Markets looked to break out of their summer trade range and overcame the traditionally weak seasonal period to post impressive upside. The S&P 500 Index posted a return of almost +9%, the best return for September since 1939, while developed markets beat the returns of the traditionally higher beta emerging markets. Our delta remained mid-range, averaging 23% during the month, but increasing to a maximum of 30% towards the end of the month as our option positions picked up delta as spot prices moved up towards strike prices. We retain a bias to hold directional positions using options, given their known downside characteristics and we particularly favour the Asian and emerging market regions, given the higher likely levels of growth and consumption. This growth bias detracted on a relative basis, as the US market rallied aggressively on expectations of the Fed implementing a new round of quantitative easing, which also led to a significant weakening of the US dollar. It is interesting that the market appears to have moved on from worrying about the EU debt situation, believing that the backstop of the IMF and the European Financial Stability Facility (EFSF) can contain the crisis. We note that EU vs Bund spreads traded through the May 2010 crisis highs, however, we are less convinced, concentrating our cash fixed income positions in German Bunds and AAA-rated supranationals. A major beneficiary of a weaker dollar is the US export sector, also making US plant capital cheaper to external buyers which could trigger a round of cross-border M&A activity. We reinforced names that can benefit from this in the cash equity portion of the portfolio, adding to exporters and companies with deep embedded brand value. We are now running over half of our cash equity weight in the US and have a bias to add names here. We have been using our convertible positions as a source of funding for this trade, accordingly the convertible allocation has fallen 5% to our target weight of around 15% at the end of the month. We still see value in convertibles, particularly good quality high yield bonds, but many of our positions have done well and given that we hold mostly investment grade issues, we think it is prudent to take profits given the continued demand for paper. Fixed income contribution was broadly flat during the month. A market where we see value is the Japanese government bond market, where we continue to hold long positions and look for the market to rally to sub 80 basis points, driven by the continued strength of the yen and expectations of policy easing from the Bank of Japan. We remain committed to our strategy of limited directional risk, instead concentrating on relative value and carry trades. We would argue that equity carry, particularly in the US, looks interesting and we feel that many investors like ourselves will look at the relative value versus alternative asset classes and conclude that on a selective basis, tactical equity investing makes sense on a risk/reward basis. Underpinned by this dividend yield and the sense that central banks are moving towards another round of easing, we feel that equities can make progress from here, although a market which is unlikely to benefit from the easing is the Euro region. We worry that the recent moves by the ECB to move away from extraordinary liquidity measures and the recent strength of the Euro make the region unappealing on a relative basis and we will look to now move our hedges to the Eurostoxx market. Finally, we welcome a new portfolio manager to the total return team, Shrenick Shah. A significant part of Shrenick's role will be to search for effective tail hedges in the portfolio. One of the features of the post-crisis world has been investor appetite for this type of protection and the shortage of supply of these products from the banking and hedge fund community. Consequently, many of these trades are incredibly expensive. We have spent a great deal of time analysing these types of positions and will continue to look for appropriate macro hedge positions for the portfolio.

June was another volatile and difficult month for investors. In this environment, the portfolio produced a positive return for the month, against a further loss in equity markets of -4.3% (MSCI World Index hedged to USD) and a gain of +1.1% on government debt (JP Morgan Government Bond Index hedged to USD).

We had reduced both the net and gross exposure in the portfolio at the end of May and continue to run muted levels of risk in the portfolio. The delta of the portfolio averaged 10% during June, with an average duration of around 1.5 years.

While we have reduced risk in the portfolio, we remain in some of our favoured trades which worked well during the month. In fixed income, we have been running risk in the belly of the German curve and maintained a core position in US Treasuries, which worked well as equity markets continued to fall. We still see very little value in most global sovereign debt, but we have to accept that US Treasuries are still one of the most liquid asset classes globally and they will perform well should the economic situation continue to deteriorate. An area that we are starting to feel offers interesting value is the UK Gilt market, with the recent budget highlighting the coalition government's commitment to reducing the fiscal deficit, a move that seems likely to protect the UK's AAA rating. With gilts offering the highest yield of any similarly rated country, we feel they are likely to outperform on a sustained basis.

