Market overview
It was tough going for world equity markets in the third quarter as concerns regarding the ongoing sovereign debt crisis in Europe and the US coupled with poor economic data resulted in declines for the period. Investors were already nervous, as actions by governments and monetary authorities had not gone far enough to tackle the declining global economy. This was exacerbated by downgrades by the various rating agencies, not only of the peripheral eurozone countries (Portugal, Ireland and Italy), but also of the US, which was downgraded to AA+ with a negative outlook. Investors fled to safety assets; the spot price of gold reached an all-time high of over $1,900 an ounce and US and German long bond yields eased significantly. Unsurprisingly, large caps outperform small caps globally, although there was no notable bias in style terms.

Fund review
The MSCI AC World IMI index fell 17.9% in Dollar terms, while the STANLIB Multi Manager Global Equity fund posted a better return of -16.7%. Over the past 12 months, the Fund was also ahead of the benchmark, but by less of a margin (0.5%). In Rand terms, the Fund was positive for the quarter and up 9.6% for the year. Defensive sectors remained dominant during the period, which particularly benefited Aberdeen and Veritas, with their biases towards consumer staples and healthcare. The other three managers started the quarter well, but their cyclical positions detracted toward the end. Capital's significant overweight in emerging markets detracted from performance as emerging markets were hit in the flight to safety.

Looking forward
Since the sharp fall in early August, equity markets have been moving in a large trading range, looking to find support in a highly volatile market. Risk aversion remains elevated as uncertainty persists on the economic front. The situation today is however different to the tail risk event of 2008. Risks are currently well identified - the euro sovereign debt could have some lasting damage on European banks with negative consequences for the global economy - resulting in continued volatility. Global equity valuations are attractive however we are cognizant that the whirlwind of economic noise currently being created may result in further downside before valuations reinstate themselves as the key driver of returns.

Market overview
World equity markets have absorbed a great deal of uncertainty in the past 3 months with the imminent ending of the US QE programme, Euro zone crisis, the US debt ceiling negotiation and commodity inflation. Moreover the long-standing imbalance between company balance sheets (healthy), national debts (disastrous) with consumers stuck in the middle continues. Supply disruptions as a result of Japans natural disaster have also contributed to the current soft patch. Placed in this context the resilience of global equity markets is highly reassuring. An interesting phenomenon has developed where growth as a style is outperforming value and large caps are outperforming small caps reflecting heightened concems over the economic cycle.

Fund review
Against the aforementioned backdrop global equities were essentially flat in dollar terms. Pleasingly the Fund out performed for the quarter. Over the past year the Fund has delivered a return of 9.4% in Rands. With a great deal of uncertainty plaguing the markets we noticed some rotation to defensive sectors as healthcare, consumer staples and utilities were amongst the best performing sectors, whilst energy, financials and IT underperformed. Sector allocation on average contributed to returns, however geographical allocation was negative on relative performance, primarily due to the overweight to certain emerging markets. EM inflation, policy tightening and negative growth surprises were the drivers of emerging market underperformance. Manager performance was once again mixed with Aberdeen being the largest contributor as they posted excess retums of 336bp, while Veritas (who were also defensively positioned) and Marathon continued their outperformance of 2010. Conversely T Rowe Price and Capital lagged.

Looking forward
Despite, such a seemingly depressing macroeconomic back-drop, we believe that a slow protracted global economic recovery is still on track. As such short term bouts of equity market weakness should be viewed as an entry point, rather than an exit. The global economy was always going to be more vulnerable to shocks than normal given the historic pattern of anemic recoveries following a financial crisis. This pattern has clearly frustrated policymakers and investors alike, contributing to policy uncertainty, gun-shy investors, and choppy markets. The outlook should start to brighten as some of the factors behind the first half slowdown are essentially transitory and already appear to be improving. Also, while emerging market economies have slowed.

