It was a volatile quarter for global stock markets. July was an excellent month as equities rebounded strongly after a two month correction with pessimism having reached extreme levels and markets being oversold. Some of these gains were given back in August, only for the quarter to end strongly as fears of a "double dip" abated with the release of better than forecast US data and solid China data. Investors even latched onto negative data releases (evidencing lacklustre consumer demand and stubbornly high unemployment) as good news for the stock market as it increased the likelihood of the Fed engaging in "QE2" which would result in the debasement of the US dollar. The All Share Index gained (+13.3%) for the quarter, with the rally led by large/ mid caps and industrial stocks. Property (+13.7%) put in another strong quarter, no doubt a beneficiary of the SARB interest rate cut and a continued drop in reported inflation. Bonds (+8.0%), income (+2.3%) and cash (+1.5%) produced positive returns with the longer end of the curve outperforming significantly. Global equities ($) gained (+14.3%), as did global bonds ($) (+7.3%); however due to Rand strength, the Rand returns weren't as strong at +4.0% and -2.4% respectively.

On a see-through basis, we were overweight local equities, but underweight global equities, relative to benchmark at quarter end (we have been sellers of local equities into recent market strength). We were marginally underweight bonds (and had relatively low duration) with the deterrent of historically low interest rates being countered by favourable inflation data. The Rand strengthened over the quarter, providing us with an opportunity to move more funds offshore; we ended the quarter with a slight underweight relative to benchmark. We remain of a cautious stance after the recent strong rally in stock markets amidst an environment that continues to be highly uncertain.

The Portfolio ranked 8/15 amongst its peers for the quarter and 9/15 for the past 12 months (ahead of peers by 0.2%), over which period our building blocks performed well versus their respective benchmarks.

The 4th quarter investment environment favoured riskier assets as the stimulus lead recovery took effect. Global stock markets grinded higher and investor sentiment remained high. The All Share Index up 11.4% for the quarter, with resource shares rallying sharply. Property (+4.0%) partially participated, being held back by concerns about slowing income growth and rising vacancies. Bonds (+1.1%) and income (+2.0%) also produced positive returns but lagged equities. Global equities gained 4.6% in $ benefitting from the increased risk appetite, but global bonds lost ground (-0.8%) as US inflationary expectations picked up and continued issuance of US Treasuries flooded the market. The Rand strengthened the entire year supported by capital flows however this looked increasingly vulnerable as 2010 approached.

At year end we were overweight equities, both locally and globally, relative to benchmark. We were underweight bonds in favour of an overweight to cash, believing we are near the end of the interest-rate cutting cycle. Rand strength during the quarter increased our underweight foreign exposure in the Portfolio. We suspect that we will get several opportunities to increase foreign exposure during the 1st half of 2010, but think that for now the risk trade may be supportive of the Rand in the short term. Assuming all goes well, the soccer World Cup is likely to promote this outcome and provide mild stimulus to the SA economy in 2010. Equity markets have priced in a lot of good news and are vulnerable to a sell off should there be disappointment with the much anticipated growth in company earnings.

Relative to peers, Portfolio performance was disappointing in 2009, despite the underlying holdings all performed well relative to their respective benchmarks. We suspect that the foreign exposure of the Portfolio was higher than its peers and this hurt as the Rand strengthened during the year. We do however believe that this will contribute positively to relative returns in 2010. Pleasingly, the Portfolio outperformed its composite benchmark on a gross basis during 2009 and produced a net return of 17.8%. Over the past 5 years the Portfolio has produced a 12.6% return per annum.