

What we did during the quarter
We have been increasing the Fund's position in local bonds since September via the SIM Bond Plus Fund. SA bonds are trading close to what we deem to be fair intrinsic value from previously overbought levels.

We have introduced two new holdings into the fund. Within the local cash component, it is the SIM Enhanced Yield Fund. This fund is invested in quality corporate credit, mostly short-dated money market instruments. Assets are invested in a blend of maturities across the money market yield curve and should help enhance yield within cash. The other new holding is the global Sanlam World Equity Tracker Fund. The investment objective of this fund is to provide a total return equivalent to that of the MSCI World Index. Our aim in using this fund is largely two-fold: obtaining exposure to developed marked equities, in which we see attractive relative value, and obtaining greater diversification within the managed fund's current global equity offering.

Towards the end of the quarter, the Fund's foreign exposure was concomitantly lowered in favour of local equities as a consequence of new National Treasury ruling reclassifying previously inward listed stocks to local asset status on the JSE. The major beneficiary of the change was British American Tobacco, a stock that now joins the JSE Top 40 Index. We used this as an opportunity to add the Sanlam World Equity Tracker Fund.

SIM Strategy
Local equities: We introduced an overweight position in SA equities towards the end of the third quarter of 2011. The SWIX traded at a price-to-earnings (PE) ratio of 12.5 and, if earnings forecasts are to be believed, on a one-year forward PE ratio of 11. Even though this is close to our estimate of fair value, SA equities do appear attractive relative to other domestic asset classes.

Local bonds: We closed our underweight position in conventional bonds during the quarter when SA 10-year bonds were trading at yields of about 8.3%, up from about 7.6% at the beginning of September. At that time, we increased our beginning of September. At that time, we increased our underweight position to 2% under benchmark.

Local listed property: Property stocks continue to trade close to fair value, given current dividend yields. The dividend yield of listed property in SA is about 7.6%. We therefore retained our neutral position during the quarter.

Global equities: We retained our overweight position in global equities, which are trading at cheap levels if you consider longerterm measures such as price-to-book and price-to-normalisedearnings ratios.

Global bonds: We retained our underweight position in global bonds. The current real return offered by developed market bonds does appear too low given our long-run expected inflation in these markets.