We continued to add to our Asian geographic bias during the month and we see one of the benefits of the recent growth scare is a reduced likelihood of aggressive monetary tightening in the region. Although small, the move by the People's Bank of Chine to revalue the CNY also acts a positive and we added some upside options on the Hang Seng, which look incredibly cheap. Our cash equity positions remain concentrated in the US, particularly large-cap, blue chip companies with a global bias.

We have retained our exposure to the convertible market, believing that they offer a more attractive risk/reward profile than straight credit, particularly short-dated US-based bonds. Our outlook remains cautiously optimistic and we do not subscribe to the double-dip recession theories. We think that the recent dip in the data is a mid-cycle pause from well-above-trend levels of GDP growth. However, the risk of a more sinister outcome has risen and in our minds, the global economy has reached a fork in the road. One path we use as our central scenario is that growth slows but remains positive; the other path is that the structural issues in the global economy overwhelm the cyclical bounce that we have been experiencing, policy actions will ultimately prove ineffective and a deflationary depression awaits. We stress that the latter path is still an extreme scenario, but the recent roll-over in both the hard and soft data remind us that we should not completely discount this risk.

We will look to keep risk in the portfolio low until we gain more clarity on the path of the economy. We intend to keep the strategic delta of the portfolio at the lower end of permitted ranges over the summer months. We will also look to enter into relative value positions, both in the fixed income and equity markets, rather than directional bets. Additionally, we will maintain the underlying cash investment in the most liquid, high quality investments in this uncertain environment.

We continue to believe that the macro-environment is likely to provide a positive backdrop for risk assets, as the economic data continues to surprise on the positive side and believe that corporate profitability is likely to recover strongly given the high degree of operational leverage in the economy. Of course, we ask how much of this is already priced in and would argue that most, but not all of the good news is currently priced into the market. After the significant gains of the past year, it is difficult to argue that global equities are cheap on a fundamental basis and for these reasons, we maintain a cautious long-equity position, with the delta of the portfolio averaging 24% during the month.

This cautious headline number masks some significant geographic switches which took place during the month. The most significant being a decision to start rebuilding exposure in the Asia ex-Japan region. Both Hong Kong and China have lagged developed markets since the autumn, as participants worried about the pace and effectiveness of the authorities' response to the underlying inflation dynamic. Their strategic bullishness on the region has remained undimmed but they have been much more nervous on a tactical basis because of these issues. However, we now feel that with valuations in the region are cheaper than long-term averages, the risk/reward favours building a longer term position. We feel and have argued previously, that the early move by the People's Bank of China is a long-term positive as they respond to real growth and attempt to lay the foundations for a more sustainable recovery.

Convertibles worked well during the month, rallying as credit spreads continued to tighten. Increasingly, the optionality embedded in this asset class is starting to drive returns - notably this option was virtually free at the start of 2009 and is increasingly becoming valuable. The average delta of the convertible positions has increased from around 20% to 30% over the past six months, as bonds move closer to their strike. We continue to believe that the allocation to convertibles offers an attractive way of participating in the equity rally with a limited degree of risk.

We estimate fixed income was flat during the month. The modest amount of directional risk detracted as bonds sold off in response to the stronger data, however these losses were offset by some relative value positions, particularly in the Australian inflation market.

Our outlook remains cautiously optimistic, but given the size of the move in risk assets, we believe that we are in the later stages of the rally and any directional bets must be scaled accordingly. We also believe that betting on broad-based index progress is likely to be unprofitable, correlations across regions and companies are likely to fall and bottom-up analysis at the stock and geographic level is likely to be a key determinate of returns through the rest of 2010. There is debate in fixed income markets about possible funding and solvency issues and much has been written about the periphery of Europe. Our view has not changed; we believe that in the short term, a default will be avoided, but the long term, issues to be solved are immense. A new twist has been the debate around the sustainability of the US debt burden, while 10-year swap spreads inverted towards the end of the month and in the last week a series of bond auctions were taken very badly by the market. These developments are worth watching, but we believe they are driven by technical issues rather than a fundamental deterioration and will look to selectively buy US duration on dips.