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. 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. 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. 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.

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 out of the US, which continues to reflect modest growth supported by accommodative monetary policy. The US Treasury weakened over the quarter from its historically low levels and was the worst performing asset class. Given this backdrop, the local equity market rallied, but not as significantly as its global counterparts. The rally was led by the financial and industrial sectors, with resources lagging behind and producing a negative return for the quarter. The carry trade continues to be an attractive proposition for foreign investors, with the All Bond Index and Inflation-Linked Bond Index outperforming cash. Property remains an attractive asset class, producing an 8.0% return and outperforming all local asset classes.

The sovereign debt and related banking crisis in Europe as well as the actions on the part of the ECB (a further decline in interest rates to 1% as well as the provision of I489 billion in cheap three-year loans to European banks) to provide much needed relief, dominated global markets during December. As has been the case for the entire 2011 calendar year, capital markets remained volatile during the month.

With global equity markets coming under pressure as a result of the focus on Europe and softening global economic data, it comes as no real surprise that more equity centric strategies struggled during the month. The portfolio's portable alpha and fixed interest strategies, particularly the inflation linked bond strategy which returned just over 2% for the second month, provided a robust underpin resulting in the portfolio delivering a positive return for the month.

Our outlook for the portfolio is essentially unchanged from last month. We remain confident that going into 2012 a global recession will be avoided, providing an environment that should allow for a moderate appreciation in corporate earnings. With the fundamentals remaining intact and valuations still relatively attractive, we continue to hold the existing exposure to the asymmetrical risky strategies. We retain our view that domestic interest rates are likely to remain unchanged for the next twelve months as our Reserve Bank is likely to err on the side of supporting economic growth in the face of potential exogenous risks. The expectation of low single digit returns from cash (as well as negative real interest rates) supports our view to retain low exposure to pure cash strategies in favour of low risk fixed interest strategies. We remain acutely aware of the risk and consequences of an unfavourable outcome in Europe and have positioned the portfolio appropriately.