The third quarter of 2014 has been a turbulent one for investors. Equity market performance has been dictated as much by currency swings as by genuine price appreciation. Dollar investors will be disappointed by the 2.8% fall in global equity markets over the period whilst sterling investors will be encouraged by a 2.5% rise thanks to a 5% devaluation in the $/£ cross rate. The reason? Scotland's close shave to vote 'yes' in an irrevocable referendum on independence from the UK, nearly pulled off thanks to complacency in Westminster and blue sky thinking from a Scottish national party who must surely be relieved at not having to justify North Sea oil based revenue forecasts, as the price of Brent crude continues to slide.

Any weakness, however short term, will come as a surprise to investors whose interest may have been focussed on the US new issues (IPO) market and CNBC headlines proclaiming all-time highs being reached by the S&P. The huge success of the flotation of Alibaba, now one of the world's largest companies, from a standing start 15 years ago, detracted from some worrying underlying economic data. We have been saying for some time that, in order to progress from here, the 'E' in 'PE' (represented by corporate earnings), needed to rise to justify current equity market valuations. So far, we have seen little evidence of this. Yes, employment is rising in the US and the UK and, yes, GDP growth is accelerating. The snag is that the assumed benefits of both trends are not yet being felt by the wider workforce who continue to suffer from falling wages in real terms as they have for a number of years. Ironically, this may be positive for both bond and equity markets in the near term. Interest rates are not going to rise until the Federal Reserve and the Bank of England are convinced that a sustainable recovery is underway. Like a Formula 1 car stuck in neutral, the economy is revving hard but going nowhere fast.

So much has happened in the quarter, Scotland aside, that it's difficult to know where to start. BNP Paribas were fined a record $9bn for breaching sanctions with blacklisted jurisdictions. A Malaysian airlines plane was tragically shot down over the Ukraine, stirring fears of a Russian led conflict in an already troubled (and energy sensitive) region. The situation in the Middle East escalated with NATO currently co-ordinating strikes on Isis jihadists in Syria and Iraq. On the corporate front, Apple launched the latest incarnation of the iPhone but there have been widespread complaints over the release of its latest software for existing devices as well as reports that the new phone could be easily squashed! Second quarter results were mixed. McDonalds and Coca-Cola fell slightly after reporting below consensus figures but the US market overall was one of the few to remain in positive territory in Dollar terms over the period. Europe was once again a disaster, falling by 3.1% in sterling terms and by an astonishing 8.1% in Dollar terms. Adidas fell by 15% as sales figures in its important Russian market were affected by EU sanctions. Even the UK market, which until the Scottish debacle had been somewhat of a global market safe haven, fell by 1.8% in local currency terms led by the accident prone Tesco which was forced to admit having overstated its earlier profit forecasts for 2014. Once again, bonds offered the most protection with a 0.4% rise in US Treasuries as the immediate threat of higher rates abated, inflation remained subdued and investors dumped gold and other precious metals as well as most commodities.

After some months of outperformance, property shares succumbed to profit taking in September as bond yields rose and investors fretted about higher borrowing costs. Whilst it is true that higher interest rates are a headwind, in fact property companies tend to be more affected by economic growth which, as we have noted, remains strong in both the US and the UK. US property companies (REITs) have been most affected by the sell-off giving us a good entry point at a level which we considered out of reach a few months ago.

In times such as these, chasing performance by aggressively switching asset class is likely to end in disappointment. We have said before that our investment funds are designed for the longer term and that unless there is compelling reason to do so, we will buy into the dips and accumulate cash as markets rise. With some cash now in our pockets we have already begun to add to our fund holdings after the recent sell off in early October. Our prediction is that the market will slip sideways for some weeks before gaining any traction and we are happy to accumulate income from our dividends as this period passes by. We wrote earlier in the year that dividends will most likely constitute an important component of total returns in 2014 and this remains an area where the Fund is heavily biased, precisely for times such as this.

