Market Review
It was a truly tumultuous quarter for global financial markets, with stock markets trawling bear market territory and most economic indicators confirming that at best the world economy, particularly developed countries, are likely to deliver well-below trend growth in the short to medium term. A rush to supposedly risk free assets like developed market government bonds saw emerging market equities underperform their developed market counterparts, with the MSCI Emerging Market Index slumping 22.5% versus a 16.5% slide in the MSCI World Index. SA was not as hard hit as other emerging markets, retreating 16.8% in dollars versus a 31% plunge in Russia's stock market (the worst performing emerging market during the quarter). In rand terms, the performance of the FTSE All Share Index looked even better, given the significant and sudden depreciation in the currency during the quarter, which knocked dollar based returns. The headline index shed 5.8%, with resources (off 10%) hardest hit by the decline in commodity prices and the financials and industrials down about 3% each. Fixed interest-yielding assets managed to end the quarter in positive territory, with nominal bonds gaining 2.8% and inflationlinked bonds 3%. Cash delivered 1.4%.

What we did during the quarter
In July, we increased exposure to SIM Active Income from local cash. August saw us reduce our global bond exposure in favour of global equities as global bonds became overvalued, while global equities became extremely attractive from a valuation perspective offering good long term upside. Domestic equities were opportunistically increased during August as equity markets declined. In September, we bought local bonds (SIM Bond Plus) as bond yields picked up, making bonds cheap. With the rand's massive depreciation against the US dollar, the Fund's foreign exposure increased and we used this as an opportunity to reduce global bonds further. Global equities were trimmed as a rebalancing measure.

SIM Strategy
Local equities: We introduced an overweight position in SA equities towards the end of the quarter. SA equities relative to other SA assets do appear relatively attractive. The SWIX trades at a current price-to-earnings (PE) ratio of 12.5 times and, if earnings forecasts are to be believed, on a one-year forward PE of 10.5. Our bottom-up price to intrinsic value charts show a 10% upside to fair value, which is the biggest margin since the third quarter of 2009.
Local bonds: SA long bonds rallied significantly in August in the wake of a rally seen in the global sovereign bond markets. As a result, we have introduced a short position in SA long bonds as we believed the news flow at that time did not materially alter our long-run inflation assumption or the real return we require from SA long bonds. In fact, one-year inflation forecasts in SA were, and still are, above our long-run inflation assumption of 5.25%. Since then SA conventional 10-year bonds have weakened to well above 8%, from about 7.6% a month ago and we have started to close our underweight position.
Local listed property: Property stocks continue to trade close to Local listed property: Property stocks continue to trade close to fair value, given current dividend yields. We therefore retained our neutral position during the quarter. Global equities: Global equity markets have become cheaper and we have added to our overweight position. We continue to prefer Europe, including UK, as they are trading at considerably cheaper levels than, say, the US, if you consider longer term measures such as price-to-book and price-to-normalisedearnings ratios. Although the sovereign debt problems in Europe are concerning, the sovereign debt as percentage of gross domestic product for the Euro area as a whole is very similar to the US.
Global bonds: We retained our underweight position in global bonds. The current real return on offer from developed market bonds does appear too low given our long-run expected inflation in these markets.

Market Review
It was a bumpy ride for financial markets during the second quarter, with investors caught up in Euro-zone government debt angst and preoccupied with evidence showing the global recovery could be running out of steam. Towards the end of the quarter, US sovereign bond yields also kicked up as the deadline to lift the US debt ceiling neared and political wrangling continued.

Notwithstanding these challenges, developed market equities managed to end the quarter slightly higher, with the MSCI World Index 0.6% ahead in dollars. Emerging markets, however, lost ground, with the MSCI Emerging Market Index shedding 1% for the quarter. At home, the JSE All Share Index slipped 0.6% in rands during the period. A slightly stronger rand versus the dollar alleviated the decline, with the All Share Index easing a mere 0.1% in dollars. In contrast to this weak equity market performance, local bonds advanced a healthy 3.9% during the quarter, as measured by the All Bond Index; inflation-linked bonds gained 3.8% and cash 1.4%.

What we did during the quarter
In April, we increased the exposure to domestic property by 0.5% (after trimming in January) from cash. In June, we added a further 0.5% to property and added 0.75% to offshore cash, both from domestic cash. We remain overweight offshore versus local as we believe the rand is overvalued, and we regard this fund to be appropriately positioned according to its risk profile and fund objective.

SIM Strategy

Local equities:We retained our neutral weighting to SA equities during the quarter. Using consensus earnings forecasts, the market is trading at a reasonable price-to-earnings ratio of 11 in one year's time. However, we do prefer to look at longer term discounted cash flow valuations in conjunction with normalisation arguments. Based on this, we believe the market is fairly priced.

Local bonds:We introduced an overweight position in SA bonds early in March this year as ten year bonds then weakened to 8.80%. Long bonds have rallied since then and we decided to cut our overweight position at around 8.50%. The real return on offer from long bonds is still slightly above our long-run real required return of 3% assuming that long-run inflation will be within the inflation target range. We reduced the size of our overweight position in SA inflation-linked bonds. Long dated South African inflation-linked bonds have now rallied to real yields of about 2.5%, which we consider as a fair prospective return given the risks inherent in the investment. Even though we believe inflationlinked bonds are fairly priced in their own right, we do still have an overweight position funded from cash. We believe the real yield on offer from cash is currently too low and that it is highly likely that an inflation-linked bond investment will give a better relative real return.

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

Global equities: We maintained our overweight position in international equities, primarily expressed through an overweight position in Europe. We consider Europe as a relatively attractive market on a number of measures, despite the sovereign debt problems in some of the smaller European countries. Simplistically Europe trades on a price-to-long-term trend earnings of about 10 times, while the US trades on a price-to-long-term trend earnings of 20.

