Market review
There was heightened volatility across most asset classes, but especially in global equity markets. Emerging markets experienced significant portfolio outflows and their currencies weakened, particularly in September. At the time of writing this report, it seemed more and more likely that there would be an orderly default of Greece's debt, which added to uncertainty yet again. Generally markets were spooked by the high sovereign debt levels and the possibility of renewed economic recession. Investor concerns about losing capital were evident in the flight to US Treasuries. The yield on the 10-year Treasury, which traded at 3.14% at the end of June, ended the quarter at 1.93%, a new multi-decade low. The rand weakened to its worst levels in two years (R8.09/$) in September, partly due to a significant sell off in local bonds and equities during the month. The weaker rand and risk of higher inflation gave the Reserve Bank little option but to keep the Repo rate on hold in September.

The FTSE/JSE All Share Index (ALSI) lost 5.8% in rands for the quarter, Resources shed 10%, Industrials fell 3.3% and Financials slipped a slightly smaller 3.1%. The MSCI World Index declined 16.5% in dollars, outperforming the MSCI Emerging Market Index, which slumped 22.5% during the quarter. Portfolio outflows and a weaker rand (which fuels inflation expectations) led to significantly higher nominal bond yields in September. Although the All Bond Index retreated 2.1% for the month, it still managed to gain 2.8% for the quarter. Inflation-linked bonds delivered a return of 3%, cash 1.4% and property a respectable 2.2%. Inflation-linked bond yields declined slightly during the quarter in what can be described as a quarter of two halves. Long -dated real yields initially declined to 2.25% in August before weakening to about 2.5% at the end of the quarter.

Asset allocation
During the first half of the quarter, we reduced our bond exposure into strength. This served the fund well when yields kicked up towards the end of the quarter. In September, we started to increase our exposure to bonds again when nominal bonds were trading slightly above our long-term fair value of about 8.3%. We still like the defensive and diversification properties of inflationlinked bonds and will continue to hold some exposure to them. We continued to enhance the money market yield by investing in longer-dated bank paper and selective primary credit placements.

We used the market volatility during the quarter to add to our hedged equity position. Equities were trading below our assessment of their intrinsic value and this, plus the high levels of risk aversion, gave us a good entry point into equities. Our intention is to keep a healthy level of overall equity, but to increase the hedged equity component further. We like the risk/return characteristics of hedged equity in the current investment environment.

Investment strategy
It is no surprise that, given the heightened risk aversion and global pessimism, equities offer the most value from a bottom-up and longer-term perspective. We believe that adding equity exposure via 'hedged equity' provides the best risk/return trade off for investors in the absolute return funds at this point in time. We repeat last quarter's comment: "We believe maintaining a well -diversified portfolio in the current investment environment is crucial for attaining our real return targets". We also think that exposure to equities still provides investors with the best exposure to equities still provides investors with the best opportunity of outperforming inflation over the longer-term.

Market review
Greece and the excessive levels of developed market sovereign debt continued to plague international financial markets. The FTSE/JSE All Share Index (ALSI) lost 0.6% in rands for the quarter, with Resources down 5.7%, Industrials up 3.7% and Financials increasing 1.3%. The MSCI World Index advanced 0.6% in dollars, while the MSCI Emerging Market Index lost 1% for the quarter. The South African bond market experienced significant offshore portfolio inflows, which supported yields during the quarter and saw the 10-year bond yield decrease from 8.76% to 8.39%. The All Bond Index returned 3.9%, followed by inflationlinked bonds, with 3.8%, and cash, 1.4%. Inflation-linked bond yields declined about 10bps during the quarter, with the R197 ending the quarter at a yield of 2.57%, close to our long-term fair value of 2.5%. Property stocks gained an impressive 5% for the quarter.

What SIM did
Market volatility around the Greek debt crisis afforded us the opportunity to add some hedged equity to the portfolio. Overall equities are trading at their long-term fair value. For funds with international exposure, we increased our international equity exposure via a MSCI World Tracker fund.

