Market Review
New found optimism in the developed markets saw the MSCI World Index advancing a strong 7.9% at the expense of the MSCI Emerging Markets Index, which backtracked 1.6% in total dollar-based terms. Towards the end of the quarter, investor sentiment in Europe was somewhat dented by the European Union's bail-out of the Cypriot banking industry. In the US, however, the broad-based S&P 500 and blue-chip, heavyweight Dow Jones Index ended the quarter on record highs. In SA, the All Share Index gained 2.5%, easily outperforming cash (1.25%) and bonds (0.97%). Inflation-linked bonds were the best performers in the fixed interest universe, adding 1.84% during the quarter. Industrials and financials again led the way, gaining 6.3% and 5.9% respectively, while resources lost ground again; declining 6% during the quarter

What we did during the quarter
We have been adding to our local bond exposure via the SIM Bond Plus Fund. This was done in several tranches over the quarter as and when bond yields picked up. This is in line with changes made to the SIM houseview, reducing our long-run real required return assumptions for all interest-bearing assets. As such, although the Fund remains underweight bonds, the degree of the underweight position has been lessened. Other additions to the Fund were made in the equity and cash segments, with the purchase of the SIM General Equity Fund, a well diversified and actively managed fund, as well as the SIM Enhanced Yield Fund. The SIM Enhanced Yield Fund has been a consistent alpha generator within its space, outperforming relative to the cash/STeFI benchmark by 0.2% and 3.1% over the three month and rolling 12-month period respectively. We also marginally increased our exposure to the SIM Property Fund. This Fund, we believe, is somewhat defensively positioned, with its overweight postion in higher yielding smaller- to mid-cap stocks and underweight exposure to the lower yielding, more liquid, large-cap stocks. On the international side, the Fund benefited from an overweight position in offshore assets during these past months of rapid and pronounced local currency depreciation. We did use this opportunity to repatriate some rands at levels that were weaker than purchasing power parity levels, which we estimate to be around R8.75 to the US dollar. Further, with offshore equity in some of the developed markets trading near all-time highs - and as a rebalancing measure - we trimmed back on equity in the Sanlam World Equity Tracker Fund. We still believe that selected global equity markets and listed property markets are considerably cheaper than the SA market.

SIM Strategy
Local equities | We currently have a benchmark holding in SA equities as we believe SA equities are fairly valued to slightly expensive. In summing up the individual company valuations, as calculated by our equity analysts, the market appears to be about 10% overvalued if we assume a required real return of around 7%. Even so, the prospective real return on offer from local equities remains attractive relative to the other domestic asset equities remains attractive relative to the other domestic asset classes.
Local bonds | We retained our underweight bond position. We require a 2% real return for SA 10-year bonds, which is 1% higher than what we require from cash to compensate us for the inflation and term risk associated with investing in long bonds. Currently the 10year bond trades about 0.5% below our long-run fair value of 7.25% based on our long-run inflation assumption of 5.25%. Even though this does seem expensive relative to our long-run fair value, we are concerned that our long-run real return assumptions for government securities are too high, given our opinion that we have entered a protracted period of financial repression. It is difficult to judge how aggressive governments will be in pursuing financial repression.
Local listed property | Property stocks are somewhat expensive relative to what we consider to be fair value, given current dividend yields. However, relative to current SA long-bond yields, the dividend yields offered by listed property seem reasonable and we therefore retained our neutral position in property.
Global equities | We retained our overweight position in global equities. Global equity markets are trading on a trailing price-toearnings (PE) ratio of around 15. The long-term average since 1970 has been 17.5. On a cyclically-adjusted basis, the global market is trading on a 17.5 price-to-adjusted-earnings, while the long-run average is closer to 25.On a cyclically-adjusted PE basis Europe and UK are the cheapest markets and they also trading well below their long-run averages.
Global bonds | We retained our underweight position in global bonds. Benchmark 10-year sovereign bonds in the US, Germany and UK offer negative prospective real returns, given the implicit inflation targets of the central banks, as well as long-run consensus inflation forecasts.
Global property | We have a significant overweight position in international property via listed REITs. Currently our holdings have an average dividend yield of about 6%, which is attractive compared to the 6% dividend yield offered by SA listed property. Price-to-cash flow for global property companies remains below the long term average.
Global property | We have a significant overweight position in international property via listed REITs. Currently our holdings have an average dividend yield of about 6%, which is attractive compared to the 6% dividend yield offered by SA listed property. Price-to-cash flow for global property companies remains below the long term average.