A bleak macroeconomic undertone emerged in the first quarter led by social unrest which swept across several MENA countries. In Portugal, a failed austerity compromise caused the collapse of the government, exacerbating sovereign debt concerns. A budgetary showdown on Capitol Hill threatened to bring federal agencies to a halt compounding matters and the earthquake in Japan, subsequent tsunami and leak at the Fukushima nuclear power plant added to the volatility. Despite this barrage of headwinds, equities managed to deliver one of their best starts to a year since 1998. Our sense is that equities gained on the back of strong underlying fundamentals. Earnings beat expectations by 5.4% driven by a significant pickup in top-line surprises. Companies continued to return capital to shareholders while maintaining strong balance sheets. The jobs and manufacturing picture continued to improve with the US unemployment rate falling to 8.8% and the ISM's three month average reaching its highest level in 20 years.

Against the aforementioned backdrop the STANLIB MultiManager Global Equity Fund produced strong positive retums for the quarter helped further by the depreciation of the Rand relative to the dollar. Underperformance relative to peers for the quarter was predominantly attributable to what is now commonly referred to as, '1he great rotation". In this regard last year's winners became this year's lagers, as evidenced by emerging markets massively underperforming their developed counterparts. GEM inflation, policy tightening and positive DM growth surprises were the drivers of the asset class's underperformance. Unsurprisingly, Japanese equities registered a fall for the quarter (market fell 20% peak to trough in March) so while being overweight EM detracted from retums, our half benchmark weight in Japan contributed positively.

The world is tightly balanced between Macro and Micro drivers. Stockpickers are generally optimistic arguing that earnings drive markets, highlighting that valuations are undemanding. This is supported by strong corporate balance sheets, pricing power in a moderately inflationary environment, extremely low interest rates, negligible wage inflation and full order books. Top down managers would suggest much of the above is due to government sponsored stimulus measures which cannot continue indefinitely. Their primary concern is the US housing market and sticky unemployment. With QE2 due to end in June they fear the market is looking a little overbought. All these arguments have merit; but unless there are dramatic changes to the macro situation, we remain broadly positive on equities.

In 2010 the MSCI AC World Index rallied 10.4%, which compares favourably to the 6.6% average calendar-year return since the inception of the benchmark in 1988. The market was volatile with only six of the twelve months producing positive returns. Emerging Markets (+16.4%) were once again the top performers during the year, while Japan (+13.4%) and the USA (+13.2%) also generated strong returns. The one region to disappoint was Europe (+1.0%) as the sovereign debt crisis weighed on retums. For the year, the Portfolio returned 13.3% vs. the MSCI World retum of 11.8% and was significantly ahead of the Lipper average. In Rand terms the Portfolio was negative 0.4 % for the year but ranked 9th best out of 24 local peers in the Foreign Equity General category, which was pleasing.

The STANLIB Multi-Manager Global Equity Fund produced strong retums for the quarter, albeit it marginally behind benchmark. This was predominantly attributable to regional allocation. Developed markets outperformed emerging markets for the quarter. Marathon was overweight South East Asia, and Aberdeen was underweight the US, which detracted value. T Rowe Price had a significant underweight in Japan, which hurt as support measures by the BOJ and strong yen continued to boost retums of the market. Unsurprisingly our defensive manager, Veritas, lagged in the bull market. The main change during the quarter was the removal of our core manager Gartmore. The company has had key staff departures recently and was effectively put up for sale. They have been replaced by Capital lntemational.

With the world index up strongly in 2009 and 2010, thoughts turn inevitably to the year ahead. The key fundamentals for equities are the outlook for earnings, valuation and the liquidity backdrop. On all three counts, the market outlook still looks favorable and we are constructive on equities for the year. Eamings are recovering and interest rates are likely to remain low in the major regions for some time. Having had a good rally, it is appropriate to be mindful of the current high levels of risk appetite making markets vulnerable to surprises and setbacks. Ultimately though, we do not believe these factors will derail the recovery, hence we are likely to view pull-backs as buying opportunities.