Global Asset Management

Market environment

Financial markets continued to be challenging, with broad indices declining for the third consecutive quarter amid continued investor concerns over the US economy and housing market. These declines had spill-over effects into other markets and the main investment strategies of Global Asset Management returned mixed results.

Core / value equities

The key global equity composite narrowly underperformed its benchmark, primarily due to its positioning in financials and materials, though this was partly offset by strong stock selection in energy and in healthcare and consumer staples. The composite was just ahead of its benchmark for the half year to June 2008 but continued to lag over most longer-term periods. Regional equity strategy performance varied over second quarter: Europe (including UK), Canada and Australia were weak, while Japan and US core equities were just below benchmark. Meanwhile, US value equity outperformed and Asian and emerging markets strategies generally performed well.

Growth equities

Almost all of the growth equities strategies outperformed their benchmarks. US large cap strategies saw positive contributions to performance from stock selection and sector allocation. The performance of US small and mid cap strategies was primarily a function of sector allocation. Non-US strategies saw a balanced contribution from sector-, country- and stock-specific factors. European stock selection was particularly strong with holdings in the UK, France and Spain among the largest positive contributors. This strength in Europe was also reflected in global strategies. In emerging markets, significant value was added by good stock selection in the materials sector.

Fixed income

Global sovereign, UK, Japanese and Euro fixed incomefunds were substantially above their respective benchmarks. The performance of global aggregate strategies also improved significantly to be close to benchmark for second quarter. Swiss and Canadian strategies were near benchmark and Australian strategies were slightly behind. Emerging market debt outperformed its benchmark and the longer term performance track record remains strong. Despite some improvement in investor risk appetite at the beginning of second quarter, there continued to be disruption and illiquidity in the structured credit markets. Further price declines for collateralized debt obligations and residential mortgage-backed securities continued to significantly impair the performance of some strategies, notably absolute return bond. US core and core plus were still behind benchmark but showed improvement on recent quarters.

Global investment solutions

Higher volatility in equity markets resulted in mixed monthly returns within global investment solutions,with overall losses in June outweighing the gains of April and May. The significant declines in most equity markets also negatively impacted dynamic alpha strategies but the extent of this impact was lessened due to some offsetting short positions in emerging markets and selected European markets. Market allocation decisions in balanced strategies detracted from performance due to an overweight in equities, while currency decisions resulted in a slightly negative contribution. The continued upward pressure on the Australian and New Zealand dollars and downward pressure on the US dollar offset some earlier gains from the anti-carry trade bias in currency portfolios (whereby investors / traders have borrowed in lower yielding currencies and invested in higher yielding currencies). Over longer periods, contributions from both market and currency allocation remained positive across most balanced funds.

Alternative and quantitative investments

Despite deteriorating market conditions at the close of second quarter the O'Connor single manager platform within alternative and quantitative investments performed well on both an absolute and relative basis. O'Connor's five largest offerings, including the flagship multi-strategy, were materially positive performers for the quarter. A few smaller niche strategies were, however, adversely impacted by the challenging markets and posted negative quarterly performance. The multi-manager platform also posted positive performance in second quarter for the vast majority of strategies, despite the difficult market environment.

Global real estate

Against a weakening market background, Swiss, UK and US-based flagship direct real estate funds underperformed their respective short-term benchmarks. In contrast, German-based direct real estate funds and a Japanese J-REIT flagship fund (managed in collaboration with joint venture partner Mitsubishi Corporation) produced positive returns. Global real estate securities markets continued their downward trend and a combination of regional allocations, stock selection and currencies resulted in underperformance in global strategies although the domestic strategies for Switzerland and the US outperformed.