Global equity market volatility continued into September as concerns regarding the potential economic impact of the European sovereign debt crisis deepened. The mixed economic data released during the month did little to comfort investors. The negative sentiment, which impacted risky assets globally, weighed most heavily on global emerging market currencies, including the Rand.

The FTSE / JSE All Share Index fell 3.6% in Rands and the MSCI World Developed Markets Index was down 8.8% in US$. The 13.6% decline in the Rand vs the US Dollar did however provide a welcome buffer for the international component of portfolios. Flight to safety saw local bonds produced a negative return as well, returning -2.09%, with inflation-linked bonds producing -1.22%. Cash was the saving grace in the local market, producing a minute return of 0.45%.

The portfolio's overweight position in risky assets, on our view that the likelihood of a global recession is remote, did detract value during the month. This contributed to the underperformance of the fund relative to its benchmark. Exposure to government and inflation linked bonds detracted from performance as well, given the flight to safety by investors globally and not discriminating across emerging market asset classes. The best performing asset class was international sovereign bonds, which produced a massive positive return, which the fund unfortunately did not participate in as the asset class is hugely overpriced. Global equity exposure did however contribute positively to overall performance, given the weakening of the Rand by as much as 13.5%.

Over the last quarter, equity markets globally have continued to be marred by uncertainty of the economic landscape of certain regions of the globe, particularly the EU, USA and Japan. This resulted in intra month volatility in equity markets, both internationally and domestically, but only saw equity markets give up minute gains experience in Q1 of 2011. One of the best performing asset classes was fixed interest both domestically and internationally, with the local bond index marginally outperforming local inflation linked bonds. Global bonds performed well over the quarter, as investors sought to safe heaven assets. The best performing asset class was local property as interest in the sector has started picking up with new listing in the tiny sector.

The Fund marginally underperformed its benchmark over the quarter. Performance can predominantly attributed to exposure to local bonds and cash, which had quite significant exposures in the fund. The equity manager combination added value as well, with RE:CM Flexible Equity being the best performing equity manager in the combination. International exposure was a detractor of performance as international equity produced a small negative return and the Rand appreciated marginally.

We maintain a cautious approach, with the uncertainty evident in the major economic regions of the world. However, based on the valuations of equity markets, both locally and globally, the earnings prospects for companies are still very much intact and that equities should produce the best return amongst all other asset classes. Local bonds seem to be reasonably priced currently, but with the inflation outlook deteriorating over the next year, bonds are very expensive and will not adequately compensate investors for the risk taken.

The inconspicuous return of 0.52% for the All Share Index in March 2011 does not in any way explain the events of the month that past. To the 16th of the month, the market was down more than 6%; thereafter to month-end all these losses were recovered with some to spare. With mediocre returns from the rest of the other asset classes, it was not a good month for investments in absolute terms.

The fund managed to produce a positive return in March, but marginally underperformed the benchmark. This can largely be attributed to the equity manager combination, which detracted value relative to the broader market. SIM Unconstrained had a particularly poor month, with the rest of the combination producing satisfactory returns. International exposure was a significant detractor of performance as well, given the strengthening of the Rand during the month and poor return by developed equity markets.

SMMI does see the equity market volatility that we have seen to continue for some time going forward and these volatile environments do provide opportunities to tactically allocate within the portfolio. While equity might be expensive on a valuation basis, it will still provide a better return over a 12 month basis. The ensuing environment is still quite negative for bonds in light of inflation bottoming out and posing a concern going forward.

Against this backdrop, SMMI has positioned the portfolio defensively (given the equity managers defensive positioning), while still managing to participate in the equity market upside by being marginally overweight equity. An underweight to local bonds is maintained as inflation poses a risk to the upside and rate hikes will ultimately push bond yields higher. Foreign equity still remains attractive and the fund maintains its overweight to the asset class, especially in light of the overvalued Rand.

The start to the new year saw global equities being the best performing of all the asset classes in January yielding 2.2% in USD's and 10.8% in rands. While the sharp depreciation in the rand/USD exchange rate substantially boosted returns, the $-gains came on the back of positive earnings surprises and good economic data releases. Global bonds underperformed global equities in January yielding -0.1% in USD's and 8.3% in rands. Domestic equities were of the worst performing asset classes in January with returns of -2.5% falling well short of foreign asset class returns. This was primarily due to a 7.75% depreciation in the rand/USD exchange rate. Although $-metals prices rose 2.5% over the month, resource stocks yielded a pedestrian -0.5% on emerging market contagion and a softer $-gold price. Financials, in turn, yielded -1.25% whereas industrials yielded a disappointing - 4.1% return. Domestic bonds marginally outperformed domestic equities in January yielding -2.14% for the month. SA cash yielded 0.5% in January, outperforming all of the domestic asset classes.

The SMMI Moderate FoF managed to mitigate a significant amount of the downside in a month of poor domestic asset class returns. The funds active return was driven by low exposure to domestic equity when compared to the peer group as well as good exposure to international assets. Within the domestic equity managers, SIM Unconstrained was the best performing strategy for the month. Coronation Equity underperformed the broader market by a significant margin.