Fund commentary

The Fund underperformed the benchmark and the median manager during the period, as poor weighting and stock selection decisions within the consumer discretionary and financial services sectors proved detrimental. In the former, an overweight to retail companies (eBay Inc, Apollo Group Inc) drove down returns, as a disappointing earnings season and a rapid drop in consumer confidence over the sustainability of the economic recovery, caused investor concern within the industry. In the latter, an underweight to Real Estate Investment Trusts and an exposure to State Street Corp detracted as the financial services holding company slumped to a 52-week low as investor confidence in its outlook waned. The majority of the Fund's underlying managers were underweight the top-performing utilities sector which was also a key contributor to the Fund's underperformance, particularly within electrical companies (AT&T Inc). ICAP, a value manager, rallied against its piers as effective stock selection within commodities drove returns.

Growth manager BlackRock finished modestly ahead of the benchmark as growth stocks outperformed value counterparts. The manager’s sector positioning proved positive, notably the underweight to financial services. In terms of stock selection, stock specific factors drove key contributions from IT groups like Apple and Baidu Inc. Energy exposures were less positive, as Anadarko Petroleum, part owner of the Deepwater Horizon rig was pursued by BP for its share of the cost of the mop up operations in the Gulf of Mexico.

Growth manager Columbus underperformed both its own benchmark and the Fund benchmark during the period, as an overweight to and stock selection within the consumer discretionary sector weighed on returns. Key detractor Priceline.com slumped 12% amid speculation the country’s second-biggest online travel operator’s second-quarter profits will fall short of analyst estimates. The manager’s positioning in the financial services sector also proved detrimental, notably within financial data & systems companies. 􀀀 ICAP outperformed the Russell 1000 Value Index for the quarter on the strength of its stock selection decisions. An overweight to strong-performing gold stocks (Newmont Mining) was the single largest contributor to the quarter’s performance. Selection within the producer durables sector was also beneficial due to holdings in machinery companies (Cummins, Caterpillar). Elsewhere, the decision to hold domestic integrated oil companies with limited exposure to off-shore drilling (Marathon, Anadarko) added value. In contrast, an underweight to utilities, and stock selection within the financial services sector (insurers) detracted.

Sound Shore underperformed during the period, as its positive selection within energy was offset by poor selection decisions within financial services. Credit Suisse Group, State Street Corp and Invesco Ltd were among the financial institutions which declined as confidence in the economic recovery wavered during the second quarter of 2010. The manager’s consumer discretionary holdings also weighed on returns. Apollo Group Inc - owner of the biggest for-profit university in the US - declined as quarterly net income fell after the company set aside funds to cover the costs of a shareholder lawsuit. 􀀀 Sustainable Growth underperformed during the period, as performance across the sectors was generally negative. Selection decisions within financial services and producer durables contributed to the Fund underperformance. In the former, State Street slumped to a 52-week low as investor confidence in its outlook waned. In the latter, air transportation companies (FedEx Corp) declined as carriers lost a court bid to block a new federal rule making it easier for unions to organise employees into collective bargaining units.

Value manager Palisades underperformed both its own benchmark and the Fund’s benchmark during the period, as an underweight to the best-performing utilities sector predominantly drove down returns. Having no exposure to electrical and telecommunication companies proved detrimental as investors sought more defensive stocks. Selection within the consumer discretionary sector (commercial services) also contributed to the manager’s underperformance; key detractor - eBay Inc - declined as disappointing quarterly earnings were released. The manager’s underweight to consumer staples (Soaps & Household Chemicals) also proved negative on returns.

31 July 2010