Fund Objective

Merrill Lynch Balanced Portfolio Fund aims to achieve long-term total return, either through capital growth and/or income generation depending on market conditions.

View on Past Performance

The third quarter of 2008 will be remembered as one of the most tumultuous periods in financial history. The financials sector took centre stage, with instability leading to heightened volatility, regardless of asset class or geographic region, and a weaker global economy.Against this background, the Fund returned -13.8% for the three-month period. The Fund's UK equity portfolio suffered through the start of the quarter as sector rotation saw a substantial rebound in financial companies, and a significant sell-off in oil prices and related stocks.Relative performance was further impacted amid tumbling share prices in September, as resources stocks endured weaker commodity prices, and our below-benchmark weighting in banks was offset by poor stock selection - preference for RBS proved disappointing, along with our underweight position in HSBC, which performed well on the perception that it is safe and well-capitalised.Activity has seen a flattening of risk levels, with oil and mining exposure reduced selectively into strength and proceeds moved to more-defensive areas. Globally, equity markets recorded double-digit losses in local-currency terms as September's events brought intense volatility and stockmarket declines.The positioning of the Fund's overseas equity portfolio reflected a slant towards quality in both regional and style decisions, as we sought exposure to the US equity market given its diverse composition and relatively high earnings characteristics. Despite attractive valuations, we are least positive on Europe, where we perceive the highest risks from earnings downgrades.

Future Expectations

Expectations for official interest rate cuts and increasing demand for "safe haven" assets drove government bond prices higher over the quarter. The Fund's fixed income exposure benefited from a long-duration bias, and a preference for European government issues, which outperformed gilts. However, gains were more than offset by a large overweight in corporate bonds, as liquidity dried up on concerns that even the most influential institutions could face solvency issues.In asset allocation, we underweight equities and government bonds, and overweight credit and cash. Looking ahead, we favour the outlook for equities relative to fixed income, as the headwinds of declining corporate profits could be offset by extreme valuation signals and the high levels of cash awaiting re-investment. As such, we have started to remove equity market protection, as Governments have stepped into to underwrite the financial system.

Fund Details