Our portfolio performance this quarter was helped by our focus on the mid- and small-cap sectors, where the stocks remained fairly resilient. Our overweight positions in British American Tobacco, MTN and Altron also added value. Our Nampak position is another contrarian call which paid off handsomely for us. On a price to value basis, we see greater value in financials over industrials and increasing value in the small-cap sector. We have also reviewed our long-term commodity price assumption upwards with the diversified miners the main beneficiaries of the change. From a bottom-up, stock-specific perspective we see value in the likes of Anglo American, Sasol, BAT, Old Mutual and some of our banks. Our portfolio remains underweight a number of stocks where valuations are unattractive, such as Shoprite, Kumba, Truworths and Harmony. The selloff in resource stocks has enabled us to add to our positions in quality stocks like Anglo American and Sasol. We continue to add to Investec, which is trading at close to book value. These purchases have been funded by the sales of outperforming stocks such as Capital and Counties, Lewis and Mondi.

During the second quarter, bond yields decreased and we used this market strength to reduce our nominal bond exposure as bonds are now trading close to our long-term fair value level of about 8.25%. The real return on offer from nominal bonds is about 3% assuming that inflation will be within the target range. We added to our property exposure via an investment in Rebosis, a new listing in the property sector. We continued to reinvest some of the portfolio's cash into longer-dated floating-rate notes, earning an attractive pick up over money market yields.

Although inflation-linked bonds are trading close to their fair value of about 2.5%, we will continue to have a significant exposure to them given the diversification properties they offer, as well as the high correlation ILBs have to our longer-term investment target.

SIM strategy
Most asset classes are trading at or close to fair value with no glaring opportunities available to investors. Equities are trading at fair value from a bottom-up valuation perspective. Given our portfolio mandate, we will continue to hedge part of the equity exposure. We may well increase our hedged equity exposure as an alternative 'asset class' going forward. We like the risk/return characteristics of hedged equity in the current environment. Although most asset classes are fairly valued we do recognise that the investment landscape is more uncertain than it has been for quite a while. We believe maintaining a well-diversified portfolio in the current investment environment is crucial for attaining our real return targets.

Market review
The first quarter of 2011 will be remembered for the tragic tsunami in Japan and continued political unrest in North Africa. Despite these factors putting a temporary dampener on markets, the global economic recovery seems to be well on its way. As can be expected, the high levels of sovereign debt remain a concern, especially in Greece, Portugal and Ireland. The local fixed interest market focused its attention on the national budget in March, with a higher than expected budget deficit putting pressure on longerdated bonds and resulting in the bond curve steepening significantly. The rand started the year on the front foot at R6.62 to the dollar and weakened slightly to R6.75 by quarter end.

The All Share Index gained 1.1% for the quarter, with Resources up 2.8%, Industrials slipping 0.3% and Financials 0.7% ahead. The MSCI World Index advanced 4.9% in dollars, while the MSCI Emerging Market Index added a more muted 2.1%. The South African 10-year bond yield increased from 8.15% to 8.76% over the quarter. The All Bond Index shed 1.6%, followed by a 1.2% gain in inflation-linked bonds. Cash was the best performing fixed interest asset class, delivering 1.4% during the first quarter. Inflation-linked bond yields were mostly unchanged for the quarter, with the R197 ending the quarter at a yield of 2.66%, close to our long-term fair value of 2.5%. Property stocks lost 2.2% during the quarter, but still delivered a healthy 15.4% for the past year.

SIM Strategy
Over the quarter we added to the portfolio's nominal bond position. Nominal bonds weakened dramatically. At yields of 8.7%, bonds are discounting a breakeven inflation level of 6%, which is too pessimistic in our view (assuming inflation-linked bonds are at 2.7%). We reinvested some of the portfolios cash into longer-dated floating-rate notes, earning an attractive pick up over money market yields.

