It was a dull quarter for international equities with the MSCI World Index (in dollar terms) down 0.9%. Beside the increase in terror activity and other geopolitical concerns, global economic fundamentals started to deteriorate relative to the previous quarter. World economic growth, although currently high, is loosing momentum fuelled by higher oil prices and interest rates. Broadly speaking, this has had a negative impact on global inflation. Whilst pockets of strong economic growth do exist in China and parts of the Asian Pacific Basin, the largest region (USA) is definitely being negatively impacted by these factors, as highlighted by a weakening currency, massive budget deficit (3.5% of GDP), trade deficit ($55bn) and slower job creation. Things could get worse if the oil price moves higher as a $5 increase in the price of oil knocks 0.3% off world GDP growth per year.

During the quarter the Rand depreciated marginally from R/$6.22 to R$6.48, after touching R$5.89 in July. As a result of the currencies weakness, the MSCI (in Rand terms) was up 3.2%. Although the fund under-performed its benchmark, it should be noted that the benchmark was virtually impossible to beat over the period given increased volatility in the Rand and oil price. In fact over the last 12 months, only two foreign general equity funds beat the benchmark. The fund was ranked 9/26 over this period with a return of 5.6%.The best performing region was the UK (+2.2%) where the fund had an 11% weighting. The worst performing areas were Japan (-8.1%) and Asia Pacific Basin (-2.8%). Marginal overweight positions here hurt the fund during the quarter however over the longer term, this has been a profitable area to invest. These two funds remain well ranked versus their international peers over the long term.

International equity markets had a positive start to the year although momentum turned negative in February and March following increased terror activity and geopolitical concerns. Question marks relating to the sustainability of the global economic recovery also started to emerge, which was negative for equities. On the whole, the MSCI World Index ($) managed to fi nish up 2.7% on the quarter.
Regional Review - Continental Europe (-0.3%) and the UK (+1%) lagged other international equity markets. Whilst economic data diverged between these two regions, investor confi dence was lost toward the end of the quarter following the train bomb attacks in Madrid. Cyclical sectors were pounded as investors moved toward more defensive sectors, benefi ting the healthcare and tobacco stocks in these regions. Although economic and corporate data was strong in the US during the quarter concerns over the growing budget defi cit and weakening dollar subdued the equity markets. Both the Dow and the NASDAQ were marginally negative. The strongest region was Japan (+14.8%) where markets reacted positively to the news that Japan's current account surplus widened to record levels during the quarter. Strong household spending and employment numbers point toward an improved outlook for the Japanese economy, spurred on by a strengthening currency relative to the dollar. The Asian markets (+12.3%) continued to perform strongly, notably Korea and Malaysia.
Fund Review - In Rand terms the MSCI World Index was down 2.2% following the persistent strength of the Rand, which fi nished the quarter at R6.30/$. The Portfolio outperformed its benchmark for the quarter with a return of +1.22% and was ranked in the top quartile of Foreign Equity General unit trusts. The Portfolio improved its long term ranking to 4 / 21 during the period. The Portfolio had roughly 7% exposure to SA cash during the period, which benefi ted performance. However it was the overweight exposure to Japan and the Asia Pacifi c Basin that were the key contributors to out performance. Each regional Russell Fund continues to perform well relative to their respective peers and risk is well controlled at the Portfolio level. With the most talented global equity managers managing your money (as selected by Russell Investment Group) the only variable to consider is the direction of the Rand. Currencies are however notoriously diffi cult to call, literally amounting to "a fl ip of the coin" as Greenspan puts it. STANLIB have continuously revised down their forecast on the Rand, expecting it now to fi nish the year closer to the R7.00/$ mark than the R6.00/$ mark. This seems plausible should local interest rates pick up toward the end of the year and the strong commodities cycle, driven by global economic growth, falters.

Due to the STANLIB amalgamation (27 Feb 2004 Funds Liberty Multi-Manager International Fund of Funds will be renamed to the STANLIB Multi-Manager International Fund of Funds.

Global equity markets enjoyed an impressive recovery in the second half of 2003. For the fourth quarter, the MSCI was up 14.4% in USD terms although volatility increased during the period. European (+21.7%) and UK (+17.7%) equities led the charge, whilst the USA (+11.6%) lagged. Technology shares continued to recover with the NASDAQ (a general barometer of sentiment) producing a return of 12.1%. Although the rand strengthened during the quarter, it showed signs of weakness during December. In rand terms the MSCI produced a return of 9.1% for the quarter, whilst local equities returned 17.1%. The fund produced a return of 5.7% for the quarter relative to its benchmark of 9.6%. The returns for the quarter are not directly comparable with the benchmark, as the underlying international unit trust holdings in the fund are priced with a one-day lag. Excessive movements on the last day of each quarter can have an impact on the funds return relative to the benchmark. In the longer run these pricing impacts get smoothed out.
The fund remains fully invested in the underlying Frank Russell regional funds. There is only a small portion of local cash in the fund, which hurt performance during the quarter given the stronger rand. This has however clearly benefited the fund in the early part of 2004 following significant rand weakness. The fund remains overweight US small cap equities, which has benefited the fund tremendously as US large cap equities were a relative under performer. There has however been a marginal improvement in the relative rankings of the FRIC US Equity Fund versus its peers over the quarter. Although the Asia Pacific and Japan regions produced positive returns for the fund during the quarter, a small overweight position relative to the benchmark detracted from value as these regions under performed. The FRIC Asia Pacific Basin and FRIC Japan Equity Fund continued to be ranked highly amongst their respective peers.
This fund is positioned to benefit significantly from rand depreciation and its multi-manager investment approach will ensure that returns are achieved at lower risk than comparable single manager funds. This combination should be attractive for investors wishing to take some of the risk out of investing in the international equity markets and benefit from the current strength in the rand.