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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

• Risk sentiment was weighed down at the start of the quarter by the Greek sovereign debt crisis after Eurostat announced an upward revision in Greece’s 2009 deficit.
• Eurozone leaders agreed on a 110 billion euro rescue package under which Greece would have access to bilateral loans from other Eurozone countries and the International Monetary Fund, which reduced the near term fears of default, although risk assets continued to sell off into May on continued peripheral Europe sovereign debt concerns whilst liquidation pressures raised asset correlations and led to some dramatic price declines.
• Volatility rose, most famously with the “flash crash” in mid May attributed to high frequency trading. In June the markets sold off again as they tuned into softening economic data coming out of the US and China.
• US equities outperformed in April and May on positive economic data and a solid reporting season, which exceeded expectations as profits – and more importantly – sales revenues coming in ahead of expectations. However markets closed down in absolute terms in an environment marked by heightened risk aversion and weaker data as the quarter closed out.
• UK equities also fell over the quarter with weaker industrial metals prices, on the back of a tightening Chinese property market, was reflected in mining shares.
• British Petroleum’s woes in the Gulf of Mexico also weighed on the market through the quarter. June also saw parliamentary elections in the UK with the Conservative-led coalition seen as potentially positive for the UK economy.
• European equities were mixed with European peripheral markets continuing to suffer from Greek contagion issues, however large parts of Europe are expected to benefit as the declining euro makes exports more competitive.
• German equities in particular outperformed. Germany is seen to be in a stronger fiscal position relative to other European countries and this has positive implications for domestic consumption.
• In addition German blue chips are seen to have relative immunity to southern Europe weakness, given their exposure to US and emerging markets.
• Japanese equities initially benefited with the economy seen to be gradually improving, driven by the global manufacturing cycle recovering and feeding into exports, particularly to Asia.
• Government stimulus measures and childcare subsidies are expected to continue to support consumption. However currency appreciation later in the quarter hit manufacturers and exporters hard.
• Positive reaction to the election of new prime minister Naoto Kan, expected to pursue more business-friendly policies than his predecessor, failed to lift equities for any significant period of time, and expectations of a rise in the consumption tax provided further downward pressure.

Performance of Quantitative Strategies

• Stock selection made a positive active contribution in the June quarter.
• With the equity market downturn dominating the quarter investors sought out quality as they rotated away from higher risk companies (either systematic beta or stock specific risk) towards higher quality names.
• Thus the Capital Investment and External Financing Signal (favouring companies with stronger balance sheets), Earnings Quality Signal (companies with higher quality earnings reported in income statements) and the Earnings Sustainability Signal (companies with higher profitability ratios) were the strongest contributors to stock selection for the quarter.
• Earnings Surprise and Risk Control were also positive with Price Momentum and Japan Signals flat.
• The Other Japan and Value signals detracted from performance during the period.

Trading Strategies

• Stock Substitution trades were positive for the June quarter with merger arbitrage and event driven positive and relative value negative for the quarter.
• In merger arbitrage the most profitable trades were in June month, including Mariner Energy/Apache and Smith International/Schlumberger deals in the energy sector. The XTO Energy/Exxon Mobil merger successfully completed on June 28 and had a positive effect on the performance of the entire merger arbitrage book.
• Among the event driven trades, trades around the annual reconstitution of Russell indices on June 25 were the largest positive contributors.
• The additions of Berkshire Hathaway to the US S&P500 and several US companies that changed their country of incorporation, e.g. Accenture, Covidien, Tyco, presented a larger number of trade opportunities.
• Other positive contributors included trades based on Mead Johnson and AOL spin-offs and trades based on Madison Square Garden and Liberty Starz/Direct TV spin-offs.
• The relative value trades detracted from performance.

About the Fund

Investment objective
The objective is to out-perform the Morgan Stanley Capital International (MSCI) World Index, ex-Australia, by approximately 1% per annum (before fees).

Fund strategy

• The Global Equity Enhanced Index funds are managed to appear similar to the index in terms of key characteristics but, within this constraint, contain a large number of small stock specific positions
• Our investment philosophy relies on opportunistically applying a wide set of investment strategies and combining these strategies into a highly risk controlled portfolio that shares similar risk characteristics with the benchmark.
• We believe that superior, risk adjusted returns can be achieved by capitalising on a broad set of quantitative stock selection techniques and trading strategies designed to exploit predictable market anomalies.
• In contrast to traditional active management, these opportunities are clearly measurable and do not rely on internally generated economic or company specific forecasts.

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