Major equity markets have experienced a good six month trading period in the first half of 2014. In Dollar terms, US equities led the way with a gain of 6.1%, but year to date, both UK and European equities have lagged behind the market averages, despite fresh evidence of economic recovery. This is thanks in no small part to the strength of the Pound which has gained 3.3% against the Dollar and 4% against the Euro. The surprise package has been the performance of bond markets. World bonds have gained 5% over the six month period to the end of June whilst Dollar bonds have gained 3.3%. When US Federal Reserve Bank chairman trigged a 'taper tantrum' last May by announcing that the end of quantitative easing was in sight, most investors reasoned that the next move for bond prices would be down, as yields rose to compensate for the likely ensuing hike in interest rates. Their conclusion was probably right but their timing was some 12 months early. Now, however, with both central banks on either side of the Atlantic openly speaking about tightening rates, the end of an unprecedented period of cheap money is fast approaching. Whilst, logically, this should already have been factored into valuations, the likelihood is that markets will correct when the first hike eventually arrives for the circular reason that the reaction to such a move is itself uncertain. We will be in short term unchartered territory and this could create an interesting buying opportunity.

Elsewhere, large companies have enjoyed a reasonable period of growth after underperforming smaller companies in 2014. Again, this move in 2014 was surprising as smaller companies typically suffer more in a rising interest rate environment as the cost of debt rises and the availability of bank loans declines. However, GDP growth has been far better than expected. In the UK it may well breach the 3% level in 2014 and with sterling strong, domestic, non exporting UK companies have been generally doing well. Latterly, the quest for yield has also been uppermost in investors' minds, hence the recent rotation into safer territory in anticipation of the long awaited rate hikes.

As the artificial reasons for keeping rates lower for longer than necessary dissipates, so central banks will find themselves reacting to the return of the old enemy, inflation. In recent times, central banks have been far more concerned about deflation, or falling prices, and have been keen to stimulate the economy as required. This has meant lower rates and extended QE in the US, UK and most spectacularly of all in Japan where the process has coined its own name - Abenomics. In Europe, however, deflation remains a real worry. GDP growth is patchy and although the eurozone crisis has abated, growth is elusive, even in Germany and especially in France and Italy which are both struggling with a top heavy government and lack of investment.

The UK is probably in the sweet spot right now with good growth rates, low interest rates and a small amount of inflation. The strength of the currency is a worry for exporters, however. We have seen a couple of major companies warn on profits for forex related issues (i.e. sterling strength) and this will continue if exchange rates remain at their current elevated levels.

All things being equal, we believe that we are at the start of a good period for equity markets, rate hikes notwithstanding. Unemployment is falling, corporate growth is in evidence and rates will be low for some time to come, even if they settle at a higher level than today. Geopolitical risks, as ever, remain but it is worth noting that the situation in the Crimean Peninsula and the Ukraine has abated and that Russian equities have regained nearly all of the ground lost in the early days of the crisis. This was almost unthinkable just 3 or 4 months ago.

2014 has started on a quiet note, at least for the three major markets represented in the Fund (the fourth major market, Japan, has had a dreadful start to 2014). As yet, the problems in the Crimean peninsula and the Ukraine have not had a serious impact on markets, but we are mindful that this could change very quickly.

After a stellar 2013, the US has been playing a waiting game in two main areas. Firstly, over the timing of the first interest rate hike for many years and, secondly, whether earnings in 2014 will justify the market rally in 2013.

The backdrop for further equity market gains in the US is encouraging. Markets have taken the impending end of Quantitative Easing in their stride, in no small part thanks to the careful policy guidance which the Federal Reserve Bank has been filtering into the market. In other words, there have been no surprises to date, and markets, of course, hate surprises. Newly elected Fed chairman Janet Yellen has been keen to extend the policy of her predecessor in carefully explaining that interest rates may start to rise whilst being sufficiently vague in terms of using any particular data point as a trigger for this to occur. The key economic release to date has been the unemployment rate, which has been widely used by policy makers on both sides of the Atlantic as an excuse to keep interest rates lower for longer. The snag is that the unemployment rate has been falling faster than predicted, whilst the participation rate, defined as the number of people actively seeking work, has also been falling. To confuse matters further, inflation has also been falling in no small part thanks to lower energy costs whilst the wider economy, measured by an abundance of manufacturing data, is still accelerating. What we appear to be faced with, therefore, is a relatively benign investment climate, the biggest threat to which is corporate earnings (or lack of) rather than macro events. We and the market will, therefore, be watching first quarter earnings in April with particular zeal.

