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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

• There remain considerable arguments for investing in risky assets with profit growth remaining strong and earnings surprise and corporate earnings guidance remains generally positive, if somewhat softer than a month ago.
• Equity markets also have potential latent support from balance sheet management, as many companies have the potential to increase distributions to shareholders via increased dividends or share buybacks. Valuations remain generally supportive of risk assets – for example, in equity markets, forward PE ratios are very cheap relative to interest rates.
• In FX, the ‘riskier currencies’ (such as the Australian dollar, Canadian dollar, Indian Rupee and Brazilian Real) remain generally supported by attractive and in some cases (eg Brazil), rising interest rates.
• Some of the risks that we have been monitoring have increased over the past month.
• Positive surprises for macro-economic growth and inflation data have generally weakened over the month. This softening has been led by the United States, where macro-economic surprise has turned negative. The weaker tone in leading indicators noted last month continued in June.
• Our leading indicators have fallen to flat, the weakest they have been in over a year. This weakness has been broad-based across all major regions and across both developed and emerging markets.
• While macro policy settings continue to be extremely supportive in general, fiscal policy has become less expansionary of late in Europe and potentially in the US. That said, we continue to expect a mid-cycle slowdown, as monetary policy globally remains extremely supportive, with the potential for further quantitative easing if required.
• Although fiscal policy is yet to be tightened significantly (outside the distressed economies in peripheral Europe) the impact of fiscal policy on the global economy is transitioning from a major positive over the past year to neutral, and it will become a significant negative in 2011.
• The private sector could normally be expected to take up the slack at this stage of the cycle as labour markets and capital expenditure recover, although the recent softer tone of macroeconomic data has cast that in some doubt.
• The European sovereign debt situation stabilised somewhat in June. However, spreads of peripheral EMU countries debt remain at historically extremely wide levels, indicating market scepticism that the very extensive liquidity support provisions put in place will be a permanent fix.
• While the European sovereign debt situation is by definition political, potential bearish triggers for renewed market concerns may include:
  – a situation where significant parts of the banking system in some EMU countries become distressed and require government support or even in an extreme case, nationalisation; and
  – this could, in turn, stress even the very considerable support arrangements put in place by the EU. If, however the sovereign debt of small EU countries is increased through absorbing domestic banking sector debts, then the total sovereign bailout required would increase. This could cause the EMU sovereign bailout fund to require a capital increase or risk being downgraded by ratings agencies.
• On the positive side, we think that recent months have demonstrated the depth of commitment by European political leaders to the Euro. Should further support be required, we have little doubt that it would be ultimately forthcoming.
• The US economy appeared to slow in June with a number of potential reasons causing this.
  – the expiration of some Federal Government measures to stimulate the housing market appears to have had a larger than expected impact on the housing market;
  – the prospect for tighter fiscal policy also appears to have increased; and
  – a number of tax cuts passed during the Bush administration are due to expire soon.
• It is also possible that increased financial regulation flowing from the financial reform bill may have the unintended macro economic consequence of tightening credit. This of course is not confined to the US, as other national parliaments are also in process of increasing financial regulation and there are also the transnational rules of the Bank of International Settlements under Basle 3.
• Finally, the cyclical risk in China will remain a key focus in coming months as evidence builds that the economy is slowing. We expect the slowdown in growth to be benign, but it will take some months to get some visibility on economic growth in 2011 in China.

Performance Contributors

• June was another volatile quarter. Equity markets and other risky assets started the quarter strongly, and then sold off significantly on the back of the fiscal issues in Europe and heightened concerns about a slowdown in the Chinese economy coupled with an unexpected apparent slowdown in the US economy.
• The Funds’ performance for the quarter was -6.05% (before fees) against the benchmark -5.09%.
• Over the quarter the main detractor to performance was Australian equities.
• Over the past year the strategies which contributed positively to performance were Global Allocation and Australian Fixed Income with tactical asset allocation and Australian equities detracting from performance.

Portfolio Strategy & Outlook

• In terms of positioning in asset allocation, positioning remained cautious throughout the quarter. Our process is to back strong fundamental ideas with rigorous risk control when opportunities arise.
• During the quarter, the confluence of generally positive, although softer, fundamentals with generally negative and highly volatile momentum in risk assets meant that such opportunities were difficult to identify.
• During the quarter active risk levels remained low. It is most likely that this fall in risk assets is corrective rather than the start of a new bear market, but after such a long rally with minimal corrections it is possible that this consolidation phase lasts for several months.

About the Funds 

Investment objective

The investment objective of the Funds is to provide investors with the highest possible returns consistent with a "balanced" investment strategy encompassing:

• an orientation towards growth assets;
• a bias toward Australian assets; and
• active asset allocation, security selection and risk management.
   

 Fund strategy

The investment strategy of the Funds is to provide investors with a diversified exposure to the best investment teams and strategies that BlackRock has globally within the context of an Australian based "balanced" investment portfolio.

The Funds’ strategy is built around two steps:

Establishing the most appropriate strategic benchmark subject to the growth/income splits and market risk exposures of the range of Australian balanced funds; and

Enhancing the returns of the Funds relative to the strategic benchmark to the maximum extent possible by utilising investment teams, strategies and techniques from BlackRock's resources around the globe subject to a risk budgeting framework.

Designed for investors who…

• Seek a fund which aims to provide a combination of capital growth and income.
• Accept the risk that moderate volatility may be experienced.

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