Macroeconomic and financial environment – Important factors for the management of the fund:

- The latest indicators confirm the fragility of the economic recovery in the United States. In previous economic cycles, there was a direct link between the severity of the recession and the strength of the recovery: the more severe the recession, the stronger the recovery that followed. This relationship has been broken in the current cycle. The weakness of the current recovery is particularly apparent in everything that affects consumers. There are fewer jobs than in 2000, despite the population growing by around 30 million. Only 20% of jobs lost during the recession have been made up again in the recovery. Average salaries are falling in real terms (i.e. adjusted for inflation). Following a period of stabilisation, house prices are falling again. The weakness of the recovery is all the more surprising given the scale of the unprecedented stimulus measures put in place by the fiscal and monetary authorities. In a strongly indebted economy, these measures are having less and less impact and are actually endangering the solvency of the United States;

- The European economic environment is dominated by debates about the wisdom of restructuring Greek debt and tensions are starting to emerge, particularly between the European Central Bank and the German government. Current problems are bringing to light the fundamental flaw in the construction of the single currency. The exposure of European banks to the sovereign debt of the peripheral countries and of US money-market funds to paper issued by European banks has the makings of another systemic crisis. In this respect, it is shocking to see how little has changed since the 2008 crisis and that enormous risks still weigh on the financial system;

- The economic fundamentals of the developing countries are in much better shape than those of the main industrialised countries. These countries are currently having to deal with inflationary pressures due to rising commodities prices, particularly food. The authorities there have introduced monetary tightening, which has weighed on the region's stock markets. In the past few weeks, a number of fears about a hard landing and a credit crisis in China have also come to light, but these fears seem unfounded, at least for the time being. The emerging markets will gradually take over from the United States as the driver of the world economy;

- Based on normalised earnings, the US and European markets are overvalued. but within markets, there are some attractive pockets of opportunity.

- Government bonds have become a structurally unattractive asset class. This conclusion has been reached based on the currently very low level of long-term interest rates, which is reducing the return potential and increasing the volatility of bond investments. As well as this, the unprecedented deterioration of public finances in many countries means that government bonds are starting to lose their ‘risk-free’ character. Measuring the risk of a portfolio in terms of its equity allocation is, in light of this, less and less relevant.

- World economic developments continue to support a strategy based on shifting the portfolio towards the emerging countries or towards companies located in the industrialised countries that generate an increasing share of their results in the emerging countries.

Asset allocation

We took advantage of the recent correction in the stock markets and some stocks to increase the net equity allocation to 57%. Starting with the gross allocation of 87%, we achieve this figure by hedging 30% of the allocation through the sale of futures on the stock markets.

Asset Allocation - BL-Global Flexible - June 2011

There are two advantages of a strategy that involves reducing the equity risk using futures over a strategy of ‘just’ holding 57 % in equities:

- It ensures that we do not have to hold 43% (i.e. the part not invested in equities) in money-market or bond investments, which hold little attraction for the time being;

- It also allows us to invest the majority of the portfolio in the stocks of quality companies whose fundamentals are in much better shape than those of many governments, and which generally pay out attractive dividends. In our opinion, the particularly uncertain macroeconomic environment is continuing to favour a long quality/short market strategy. We believe that the quality of the companies in our portfolio is much better than the quality of the overall market.

In geographical terms, a positive growth differential and much better fundamentals are reasons for investing in the emerging markets. 19% of the portfolio is invested in the stock markets of these countries, particularly South-East Asia and Brazil.

24% of the portfolio is invested in US and Canadian equities, of which 14% is covered through the sale of futures on the S&P 500. In general, North American companies are selected from four main sectors - energy, healthcare, technology and non-cyclical consumption. A large portion of these companies’ turnover is generated outside the United States (mainly the emerging markets) meaning they are therefore well positioned to take advantage of any weakness in the dollar. 18% of the portfolio is invested in equities from the eurozone, of which 12% is covered through the sale of futures on the Euro Stoxx 50. As a broad general rule, eurozone investments tend to be made in defensive sectors with particular emphasis on the dividend component. The rest of the equity portion is invested in the UK (10%, of which 4% is covered through the sale of futures on the FTSE 100), Switzerland (6%), Japan (6%), Norway (3%) and Denmark (1%).

At the end of May, the equity portfolio's average price/earnings ratio was 13.3, and the average dividend yield was around 3.6% (gross).

10% of the portfolio is invested in bonds. Of this, 6.5% is invested in long-dated German government bonds and 3.5% in Brazilian real and Indonesian rupiah-denominated bonds.   

Currency allocation

The currency allocation differs from the asset allocation in the fund. We use forward sales to lower the exchange rate risk on certain currencies or to increase exposure to other currencies. We aim to be exposed to the currencies of countries with strong fundamentals worthy of a AAA-rating and avoid countries whose fundamentals are deteriorating and/or where there is a higher risk of resorting to the printing press. This results in our partially covering the exchange rate risk on the US dollar, sterling and the yen. However, only a part of this hedge is done against the euro, given that the single currency is currently not inspiring a great deal of confidence either. A large portion of the USD, GBP and JPY exposure is hedged against the Singapore dollar, the Norwegian krone, the Canadian dollar and the Swedish krone.

Currency allocation before hedging - BL-Global Flexible - June 2011

Currency allocation after hedging - BL-Global Flexible - June 2011

Performance 2011

The net asset value of BL-Global Flexible has fallen by 3% since the start of the year. This is mainly due to the rise of the euro (the fund's reference currency) against most other currencies. The euro gained on average around 4.5% in 2011. As discussed above, only 36% of BL-Global Flexible’s assets are denominated in euro (after taking into account the currency hedging).

Year-to-date performance - BL-Global Flexible - June 2011