Global equities disappointed over the quarter, yielding 2% in USDs and -0.5% in rands. The pedestrian returns were due to a sharp rise in credit spreads following the sub-prime blowout and concerns that the credit freeze would drive the US economy into recession. Following the US Fed's 50 basis point rate cut in September, global equities surged towards quarter end. With a further rate cut expected before year end, equities are likely to continue rerating. Emerging markets continued to outperform developed markets by a large margin. The value-growth blend strategy employed in the fund worked well, and the holding in the European fund recovered strongly towards quarter end.

Fund positioning continues to favour the Eurozone and the Asia Pacific regions, with an underweight exposure to the US. The fund had a good quarter, with the underlying managers showing resilience in the face of the turbulent markets. No significant manager changes took place during the quarter.

Global equities returned 5.8% (in USDs) over the quarter, handsomely outperforming the -1.7% yielded by bonds. The improved visibility in the global growth outlook and the rebound in US leading economic indicators were all generally supportive of equities. While US growth will still fall short of trend growth this year at around 2.2%, the re-synchronisation of the US with the global economy will have positive spin-offs for Japan and the rest of Asia. The normalisation in yield curves, in particular the US, reflects the improved visibility in growth and the risk of higher inflation going forward. The normalisation in yield curves, in particular the US, reflects the improved visibility in growth and the risk of higher inflation going forward.
Fund positioning favours the Eurozone and the Asia Pacific regions with an underweight exposure to the US. This position has become more pronounced during the quarter.

The fund had a good quarter, with the underlying managers showing a strong recovery. No significant manager changes took place during the quarter.

Global equities yielded 2.1% in USD terms over the past quarter, significantly lower than the 8.0% reported during the forth quarter of 2006. The disappointing relative performance can be attributed to slowing earnings growth, mixed economic data releases and heightened market volatility. Although valuation metrics remain positive, with the Fed funds futures supportive of equities, slowing earnings momentum on the back of slowing growth will limit the upside to equities in the year ahead.

While this view is at odds with the Greenspan view that the US economy could be headed for recession by year end, SMMI supports the Bernanke view that growth will pick up in H2 as manufacturing recovers. There were no manager changes over the quarter.

The welcome mollification of global inflationary fears around mid-2006 led to lower bond yields and higher equity prices in the second half of the year. Credit spreads narrowed again after widening in the middle of the year, volatility stabilised and emerging markets recovered strongly along with developed equity markets. All eyes remained on the next step of the US Fed, and the end of US interest rate hikes was heralded by many market commentators. Judging by the latest statement early in the fourth quarter, this expectation appeared to be on track.

However, strong economic performance in many major areas around the globe during the last quarter has served to shift expectations again, and longterm interest rates rose towards the end of the quarter and into the new year, albeit not back to the June peak. The question of "whether" rather than "when" the US interest rate cycle will peak in 2007 is once again being asked. If the anticipated global economic slowdown in 2007 is more muted than expected, the outlook for global equities remains positive, but stronger growth and the accompanying interest rate adjustments may introduce more risk to global bond yields. During 2006 global equities outperformed bonds strongly. We expect equities to outperform bonds in 2007 as well, but perhaps not to the extent seen in 2006 (20% for equities versus 7% for bonds in US$).

Within the Global Equity Fund, exposure to large-cap shares was increased (via an MSCI tracker), as we believe that the environment for larger shares will improve as the economic cycle matures. The exposure to a more aggressive fund with a higher emerging-market weighting was maintained, and the fund benefited as emerging markets recovered strongly in the second half of the year. The holding in European equities benefited the fund as the region was one of the better-performing ones over the year. The value-growth blend portfolio managed by Alliance Bernstein delivered an excellent performance given that value-style portfolios strongly outperformed growth portfolios after being the poorer-performing style in 2005. Value has now outperformed growth for five out of the past seven years. Our style-blend portfolio aims to remove the risk of mistiming switches from one style to another by maintaining an even blend over time