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

Market Review
After starting the year off on a strong note, the global economy had to withstand several calamitous geo-political events, including upheaval in the several Middle Eastern/North African countries and Japan's tragic earthquake and tsunami during the first quarter. Notwithstanding these adverse developments, emerging and developed markets managed to deliver respectable gains during the quarter, with the MSCIWorld Index ending 4.9% ahead in total dollar terms and the MSCI Emerging Markets Index up a slower 2.1%. Understandably, however, Japan's Nikkei Index slumped 6.7% during the quarter, with most of the decline coming through in March (down 9.2%). At home the JSE All Share Index put in a decent 1.1% return for the quarter, with financials ahead 0.7%, resources up 2.8% and industrials down a hefty 8.6%. Of the other asset classes, the 1.4% returns delivered by cash put it ahead in the performance rankings; inflation-linked bonds added 1.2% and the All Bond Index experienced a 1.6% decline during the period.

What SIM did
No major asset allocation changes were made to the fund during the quarter. In January, we trimmed SA property in favour of offshore cash and equity. In February, we slightly increased local equities as a result of market movements.

SIM Strategy
Local equities - We remain neutral on SA equities. An aggregation of our analysts' valuations of the individual companies shows the market is fairly priced assuming a required real return of about 7% from SA equities.
Local bonds - We changed from an underweight to neutral position in mid-March. Assuming that long-run inflation will be at the upper end of the formal 3% to 6% inflation target, a real yield of close to our required 3% is on offer. It is, however, reasonable to assume that the Reserve Bank will be able to keep the 2011 average inflation rate below the upper end of the target. Also, by comparing long bonds to inflation-linked bonds, it is evident that the market is implying long-run inflation of close to 7%, if our required inflation-risk premium of 0.5% for conventional long bonds is taken into consideration. So either inflation-linked bonds are mispriced, which we believe is not the case given the 2.65% real return they offer, or conventional bonds are mispriced, which is more likely.
Local listed property - Property stocks continue to trade close to fair value, given current dividend yields. We therefore retained our neutral position during the quarter.
Global equities - We retained our overweight position during the quarter. We still see Europe as a relatively attractive market on a number of measures.
Global bonds - The current real return on offer from developed market bonds does appear too low given our long-run expected inflation in these markets. We have retained our underweight position in global bonds.

Risks and opportunities
Developed market governments are, in effect, borrowing from future generations given their current policy actions. The very large budget deficits have required increased borrowing by these governments, which will need to be paid back by future taxpayers. The effect of this monumental increase in government debt has been masked by quantitative easing, which saw central banks buy up the government debt by printing money. These now inflated central bank balance sheets will have to be unwound in the future by selling the debt back to future tax payers. Either very high growth will be required to pay down the debt, or severe austerity measures will have to be implemented. We remain overweight offshore versus local as we believe the rand is overvalued. We regard this fund as being appropriately positioned according to its risk profile and fund objective.

Market Review
Strong SA equity market performance in December, and for the quarter as a whole, saw the JSE All Share Index gain 19% for the year. Similar buoyancy was experienced across the globe, with the MSCI World Index's 9.1% fourth quarter dollar-based performance resulting in a 12.3% rally during 2010 and the MSCI Emerging Market's 7.4% dollar-based increase late last year contributing to a 19.2% return for the year. In SA, industrials shares were the clear 2010 winners, with the Industrial Index delivering a bumper 24% return for the year versus the financial sector's 16.6%. Resources were the laggard but the sector did move ahead of the pack in the fourth quarter, gaining an impressive 16.5%, which left it 12.3% ahead for the year. Foreign investors benefited from the rand's broad-based appreciation during the quarter, with the JSE All Share Index delivering 15.1% in dollars in the final quarter of the year, 16% in British pounds and 17.2% in euros. Cash outperformed bonds generating a 1.5% return for the quarter under review versus the All Bond Index's 0.7%. But the two asset classes traded places for the year as a whole, with bonds gaining 15% and cash less than half that at 6.9%. Inflationlinked bonds slotted in between, adding 0.9% during the fourth quarter and 11% for the year.

What we did during the quarter
There were no material asset allocation changes made to this fund during the quarter. In October, we completed a restructuring on the offshore side by adding 1% to global equities from cash, and in December we added a further 1% to equities at the expense of cash.

SIM Strategy

Local equities: We retained our neutral weighting to SA equities during the quarter. The consensus view is that JSE All Share company earnings are due to rise by 30% in a year's time. This will put the market on a reasonable price-to-earnings (PE) ratio of 11.5 times, assuming the price index remains at its current level.

Local bonds:We moved from an underweight position to neutral in December last year. Given our long run assumptions on inflation, long bonds currently offer a prospective real return of 3.0%, which we believe is fair considering the inflation and term risks inherent in nominal bonds. Low money market rates also mean bonds are attractive relative to cash.

Local listed property: Dividends are expected to grow at about 8% over the next year and we retain our neutral position, as we believe property shares are on average fairly priced.

Global equities: We retained our overweight position during the quarter, primarily expressed as an overweight position in European large capitalisation stocks. At close to 4%, the dividend yields on these shares are attractive relative to the rest of the developed world.

Global bonds: We introduced an underweight position in global bonds in May 2010 and increased it in October last year after US long bonds declined to historic lows. However, US long bonds weakened by more than a percent between October and the end of the year and thus we are considering reducing our underweight position again.

Risks and opportunities The major asset classes in South Africa are on average fairly priced in relation to our long-term real return requirements, which currently reduces our ability to add value from a tactical asset allocation perspective. We remain overweight offshore versus local as we believe the rand is overvalued. We regard this fund as appropriately positioned according to its risk profile and fund objective.