In the UK, a similar issue exists in terms of the point at which interest rates might start to rise. As in the US, inflation is falling, the recovery is gathering momentum, assisted by a buoyant property market, and the currency is strong. The impending 2015 general election means that politicians are already interfering with open markets more than ever and both the energy and insurance markets have reacted badly to the clumsy, clammy hands of politicians attempting to point score in the run up to electioneering proper. This, and sterling strength, is probably the greatest threat to the UK equity market right now providing that earnings momentum can be sustained.

In Europe, every day that goes by without another problem marks a day closer to resolution of the Eurozone crisis. The transition from recession to growth is, however, proving to be painfully slow. Unemployment remains stubbornly high and the Euro strong at a time when the peripheral member states need export growth rather than cheap imports. We do not expect any miracles in 2014, however, and our focus within the Fund remains on international companies such as Nestle rather than businesses relying on domestic growth.

In summary, therefore, all eyes will be on corporate earnings rather than any major policy shifts. With markets entering a period of stability, dividends will most likely constitute an important component of total returns in 2014 and this remains an area where the Fund is heavily biased.

Whilst major equity markets generally had a positive year, 2013 was noteworthy for the negative performance of several other significant asset classes. The divergence between the winners and losers was partly attributable to the appetite for risk which accelerated as the year progressed. It is easy to forget that twelve months ago talk was of a triple dip recession in the UK, another debt crisis in the US, an imploding Europe and escalating conflict in the Middle East.

In the event, lower risk assets, which seemed poised for a steady 2013, performed poorly. Global government bonds lost 4.5% of their value in Dollar terms and 6.3% in sterling terms. Gold fell by 28%, whilst base metals, with the exception of iron ore, slumped as investors grew concerned over the impact of a hard economic landing in China. This dragged down commodity currencies too. The Australian Dollar fell by nearly 15% against the US Dollar, the Canadian Dollar fell by 8% whilst the South African Rand had a particularly torrid year with a fall of 23.5% against the Dollar. The Japanese Yen crashed by 23.9% against sterling as the impact of Prime Minister Abe's reflationary policies hit the currency markets but boosted equities.

Whilst major markets advanced in 2013, emerging markets languished. The benchmark MSCI Emerging Markets Index lost 6.8% of its value in sterling terms (down 5% in Dollar terms) as investors worried about the impact of higher borrowing costs in the US and the associated impact of the tapering of Quantitative Easing.

These themes benefitted our current asset allocation within the Marriott International Growth Fund. We have a zero weighting to government bond markets and no direct commodity holdings nor any direct emerging markets exposure, although many of the underlying holdings have significant emerging market subsidiaries. The Fund gained 19.9% over the whole of 2013 in US Dollar terms including dividends. This performance generally reflected the good returns from major market equities over the year although at the upper end of the scale, index returns were often propelled by recovering laggards and smaller domestic companies rather than the big cap names which dominate the Fund. The 15% property weighting had a slightly negative impact on performance but, even here, the three underlying companies in question produced overall double digit total returns despite rising bond yields which often have a detrimental impact on commercial property values.

Whilst the appetite for risk has increased significantly, evidence that earnings can grow sufficiently in 2014 to justify increased valuations remains thin on the ground. Much of the improvement in 2013 earnings in many instances has come from cost cutting and one off items rather than from real growth in core earnings. This type of adjustment is finite and it remains to be seen whether an improvement in the wider economy filters through to company balance sheets. High unemployment rates in developed markets would suggest that we still have some way to go before the recovery really gains some traction. Consequently, the fund remains heavily exposed to large capitalisation blue chip companies offering basic necessities to consumers across the globe.