Global equities declined by 17.0% in USD over the quarter, with rand returns down a more muted 12.6% following the depreciation in the rand/US Dexchange rate. Emerging-market equities fared even worse, declining by 28.7% in USD and some 24.9% in rands. The sovereign risk premium surged to414 basis points from 295 the previous quarter, highlighting the increase in risk aversion towards emerging markets in general. With visibility in the global growth outlook having deteriorated further and earnings expected to remain under pressure for longer, the near-term outlook for global equities remains poor. The sharp pullback in the ISM Index and further widening in corporate bond spreads suggest that even non-financial company earnings -up some 3.9% year on year in the second quarter - will likely turn negative in the coming quarters. Given the lead and lag relationship between US earnings and the rest of the world, disappointing earnings growth will become more broad based and will likely continue for a number of quarters. Despite all the recent doom and gloom, equity market valuations are attractive, and given the coordinated global bail-out that has occurred it could well present good buying opportunities on a 12-month view.

The fund fell by 11.75 % in rand terms for the quarter, outperforming the MSCI World Index which declined by 17%. We are still happy with the blend of managers and no major changes where made to the fund.

Offshore assets came under pressure over the past quarter on signs of a further deterioration in the global growth and inflation outlook. Global equities yielded negative returns of 2.5% in USDs and 5.6% in rands. Emerging-market equities fared marginally better, declining by 4.7% in rands. Leading economic indicators, confidence indices, jobs data and purchasing manager indices for the US, Eurozone and Japan all weakened over the quarter, suggesting that earnings will remain under pressure for longer. Emerging markets have not been left unscathed either, with growth estimates also being revised lower on interest rate rises and increases in banks' reserve requirements to multi-year highs. Chinese banks now hold 17.5% of deposits with the central bank, while India's cash reserve requirement has been increased to 8.75% from a low of 5.5% early in 2007.

Of particular concern to the equity market is the surge in headline inflation fuelled by rampant oil and food prices. Apart from the obvious risks to consumption expenditure from rising inflation, petrol price subsidies in emerging economies like India and China have also been cut, further adding to the drag on global consumption. Over the near term, increasing supply disruptions linked to the hurricane season and demand-side pressures from the Northern Hemisphere winter are likely to propel prices higher.

The drag that headline inflation has on equity market valuations suggests global equities are also no longer cheap - a fundamental shift in view from the previous quarter. Equity markets are therefore vulnerable not only to declining earnings growth but also to declining valuations.

The fund was fully invested for most of the quarter except towards quarter end when there was a large cash position due to transactional reasons. This was rectified shortly after quarter end.

The background for financial markets in the first quarter of 2008 was one of continued uncertainty. A spate of worrying economic news from the US and Europe fuelled fears of a recession in the US and lower growth for the rest of the OECD and key emerging markets, such as China. In response to this the Fed funds rate was cut by an unprecedented 75 basis points in January between scheduled meetings, with a further 50 basis points cut at the scheduled January meeting. This was followed by a cut of 75 basis points in March to bring the rate to 2.25%. The Fed has also now injected over $620 billion into the financial system and lent money directly to securities firms for the first time, e.g. the Fed pledged $29 billion to back JP Morgan's bailout of Bear Stearns towards the end of March.
Following the rate cuts in the US, yields fell to their lowest point since 2003. Further investment bank losses and write-downs were announced for the quarter and the total loss is now over $230 billion. Against this background equities remained volatile and were down 9.5% in dollar terms as measured by the MSCI. Emerging markets suffered more as risk aversion rose, and were down 11.3%. Our view remains that the aggressive actions by the Fed will prevent a protracted US recession and that the present pullback in equity markets has returned global equity markets to attractive levels.

During the quarter no significant changes where made to the fund as we remain happy with the blend of managers.

Global equities disappointed over the quarter, yielding -2.7% in USDs and -3.5% in rands. For the year as a whole, the MSCI Global Equity Index yielded a rand return of 4.6%. Negative earnings growth for the S&P500 during the third quarter and expectations that earnings growth will remain flat during the first half of 2008 will limit gains in offshore equities, but equity markets are likely to avoid a sharp derating given that the US Fed is expected to cut interest rates in 2008, and due to reasonable valuations in major markets. In the light of the poorer global growth outlook and the belief that the rand may be vulnerable to a surging current account deficit, we favour an overweight offshore asset allocation in 2008.

The fund has lagged the category, as emerging markets, to which this fund offers little exposure, have outperformed developed markets, which form the bulk of the index that the fund aims to track. The fund continues to track the MSCI World Index closely.