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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.
• 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.

• 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.
  

Percentages may not total 100% due to rounding.

Portfolio strategy & outlook

• In terms of positioning, the Fund continues to be overweight equities and credit and underweight Australian fixed income and cash.
• The outlook for investment grade credit remains sound.
• Against a backdrop of uncertainty and volatility, regulatory reform is slowly being hammered out that will eventually result in a better capitalised albeit less profitable financial system.
• Balance sheets are in good shape and the underlying macro economy is supportive.
• Credit spreads remain reasonably elevated on most historical metrics, particularly for financials.
• While we are sensitive to developments that can again lead to pronounced bouts of risk aversion, we remain cautiously optimistic about further recovery in prices of financial sector debt issuance.

Performance contributors

• The June quarter saw continued volatility in markets over concerns about a slowdown in the Chinese economy coupled with an unexpected apparent slowdown in the US economy.
• The fiscal issues in Europe, while no means less resolved, faded as the major focus towards the end of the quarter.
• The Fund’s performance for the quarter was -2.48% (before fees) against the benchmark of -0.37%.

About the Funds

Investment objective

The primary aim of the Funds is to provide investors with a regular monthly income and some capital growth. We aim to achieve this goal by outperforming the benchmark asset allocation over rolling three year periods. 

Fund strategy

The investment goal of the Funds is pursued by investing a minimum of 65% of the portfolio in cash and fixed income as well as up to 35% in growth assets. The cash and fixed income portfolios are managed with the aim of providing an income stream through the year while aiming to maintain the portfolio’s capital value. This is achieved by investing in a variety of Australian and internationally sourced interest bearing instruments – for example, government, corporate fixed income securities and convertible notes.

A substantial portion of the Funds’ total investment in cash and fixed income is invested in floating rate notes (“FRNs”). These are debt securities whose interest rates are adjusted in line with the bank bill rate. This also includes domestic and foreign fixed income debt securities swapped to Australian dollar floating so that the exposures are also adjusted in line with the bank bill rate. The aim of these investments is to generate a regular monthly income stream.

The growth component is predominantly a portfolio of Australian shares and property (direct and listed), but may also include a selection of international and infrastructure shares. The aim of these investments is to generate a regular monthly income stream, as well as some capital growth. In managing the Funds we gain exposure in asset classes directly or through other wholesale funds that we, or members of our group, manage. 

Designed for investors who…

• Seek lower volatility in the capital value of the investment and some capital growth, and
• Seek a regular monthly income.