Towards the end of the quarter, we increased the fund's net equity exposure. Market volatility around the crisis in Japan afforded us the opportunity to add to equities at attractive valuations. During the first quarter, we maintained our partly hedged equity position. For funds with international exposure, we increased our allocation to offshore assets at the beginning of the quarter. We also increased our international equity exposure via a MSCI World Tracker fund. We believe the rand is overvalued at current levels, while clients should also benefit from the offshore diversification over the longer-term.

Outlook
Nominal bond yields increased sharply and now appear undervalued from a long-term perspective, as well as from a yield perspective relative to cash. We will be increasing our nominal bond exposure cautiously above 8.7% on the 10 year bond. Potential rand weakness and high commodity prices remain a concern and thus we will look to marginally increase our inflationlinked bond exposure at appropriate levels as a hedge against unexpected inflation.

Equities are trading at fair value from a bottom-up valuation perspective. Given our portfolio mandate, we will continue to hedge part of the equity exposure. This will reduce portfolio volatility, while protecting equities against moderate market declines. We continue to weigh the risk/reward payoff in all our investment decisions, while maintaining a well-diversified portfolio.

Market review
Last year will be remembered for, amongst other things, the sovereign debt crisis (especially in Europe); a slow recovery from the global credit crisis and a general flow of funds into emerging markets in the global 'search for yield'. The South African market, particularly the bond market, benefitted significantly from these foreign investment inflows, which also contributed to the rand strengthening from R7.40 to the dollar to R6.62 over the year. The South African equity market had a strong fourth quarter, gaining 9.5%, with 6.2% coming through in December. For the year, the JSE All Share Index soared 33% in dollars. Meanwhile, the MSCIWorld Index gained 12.3% in dollars for 2010 (9.1% for the quarter) and the MSCI Emerging Market Index increased 7.4% for the quarter and 19.2% for the year. Nominal bonds returned 0.8% for the quarter and 15% for the year. Inflation-linked bonds weakened slightly over the quarter, but real yields declined by about 0.5% during the year and thus inflation-linked bonds gained 0.9% for the quarter and 11% for the year. Cash returned 1.6% for the quarter and 6.9% for the year. Property had another phenomenal year and delivered a return of 29.6% for the year and 3.1% for the quarter.

What SIM did
During November, nominal bonds weakened significantly when yields increased by 50 basis points (bps). We used this opportunity to increase the portfolio's exposure to nominal bonds again. Increasing nominal bond exposure at 10-year yields of 8.3% or more makes sense from a long-term and short-term perspective, given that cash is yielding 5.5%. As in the previous quarter, we again participated in selected floating-rate credit issues in the primary market. We largely maintained our equity exposure during the quarter and rolled over downside protective equity structures previously put in place because equities are probably slightly overvalued at current levels. For funds with international exposure, we increased our European equity exposure, while also adding some internal property exposure during the quarter. These property stocks are trading on dividend yields of 4.5% to 5.5% and are attractive relative to international cash and nominal bonds. Given the strong re-rating of the industrial sector and the resultant price-to-value premiums of many of the industrial stocks, we see greater relative value in the financial and small-cap stocks. We are also beginning to see better value emerging in the resource sector relative to industrials. We continue to see upside in Anglo American, Sasol, Barloworld, Mondi, Nampak, Capital Shopping Centers, Old Mutual and some of our banks. We have also been increasing our exposure to selected small cap shares. We continued to reduce the Fund's exposure to Imperial and Shoprite. Both of these shares have done extremely well for our portfolios and are now trading above our measure of their fair value. We also lightened our exposure to Mr Price and Liberty Holdings during the fourth quarter.

SIM strategy
At the start of 2011, it is appropriate to re-emphasise our strategy of maintaining a well-diversified portfolio that meets our goal of achieving longer-term real returns, while avoiding capital losses over any one-year period. We also place a lot of emphasis on the amount of risk we take, or avoid, in achieving our investment objectives. With equities still slightly overvalued, we will continue to hedge a portion of our equity exposure against market declines. Nominal bonds and inflation-linked bonds are at, or close to, our calculated fair value but the 'search for yield' will also continue because money market yields are at decade lows.