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Gross performance returns and benchmark performance shown do not include expenses, fees or tax. Net performance returns are prepared on an exit-to-exit fee basis which includes all ongoing fees and expenses.

Market Review

• March saw the Australian equity market have its biggest monthly gain in six months and recorded its highest monthly close since August 2008.
• In contrast the performance for the quarter as a whole was much more subdued with the S&P ASX/200 Accumulation Index ending the quarter up just 1.4%.
• Investor focus was centered on ‘reporting season’ as most ASX 200 companies reported earnings for the first half of the 2010 financial year.
• Overall earnings reports saw positive surprises outweighing negative ones, but guidance and outlook statements were frequently guarded.
• The best performing sectors for the quarter were Information Technology (+7.1%), Healthcare (+3.2%) and Financials ex Property Trusts (+2.2%).
• The worst performing sectors were Telecommunications (-12.8%), Real Estate Investment Trusts (-3.3%) and Energy sectors (-1.3%).
• Resources (+0.3%) was more or less in line with the broader market: a tough January, marked by concerns about China’s need to tighten monetary policy, was followed by a recovery to the end of the quarter which reflected very strong bulk commodity pricing and a shift by two of the three major producers to a spot-based price system for iron ore.

The five best and worst performing stocks within the S&P/ASX 100 Leaders Index over the month are shown below:

• In the US the S&P 500 (+4.9%) posted a gain for the fourth quarter in a row and at its close at the end of March, had gained 73% from the closing low of 9th March 2009. Volatility continued to slide as the VIX index of Implied volatility saw out March at the lowest monthly close since June 2007.
• Reporting season in the US had fourth quarter earnings on average beat expectations. US non-farm payrolls fell by 171,000 from November to February, an improvement on the 385,000 drop in the previous three months.
• The US Federal Reserve (the Fed) continued to indicate that rates will stay low for an extended period, but it increased the discount rate, which is used for emergency borrowing by banks from 0.5% to 0.75% and moved the term of discount window lending back to an overnight duration.
• China reported a real GDP growth rate of 10.7% y/y for the fourth quarter of 2009 but the focus was on the moderation of credit-led stimulus policy. The People’s Bank of China raised the minimum reserve requirement for banks twice in the quarter, both times by 50 basis points (bps), to 16.5% for large banks and 14.5% for small banks.
• Greece dominated headlines during the quarter as it negotiated a financial aid package with other European Union governments and the International Monetary Fund. Attention was also drawn to precarious fiscal situations in Spain and Portugal.
• The Reserve Bank of Australia (RBA) surprised many forecasters by leaving the cash rate unchanged at its February meeting but resumed the tightening cycle in March with a 25 bps hike to 4.00%, the fourth hike since last October.
• Employment growth slowed sharply in February which saw just 400 jobs added. The unemployment rate dropped from 5.6% in November to 5.3% in February.
• The impact of rising interest rates has begun to impact the consumer, as retail sales fell by 1.4% in February and building approvals fell by 3.3%.
• The Australian dollar (AUD) tried to break through the USD92 cents ceiling during the quarter, before finishing at USD91.6 cents.
• Financials (+1.4%) underperformed the market as strong bank sector performance (+5.8%) was offset by the underperforming insurance (-10.9%) and diversified financial (-1.9%) sectors.
• The Insurance sector underperformed, as IAG (-3.7%), AXA (-3.6%), AMP (-7.5%) all dragged while QBE (-10.1%) was the largest detractor.
• The Telecommunications sector significantly underperformed the market dragged down by Telstra (-12.8%) which experienced further management turnover, the latest departure being the heads of media and consumer, while regulatory risk continues to weigh on the stock.
• Health Care (+3.2%) was one of the top performing sectors over the quarter driven by strong outperformance from Ramsay Health Care (+27.8%), ResMed Inc (+18.0%) and CSL (+12.1%) with all three companies reporting strong results and positive earnings guidance over the reporting season.

Performance Review

The main drivers of Portfolio performance during the quarter were as follows:

Key positive influences:

• Overweight ResMed Inc (RMD) vs Industrials
• Overweight Seek Ltd (SEK) vs Industrials
• Overweight IT Services vs Industrials

Key negative influences:

• Overweight Isoft Group Ltd (ISF) vs Defensives
• Overweight Qantas Airways Ltd (QAN) vs Market
• Overweight Resources vs Industrials

Please note that all performance is presented in absolute terms.

Market Outlook and Portfolio Strategy

• We see further evidence of earnings leverage to an improving economy in a generally better than expected reporting season, and we remain focused on the shape of the recovery.
• Continued strength in expectations for GDP growth, housing data and strengthening employment growth is encouraging, although we believe that the outlook for retail sales growth could be weaker than expected, with the roll off of fiscal stimulus more material than implied by the market. Strength in Asian economies, led by China, remains significant.
• In terms of stock-specific insights, the Fund retains overweight exposure to Resmed (US dollar weakness providing an attractive entry opportunity into a medical device company expecting growth on the release of an upgraded product), iSoft (which owns the leading hospital technology within a strong growth industry), Seek (benefiting from growth in job market and employment conditions), Brambles (exposure to improving US economy) and Asciano (improving port volumes and coal contract wins), and underweight positions in QBE (stalled organic growth with limited upside from price increases) and Woolworths.
• During March, we established overweight positions in Suncorp (earnings upside from better than expected banking profits and positive tailwinds in general insurance) and Amcor (upside to consensus earnings from economic recovery and synergies from Alcan acquisition) and closed out positions in Myer and Pacific Brands.
• In terms of sector specific thematic insights, we increased the overweight position in resources (renewed growth in China underpins valuations and drives earnings growth).

About the Funds

Investment objective
The Funds aim to achieve capital growth through investment in Australian shares and other securities and to provide investors with some tax-effective income through the distribution of franked dividends. We aim to achieve this goal by outperforming the S&P/ASX 200 Accumulation Index over the medium to long term.

Fund strategy
The investment goal of the Fund is currently pursued by investing in a concentrated portfolio of Australian shares. The portion of the Fund not invested in securities will be invested in the money market (‘cash’) through a BlackRock wholesale fund.

Designed for investors who…

• Seek a fund which aims to provide capital growth and some tax effective income.
• Accept the risk of significant price fluctuation