Review of 2009:

The fund’s strategy remained relatively defensive throughout the year. We took advantage of the fall in the stock markets in the first two months of the year to raise the equity weighting above 60% at the start of March. Following the sharp rally in share prices between March and May and given our lack of conviction about the sustainability of the economic recovery, we then decided to significantly reduce our exposure to equities again. Since May, the equity allocation has been fluctuating more or less in a range between 25% and 30%. Within the equity portfolio, we gave priority to the themes of ‘quality’ (e.g. Coca Cola and Nestlé), ‘income’ (companies paying out high dividends) and developing countries (Southeast Asia).

S&P 500 index and BL-Global Flexible equity allocation

The bond weighting in the portfolio was also actively managed. We believe that the ‘fair’ value for the 10-year yield (using the German Bund as our benchmark) in euro is currently around 3.5%. This figure is obtained by taking account of three factors that determine long-term interest rates, i.e. the eurozone’s long-term growth potential, inflation and a maturity premium. Using 3.5% as our starting point, we have defined a range of 3% to 4% with the aim of increasing the bond weighting (or the duration in the bond portfolio) in the upper portion of this range and reducing it in the lower portion. The bond portion has mainly been invested in government debt. The weighting of bonds denominated in currencies other than the euro has gradually been increased mainly through purchases in Norwegian krone and Australian dollars.

10-year interest rate in euros and BL-Global Flexible bond allocation

The Net Asset Value of BL-Global Flexible gained 14.47% in 2009.

Performance of BL-Global Flexible compared to MSCI AC World index

2010 strategy:

My ‘investment strategy 2010’ post from 11 January explains why we continue to believe that the economic and stock market recovery of 2009 will not be sustainable. In light of this, we continue to focus on an active contrarian strategy that consists of buying when the markets fall and selling when the markets rise. This applies to both equities and bonds.

In terms of equity allocation, our range is as follows and is obviously subject to review:

S&P 500:                        600    700    800    900    1000    1100     1200

Percentage of equities:     80%    70%    60%    50%    40%    30%   20%
(indicative)

It is important to note that the percentage of equities is a net percentage. The gross percentage may be higher and the difference is because a portion of the equity portfolio may be hedged through the sale of futures. On 15 January, the net equity allocation was 30% (55% gross including 25% hedged through futures on the S&P 500, the Stoxx 50 and the FTSE 100).

The geographical allocation of the equity portfolio is as follows:

- Europe: 27% (hedged at 17%)

- North America: 12% (hedged at 8%)

- Emerging markets: 9.5%

- Japan: 6.5%

The 'regular income' theme is extremely important in the equity portfolio, particularly in Europe. The (net) average dividend yield is currently 5.7% for eurozone stocks and 4.6% for UK stocks.

In the bond portion, the 3% - 4% range discussed above remains valid. On 15 January, bonds represented 27% of the portfolio, with 21% in government bonds (Germany, Netherlands, Norway, Peru, and South Korea) and 6% in corporate bonds (KPN, Heineken, Nestle, Bayer, and BP). Euro-denominated bonds represent 20% of the portfolio, with the remaining 7% invested in Australian and New Zealand dollars, Norwegian krone, Brazilian real and Indonesian rupees.