Having increased our exposure to equities last quarter, we kept to our game plan and gingerly shifted our stance toward favoring riskier asset classes. For the most part this was reflected by reducing the exposure to our Alpha Only Strategy and shifting the freed-up capital back toward equities. Our concern about the broader economic picture, however, prevented us from deploying toward more speculative areas of the market, and we did not stray far from U.S. high quality stocks. We believe that this latest move will probably represent the apex of our high quality exposure. While we do not expect to be reducing our current weight in the near future, it is probable that our next moves into equities will target different opportunities This last move combined with the subsequent market rally shifted our overall equity exposure to just shy of being neutral. Our next moves will likely begin to shift our portfolios to an overweight in the coming quarters. We continue to favor the Flexible Equities Strategy, which has been targeting Japanese companies that get a substantial majority of their earnings within Japan. Essentially, domestic companies (and the higher quality half of domestics in particular) are both cheap compared to junky exporters and are at an all-time low in terms of relative profitability. In other words, as the exporters get hammered in the global slow-down and their profitability relative to domestics reverts to the long-term mean, we can expect domestics to outperform. In fixed income markets, sovereign yields are likely to be pressured by rapidly increasing supply and do not offer any longerterm value. Where we have more latitude, we still prefer to own broadly diversified absolute return portfolios, but even here we are beginning to dip our toes back into equities.
