In dollar terms global equities were marginally weaker with the MSCI World Index declining by 0.9%. South East Asian markets were the best performers as they rebounded from the sell off of Q2, gaining 9.2%. An overweight position in Japan detracted from returns as Japan was the laggard this quarter declining 9.7%. Fortunately this was offset by good stock selection in the US and Europe. European equities gained 0.4% but the US declined by 1.8%. The funds underweight position in the US therefore also added to relative returns.

In rand terms the fund was slightly positive gaining 0.93% thanks largely to a weaker rand, which helped offset dollar losses. The largest holding in the fund, United Health Group, was the best performing stock within the MSCI as it gained 18.5% during the period under review. The US healthcare provider announced a 36% increase in second quarter profits and once again proved the importance of stock picking. Merck was the biggest loser after it announced one of its best selling painkillers, Vioxx, increased the risks of heart attacks. On a sector basis, continuing geopolitical factors such as the ongoing tensions in Iraq pushed oil prices above $50/barrel thereby helping the energy sector outperform. BP, our third largest holding gained over 8% and due to its high weighting in the benchmark was actually the second largest contributor to the index! Microsoft declined 3.2%, but due to it being the worlds largest company was one of the biggest detractors in the investable universe.

The manager believes there are uncertainties surrounding the level of employment and consumer spending in the US and therefore increased his underweight exposure to the region. The fund is also underweight the UK due to concerns about the sensitivity of the UK economy to rising rates (BOE has hiked rates 5 times already). The fund remains overweight Japanese equities as economic news has been strong and he expects positive earnings surprises.

During the quarter the Standard Bank International Fund and Standard Bank International Equity FOF were merged into one fund called the STANLIB International Equity FOF. This amalgamation broadened the mandate and allows us to make a few minor changes - which should work to the benefit of unit holders. To enhance the return we have added a new specialist global equity fund (Global Focus fund) to compliment the current core holding. The fund invests in a limited number of holdings (100 -120 shares) and is therefore much more concentrated than the benchmark SCI world index (1450 shares) and existing fund (450). It also differs from the current holding in that its portfolio construction is not bound by traditional geographic and regional constraints but focuses rather on sectors and stock selection i.e. has a "go-anywhere" investment mandate. The focused approach increases the diversification due to the correlation of the fund with the broader market and existing holding being lower.
Towards the end of last year a new lead manager was appointed. He immediately rang in the changes where the US portion (52% of portfolio) was split amongst four different sub managers (instead of one) This seems to have helped as the underlying Fidelity fund returned 2.9% in US$ terms compared to the MSCI world index, which returned 2.6% over the quarter. The overweight position in Japan contributed to returns while an underweight position in US equities also added to relative returns.
The funds exposure to Japan has been increased further as demand for Japanese equities is currently the highest its been in 3 years, thereby providing buying power to push the market higher. In addition increasing signs of economic growth have started emerging. The export driven recovery has clearly permeated to the domestic side of the economy, which is very positive. External demand, especially from China, is also driving growth. We would however advise investors to moderate expectations as recent developments in international politics, such as the attacks in Madrid and the situation in Iraq is affecting investor sentiment. It is doubtful we will see last years 30% plus returns in equities in 2004, although investors may finally benefit from some rand depreciation.

Due to the STANLIB amalgamation (27 Feb 2004), the Standard Bank International Equity Fund and the Standard Bank International Equity Fund of Funds merged to form the STANLIB International Equity Fund of Funds. The history of the Standard Bank International Equity Fund of Funds has been retained.

Global stock markets continued their post-Iraq War advance in the final quarter of the year. The Fidelity International Fund is the underlying portfolio for your fund and this fund advanced by 12% in US dollars in the 3 months to end December. Continuing rand strength versus the big currencies (up 3.7% versus the dollar in the quarter) reduced the rand return for the fund but thankfully not sufficiently this time to totally negate the positive market return. So finally the fund managed to record a reasonably positive rand return.
The Fidelity International Fund rose by 28.4% in dollars during calendar 2003 and has risen by some 42% in dollars from its bear market low, recorded in October 2002.
In order to boost the performance of the fund relative to the benchmark MSCI World index and relative to the competition, Fidelity have appointed a new lead manager in Richard Skelt, based in London.
Moreover, in a major positive change and break from the past, the US funds (typically over 50% of the total fund) will now be allocated amongst four different Fidelity US fund managers, instead of just one manager, which had always been the case over the past 13 years and which had lead to underperformance over the past four years. Richard Skelt is now free to change his portfolio allocations amongst the four managers in the US as he sees fit. So by splitting the US assets four ways there is more scope to allocate to outperforming managers and away from those underperforming. Richard has used this system successfully for the past few years in managing the Fidelity Global Growth fund, beating the benchmark consistently as well as most competitors.
One of the advantages of this approach is that style biases between the four managers in the US can be exploited, whereas in the past the US portion of the fund was heavily oriented towards growth shares.
The fund remains underweight in the US (52% vs benchmark's 56%), underweight in the UK (8.8% vs benchmark's 10.7%) and overweight in both Japan (10.6% vs benchmark 9.4%) and the Pacific ex-Japan region.