After a storm comes a calm...It has been nice to see equity markets move higher, but what has also been reassuring is that we have now seen a period of relative stability.

Apart from a wobble when concerns grew that the Greek private debt holders would not agree to accept losses, the FTSE has this year been trading in a range between around 5,850 and 5,950 for some time. This makes a nice contrast to the second half of last year where daily movements of 100 points or more were commonplace!

A short pause for breath was required after such a strong start to 2012. Hopefully this will become a platform for some more gains later in the year, as we still believe equities look undervalued based on company earnings.

Portfolio ChangesIf you have logged onto your online accounts recently you may have seen a number of transactions. We have recently carried out some asset allocation changes, and have taken the opportunity of the relative market stability to make a few refinements to your portfolios.

Asset Allocation Changes

In order to deal with last years’ market volatility, we have until recently held more cash than usual in portfolios. This was partly as a safety net and partly in case we needed to take advantage of market dips to buy additional equity.

We had purchased equity trackers at market lows and had been selling them as markets rose. We have now sold the last of these holdings, the HSBC FTSE Allshare Index for most clients. This was a fund we bought in early August at a market level around 5,650, selling it on 21 February at around 5,920.

The chart below shows all of the “volatility trades” we carried out since March 2011. We are pleased to say that all of these trades have now been closed at a profit:

Investment Newsletter March 2012

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Bought

FTSE All Share 3% 16/03/11

Sold

FTSE All Share 3% 07/07/11

Bought

FTSE All Share 3% 03/08/11

Bought

FTSE 100 Index 3% 08/08/11

Sold

FTSE 100 Index 3% 18/10/11

Bought

FTSE 100 Index 3% 25/11/11

Sold

FTSE 100 Index 3% 01/12/11

Sold

FTSE All Share 3% 21/02/12

Investment Newsletter | March 2012

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

In total, clients have generally made around 13% on one set of trades, and 11% on the other. We have typically invested 3% of client assets in each set of trades. As always, individual returns depend upon clients’ individual circumstances and bespoke clients will have slightly differing returns.

Given the relative market highs and reduction in some of the risks, we no longer see a need to hold so much cash. We have therefore invested much of this cash in fixed interest. In particular, we have bought a fund for most clients called the Blackrock UK Corporate Bond Tracker fund.

We typically still hold around 5% “tactical cash” for most clients, in case markets do dip and we need to buy back equities.

In addition, we have changed the geographic split of most equity portfolios, generally reducing Japan exposure (where we are least positive about returns) and increasing UK and Emerging Markets (where we are most positive).

Active and Passive Funds

We have been carrying out some in depth research into the performance of active funds (those where a fund manager decides what stocks to buy or sell) against passive funds (those which track an index).

We have always used a combination of the two types, but this recent research project has highlighted some areas where we should increase passive exposure, as well as reinforcing our belief in certain active funds.

As a result of our research, we took a decision to reduce the number of funds in our portfolios, sometimes increasing passive exposure and, in other cases, increasing the weighting in the active funds in which we have the highest conviction.

We felt that the recent market stability was a good time to carry out these transactions. The following switches were carried out:

• NeptuneUSOpportunitiestoVanguardUSIndex

• NewtonAmericantoVanguardUSIndex

• JPMEuropetoVanguardDevelopedEuropeexUKIndex

• JPMEuropeDynamictoBlackrockEuropeanDynamic

• NeptuneJapanOpportunitiestoVanguardEmergingMarketsStockIndex

• HSBCJapanIndextoVanguardUKEquityIndex

• DimensionalUKCoreEquitytoVanguardUKEquityIndex

These changes have had a number of effects:

• Wehavereducedthecostofportfolios.Thecostofthefundsforatypicalbalancedportfolio (model asset allocation 5) has reduced from 0.67% pa in March last year to 0.44% pa now.

• Wehavereducedthenumberoffundsheldinportfoliosoverthepastyear.Inabalanced portfolio the number of funds has reduced from 39 last year to 29 now. This means we hold a greater proportion in those funds which we consider to be the best in each area.

Investment Newsletter | March 2012

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

• WehavenowmergedourGlobalEstablishedandGlobalDynamicportfoliostogether.Both investedintheestablishedregionsofNorthAmerica,WesternEurope,andJapan.

• WenowonlyholdatrackerfundinNorthAmerica,withnoactivefunds.

YouwillnoticethatmanyofthefundswehaveboughtareVanguardfunds.Thisisbecausetheygenerally offer the cheapest and most efficient tracker funds on the market at the present time.

Active Asset AllocationAlthough we have increased the number of passive funds, your portfolios are being more actively managed than ever.

Studies show that, in the long term, 90% of the returns come from asset allocation changes rather than fund selection. In order to maximise your returns, we must therefore focus on optimising your asset allocations and allocation to different equity markets. The selection of the best funds is a secondary concern.

We are confident that these changes will add value through reduced cost, improved efficiency, and increased research time for our investment team to focus on what can make the biggest difference in terms of adding value.

Whilst negative on most sectors our asset allocation positioning means that we expect portfolios to produce 9.80%pa vs our normal assumption of 8% over the next 18 months.

Equilibrium Asset Management LLP Brooke Court Lower Meadow Road Handforth Dean Wilmslow Cheshire SK9 3ND United KingdomVisit us at www.eqasset.co.uk t : +44 (0)161 486 2250 f : +44 (0)161 488 4598 e : askus@eqasset.co.uk

These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser.

General Economic OverviewGlobal economic growth is likely to remain muted, but the improved picture in the US and emerging markets will ensure a positive picture overall. We believe the UK will avoid a recession, but recession is already happening in the Eurozone. Interest rates are likely to remain low for the next 18 months at least.

Sovereign debt issues have not gone away and will concern markets for some time. Inflation is falling back but not as far as many had expected. We believe it could remain persistently higher than the Bank of England’s 2% target.

Market Views | March 2012

Equity Markets

Equitymarketshavemovedstronglyupwardsastheriskofabankingcrisisrecedes.Despitetherally, equities remain very undervalued relative to history on both a price/earnings and price/book ratio basis. We particularly favour the UK market.

Fixed Interest

Inflation and interest rate risk has receded for the short term. Corporate Bonds still provide reasonable yields and could do reasonably well in this environment. We are avoiding Gilts whose values have been inflated due to recent risk aversion.

Commercial Property

Whilst the rental yield on commercial property remains attractive at over 6%, this is diluted by high levels of cash in property funds. We can foresee some capital losses although we believe these will be small and that overall returns will still be positive.

Residential Property

We believe prices are likely to remain flat over 18 months.

Cash

With interest rates remaining at record lows, returns on cash could remain below average for some time. However, there is a short term safe haven appeal.

Balanced Asset Allocation

For a typical balanced portfolio we are overweight equity and cash and underweight the other asset classes. Based on our above scores and current tactical positions we’d expect a Balanced Asset Allocation (excluding client cash) to return approximately 9.8% pa rather than the normal 8%pa.*

A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5% means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall.

* Includes Defined Returns holdings. See previous briefings for details.

+4

-1

-5

-5

-5

Asset class key+ positive - negative = neutral (normal behaviour)

+5 strongly positive-5 strongly negative

Outlook