You can read the full version of the fund manager's commentary on http://www.btim.com.au/FundCommentaries

Australian Equities

• The drivers of the positive market sentiment remain in place - stabilisation of growth in developed economies, accelerating Chinese economy and extremely loose monetary policy.
• These factors are driving a self-reinforcing rally in markets with the higher prices enabling more capital raisings and companies to de-risk their balance sheets.
• Australia’s situation is even more constructive with China’s emerging boom fuelling strong commodity prices, improving the terms of trade and supporting new investment.
• The reporting season provided more evidence that the underlying operating environment was improving, particularly for domestically exposed companies. Key themes included substantial write-offs, stronger balance sheets and improved cash flow.
• The key issue is the pace and duration of any recovery. While the policy medicine continues to be administered it is likely that the world economy will continue to be on a path for recovery and liquidity will remain strong.
• The risk to investors is what happens once the policy medicine starts to be withdrawn, particularly now market valuations are pricing in some recovery.
• Our portfolios are being positioned to capture the benefits of cyclicals where we see strong medium term fundamentals supporting the company beyond the immediate recovery in the economy.
• We are also targeting other longer term themes such as the development of LNG reserves with companies such as Santos, Origin and Oil Search.
• Finally we see value in certain companies which have demonstrated an ability to consolidate their industry to produce higher returns, such as Sonic Healthcare and QBE.

Fixed Interest & Cash

• With the global outlook now improving and with Australian economic data not being as weak as first forecast, it appears that the RBA will begin the tightening cycle over the coming months as it seeks to return the cash rate to a more neutral level. Market expectations are pricing in a 3.5% cash rate by year end.
• Three year bonds at a yield of 4.95% continue to offer good value. For this reason, the portfolio is currently overweight duration and is taking advantage of the attractive yield pick up relative to the current cash rate.
• We continue to remain overweight bond issues with an explicit government guarantee as they continue to provide good value relative to their respective Commonwealth Government bonds, despite their margins narrowing sharply over the last few months.
• The credit market has performed well since the start of the year and with credit spreads remaining above historical averages we remain positive on the outlook for credit, although the speed of the contraction in credit spreads is likely to slow.

Listed Property

• At current prices, the sector is delivering a 5.8% yield and 0-2% p.a. medium term growth. Whilst earnings and asset values will drift lower from here, the equity market has already priced most of this into LPT sector pricing.