During the quarter, the fund was transitioned from a fund of funds to a feeder fund and is now invested in the STANLlB High Alpha Equity fund, managed by Origin, rather than being invested in Fidelity unit trusts. Net of the underlying manager's fees, the fund underperformed the benchmark. Global equity markets rose sharply through the third quarter overall, with the MSCI AC World Index rising 14.5% in US dollar terms, though with a great deal of volatility: strong July, weak August, strong September. Asia, emerging markets and continental Europe were the regional leaders with solid double-digit gains (with currencies playing a big role), while Japan was the notable laggard as continuing upward pressure on the Yen raised further deflationary fears for the Japanese economy. Sector leadership was not quite so well defined. Classic cyclicals such as engineering and steel performed well, but so did banks and software, while retailers and paper stocks lagged along with more obviously defensive sectors such as utilities and beverages.
It is actually quite difficult to know exactly how to explain the quarter's strong if erratic gains. Economic data releases were on balance in line with expectations, and analysts have if anything been cautious about raising estimates. Perhaps a technical explanation would be more accurate in this case. At the start of the quarter markets appeared oversold, having fallen back very sharply in 02, while investor sentiment surveys were at that point close to bearish lows. Against a background of attractive valuations (below 13x 2010 earnings) and continuing loose monetary policy with strong hints of a second dose of quantitative easing ahead, it therefore did not take much fundamental news to spark a rally.

Looking Forward:
While the rise in prices has obviously taken valuations higher, at still below 14x 2010 and around 12x 2011 consensus earnings, global equity markets are not obviously expensive. Meanwhile from a technical perspective the world index has broken above both the highs of two months ago and the key 200-day moving average, both positive signals.
With aggregate earnings upgrades having stalled, investor attention has been drawn more clearly to those companies whose estimates are still being raised. By the same token, investors have also been attracted by companies with the strongest profitability and high expected future growth. We regard both of these developments as part of what we have previously described as the market's return to "rationality" - a return which clearly suits our own investment approach.

The STANLIB International Equity Fund of Funds will change it's name to STANLIB Global Equity Feeder Fund, effective from 30 June 2010

Fund Review
The portfolio posted a US Dollar return of 6.2% during the period under review, which was marginally ahead of the benchmark. Attribution shows that the aforementioned was largely due to an overweight emerging market position. Similarly the growth bias within the portfolio contributed to returns; however this was offset by a large-cap tilt, which detracted. Finally the benchmark has 5% in Rand cash and we were fully invested offshore. This masked some of the things we got right as the local unit continued to strengthen against the US Dollar to be the second best performing currency in 2009 - after being the worst in 2008. Relative to peers the fund is in the top quartile for the calendar year and is in the top half of its sector over 3 and 5 years.

Looking Forward
Equity markets have made a spectacular recovery from depressed levels reached earlier in the year. Progress in 2010 is likely to be more subdued but should be positive. Despite the rally many investors remain fearful of a double dip recession (not our base case). Companies have reacted swiftly to the recession so earnings should not act as a drag on equity markets. Conversely the biggest risk to markets is a de-rating.