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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

• Fears of a fizzling global recovery and Western sovereign leverage issues replaced hope for positive cyclical gearing in the second quarter.
• The market's advance stalled in mid April and fell steadily to close the period very near its low point for the year.
• The MSCI All-Country World Index fell 12.12% in the quarter. This marks the worst performance quarter since the post-Lehman fourth quarter in 2008.
• European equities underperformed global benchmarks in the quarter. Particular weakness was seen in the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain), while Sweden and Switzerland were relatively better.
• The United States performed inline with global equities and Asia outperformed with Indonesia, Malaysia, and the Philippines standing out among the few countries able to post a positive return.
• Emerging markets in general outperformed developed markets.
• Small capitalisation companies performed better than large.
• Defensive sectors such as telecom services, consumer staples and utilities outperformed more economically sensitive stocks with the VIX, a proxy for overall market volatility, nearly doubling.
• Energy was the worst performing sector driven primarily by implications from the Gulf of Mexico oil spill. Materials stocks also underperformed.
• Policy changes from China designed to slow housing appreciation generated concerns in the market that Chinese appetite for raw materials would slow.
• European financials fared poorly on anxiety over upcoming sovereign debt and bank maturities.

Market Outlook

• Markets reacted favourably from their bottoms on signs that government programs would be able to make up for the demand lost while Western corporates and consumers restructured.
• We are now in a period in which the market is trying to determine the ability of the private sector to create final demand on its own. Data such as stubbornly high unemployment, weak auto sales and falling US new home sales suggests that the private sector may not be ready.
• Earlier hopes for a V-shaped economic bounce have been shelved with investors now contemplating the future slope of improvement as well as the ability of the global economy to withstand further exogenous shocks.
• Inventory restocking will provide less of a boost going forward.
• Large positive earnings estimates revisions, one factor that has helped keep stock prices buoyant, has slowed.
• European sovereign issues remind us that the last pages of the financial crisis have yet to be written.
• The list of negative factors is lengthy, but much of this is already being discounted in stock valuations and corporate balance sheets are healthy. Cost structures have been revamped and S&P margins (ex financials) are already near forty year peaks despite much lower sales bases. Free cash yields are also very high.
• Comparisons of global stocks earnings yields to government bond yields indicates that stocks have rarely been more attractive than they are right now.
• We seek risk and reward to be balanced at this important phase of the recovery from a major financial crisis. We believe that we will remain in a rotational, range-bound market until there is more clarity on the plethora of issues facing the global economy.
• Rising market volatility coupled with higher stock correlations tell us that when themarket does break out of its current range, the magnitude of the move is likely to be significant.
• In this environment, we have chosen to maintain a low risk profile versus benchmarks. Regional, industry, and style risks are well below our historical averages. It is our opinion, however, that risk models are underestimating future volatility.

Fund Positioning

• Stock selection across the consumer discretionary and financials sectors were sources of relative weakness over the time period.
• Disappointing results within the publishing, cable & satellite, and automobile industries all combined to cause consumer discretionary to lag benchmark comparisons.
• Within financials, the valuations levels of REITs relative to their near-term business conditions caused us to underweight the sub-industry. However, improving occupancy rates and rental pricing over the quarter led to better than expected performance, which hurt our relative performance.
• On a positive note, good stock selection within industrials was driven by positioning in heavy electrical equipment and airlines. We have been particularly attracted to the later group as excess industry capacity was eliminated while forward earnings estimates are modest.
• Elsewhere in the portfolio, good stock selection in energy was the result of favourable positioning within several onshore exploration and production (E&Ps) companies.
• Lastly, our positioning in the system software space of information technology was helped by the announced acquisition of Sybase by SAP for $5.8 billion.
• Changes to overall fund positioning continue to be small in magnitude, with additions to energy and industrials being sourced from trims across healthcare, materials, and cash.
• At the sub-industry level, notable purchases were made in oil E&Ps, industrial machinery, airlines, banks, and gold miners.
• Conversely, we rotated out of healthcare equipment, pharmaceuticals, life insurers, commodity chemicals, fertilizers, and steel.
• We remain underweight emerging markets equities, although much of our developed market holdings have significant final demand being sourced in those economies.

About the Fund

Investment objective

The BlackRock Global Small Cap Fund seeks to maximise capital growth through exposure to a globally diversified portfolio of shares of quality small and mid-capitalisation companies listed on international stock exchanges.

Fund strategy

The investment process is driven by extensive, bottom-up industry and stock research. The research process centres firstly on industry sub-sectors, in order
to assess the attractiveness of these sectors on a world-wide basis, and to provide context for company analysis. The second stage of the research process focuses on fundamental company research to identify those stocks that offer above-average investment potential.

The portfolio construction process starts with the establishment of a strategic framework for investing. This framework is comprised of the team's points of
view on industry, stock, style and market risks. Portfolio strategy is dynamic and reflects the team's ongoing industry and company research, and its financial market observations. Stocks are selected on the basis of the team's bottom-up fundamental analysis.

From time to time the Fund may take active currency positions relative to the benchmark.

Designed for investors who…

• Seek investment opportunities that are not readily available or are under-represented in the Australian market.
• Seek the potential for higher long-term capital growth from such international investment opportunities.
• Have a long-term investment horizon and a tolerance for significant volatility in investment returns in the short-term.
• For the hedged version, seek to reduce the impact on A$ returns on those investments that result from currency exposure.