Equity markets again fell sharply in September as fears of a return to global recession combined with continued turbulence in the Eurozone to drive investors away from all risky assets, even the previous "safe haven" of gold.

As you might expect, analysts have - after the market fall of course - become far more cautious on corporate earnings prospects, with upgrade:downgrade ratios heading rapidly to "recessionary" sub-30% levels, even though the quantum of average downgrade is at this stage still modest. Valuations have thus fallen to historically low levels with the world index currently trading at 11x 2011 earnings and (if the forecasts are to be believed) below 10x 2012.

Our approach has continued to suffer through this sharp market correction. One reason is our bias towards mid-cap companies at a time when investors are flocking to the "safety" of the largest stocks. At the same time the market has punished a large number of undervalued cyclical names without any evidence that their business prospects are materially deteriorating. Where the evidence has indeed been deteriorating we have of course already been selling. Looking ahead, investors should eventually refocus on those companies which are able to maintain high profitability and growth, which of course is what we shall continue to do.

The overall shape of the portfolio has changed somewhat over the past month with a reduction in industrial exposure in favour of consumers and services. Our largest overweight position remains in technology with a continuing substantial underweighting of financials. Our largest regional position remains our overweighting of North America, while we remain underweight in Europe and the UK.

Fund Review
The fund continues to be a top performer in the general equity category and is placed favourably in all periods to the end of June 2011. The fund has outperformed its benchmark by more than 3% during the quarter and outperformed by just less than 9% over a one year period! Strong stock selection, especially in North America and across all sectors drove outperformance in the second quarter. Investors continue to focus on high-quality, highly profitable companies with strong eamings revisions, which of course is the Manager's investment approach.

Equity markets moved broadly sideways through the second quarter, with a very strong rally in the final week of the month tipping the score into positive territory. The MSCI World Index rose by 0.7% in US dollar terms, leaving it up 5.6% for 2011 so far. From a sector perspective, in very broad terms cyclically sensitive areas tended to underperform, led on the downside by (inter alia) steel, energy and mining, while defensive sectors like pharmaceuticals and foods led on the upside.

While the travails of the eurozone continued to dominate the headlines, the specific impact of European news flow was, as regional performances suggest, less easy to discem in the markets, save perhaps for the month-end rally which coincided with a supposed "deal" agreed between EU govemments and Greece's creditors together with the passing of the next round of austerity measures in the Greek parliament. Even so it is probably just as plausible to attribute the end-quarter rally to a technical rally as much as to anything especially fundamental.

Looking Ahead
Certainly one of the more encouraging features of the year has been investor willingness to see the world as a glass half-empty rather than half-full, suggesting that there is plenty of cash still on the sidelines. Indeed, with US equity mutual fund outflows continuing at a hefty pace, it is difficult to describe sentiment as anything other than cautious - a good sign from a contrarian point of view! Given that equity valuations appear reasonable there remains scope for any positive economic and/or eamings surprises to be taken very positively by the market. We shall see what eamings season brings us.

The overall shape of the portfolio has once again not changed markedly over the past quarter. The Manager continues to favour emerging markets, especially relative to continental Europe and the UK. Sector and industry positions also remain largely unchanged. IT and high quality industrial cyclical sectors continue to provide best ideas while the Manager struggles to find many good ideas amongst the world's major banks.

Fund Review
The STANLIB Global Equity Feeder Fund was ranked 2nd in the foreign equity sector for the quarter and was ranked 1st for the month of March. This was attributable to impressive outperformance of the underlying fund which was placed favourably on a sector and regional basis in what has been a volatile month in global equity markets.
The unfolding tragedy in Japan and the soaring oil price provided plenty of excuses for global equity markets to sell off in the first quarter. In the end they put in an extraordinarily resilient performance. While Japan itself ended the quarter down 5%, recovering somewhat from its initial larger falls, the MSCI World Index rose by nearly 5%. European markets led the way, rising 8%, followed closely by North America at 6%. Developed Asia, the UK and emerging markets (the latter putting in a strong rally late in the quarter) all rose between 2 and 4%. The strongest sector over the quarter was unsurprisingly oil and gas, rising 14%. Also strong were a rather mixed bag of healthcare, media, aerospace, construction and insurance, while only household goods, electricity and mining fell by more than 1%.
Strong stock selection in North America and within all broad market sectors drove outperformance over the quarter. Perhaps as a result of the recent stalling in aggregate market earnings revisions, investors have been focusing particularly closely on relative earnings revisions, as well as returning to focus on those companies with high structural profitability and those which appear cheap relative to their future growth prospects.

Looking Forward
Earnings revisions activity slowed in March, as we await first quarter results and as Japanese analysts are understandably taking time to take in the magnitude of what has happened. The current consensus world earnings growth forecast for 2011 is an increase of 17% which puts the world index on a P/E ratio of 12.6 - not expensive by historic standards. While interest rates may still rise in the near term in Europe (despite the continuing fiscal crises!), events in Japan have probably put back prospects for global monetary tightening by some quarters, at least relieving that potential source of pressure on equity prices.

Fund Review

The underlying investment in the STANLIB High Alpha Global Equity fund had a positive quarter outperforming the benchmark and providing pleasing one year returns. Global equity markets ended 2010 on a strongly positive note. The MSCI World Index rose 9.1 % in US dollar terms in the final quarter taking the return for the year as a whole to 12.3%. Japan and North America led the rally, rising by 12% and 11 % respectively, while continental Europe lagged, rising 4%, and thus just managing to put in a positive return for the year of 2.4% (though the EMU/Euro member countries within Europe actually fell 3.4% over the year.) Other than lagging Europe, most regional returns were notably close to each other for the year. Emerging markets rose by 19.2%, Asia ex-Japan 17.1%, North America 16% and Japan by 15.6%. The UK was stuck halfway between the leaders and laggards at 8.8%. All industry groups rose through the quarter. Cyclicals such as mining, engineering, energy, chemicals and autos led the way, while banks lagged along with the more defensive pharmaceutical and telecom sectors. 2010 as a whole has seen something of the "return to rationality" which we both expected and hoped would occur, with investors focusing on underlying company profitability and rewarding those companies whose prospects were improving the fastest. An interesting aspect of 201 0 was perhaps the historically low spread of returns across companies, with the best outperforming the worst by a smaller than average margin. As the "easy" earnings growth is likely to be behind us, we might expect this gap to be wider in 2011, hopefully to our advantage.

Looking Ahead

2010 also ends on a positive economic note, with data releases on balance continuing to surprise to the upside and analysts continuing to upgrade corporate earnings expectations for 2011. The analysts' consensus is now for a 16% rise in earnings next year, following this year's impressive 44%. This puts world markets on a trailing price/earnings ratio of under 15, and a forward ratio of around 12.5. While not therefore at unreasonable valuations, the key questions for 2011 remain how markets might react were global interest rates and bond yields finally to rise to more normal levels, how much further the authorities in emerging markets might tighten policy (most obviously in China), and how the problems of the Euro zone will develop.