Review
Over the month the Fund delivered 4.7%, underperforming the Lipper IMA Europe ex UK Sector Average (5.7%) and the FTSE World Europe ex UK Index (6.7%).

The main detractors from performance over the month were the technology and financial sectors each accounting for some 50 basis points. The Fund’s strategic underweight to financials was punished as the stock prices of banks, as well as insurers, surged on the apparent good news of Europe’s stress tests as well as a softened regulatory stance on capital requirements. While painful in the short term, these developments don’t do much to alter our long held view that the European banking system remains over-leveraged and at the continuing mercy of government funding. We fail to see the longer term merits of the sector.

Following a strong performance in the second quarter of the year, the technology sector succumbed to sharp profit taking during the July reporting season. Given these two industries represent our largest underweight and overweight sectors, July proved something of a perfect storm for our strategy. Nevertheless, we have been here before and violent bear market rallies such as we have seen in European banks are to be expected. In essence we see no real trend reversal to tempt us to change course.

One new holding was added during the month as we established a small position in AP Moller-Maersk, a Danish transport and logistics business. The company has a positive forecast on the back of higher freight rates. Further to this, a low valuation, potential cost savings and low balance sheet gearing should stand it in good stead, should there come a double dip in the global economy.

Outlook
Our last monthly comment concluded that markets, as well as money managers, remain at the mercy of macro. This may well be brought into sharper light in the coming months. A clear slowdown in US GDP and, in particular, a double dip in US housing may now set the scene for the Fed to re-enter the stage with Quantitative Easing 2. It feels that Bernanke’s finger on the trigger is getting itchier. Were he to pull perhaps the one thing we can be sure of is the law of unintended consequences: it is easier to believe that he will unleash yet another asset bubble than it is to believe in real traction in the Western world economy. It is precisely this possibility that keeps us from being more seriously underweight European financials.

Review
The Gartmore China Opportunities Fund rose 2.0% over the month, while the MSCI Zhong Hua Index gained 0.1%. Year-to-date, the Fund has performed in the second quartile in the broader IMA Asia Pacific ex Japan sector.

Overweight holdings in Weichai Power, Baidu, China Shanshui and Agile Property all delivered the month’s strongest returns. Shares in diesel engine maker Weichai Power moved higher from cheap valuations following a quarter of profit taking. Chinese technology company Baidu continues to perform following Google’s exit from China. The company controls over 64% of China’s search market and is on target to grow this to 79% next year. China Shanshui is a growing cement company which has been active in recent M&A activity. We bought back into the company after the stock reached its replacement cost level due to concerns over an investment slowdown. Agile Property rose higher as investor confidence in the property sector stopped deteriorating and the stock bounced from levels at which the company bought back stock in the last three months.

The Fund’s overweight positions in Want Want and Ruinian detracted from performance. Consumer staples company Want Want which produces beverages, rice crackers and confectionary products continues to be a long term outperformer since we purchased the stock in October last year. The company did not participate in the market rally during July. Ruinian, who produce nutritional supplements, has recently struggled following revelations of product quality issues. We sold the stock after having made a significant profit since the company’s successful IPO in February.

There was some portfolio activity over the month. The Fund purchased Wuxi Pharmatech and topped up its exposure to Air China. The Fund bought back into the favoured pharmaceutical company Wuxi after the stock declined following the unsuccessful takeover by Charles River Laboratories. Wuxi has recently announced strong second quarter results. Air China is well positioned to benefit from increasing cargo and passenger volumes in the airline industry. The Fund took profits and sold out of Digital China following concerns over distribution margins due to strong competition from Hewlett Packard in China. The Fund also reduced its exposure to the consumer staples sector with the disposal of China Resources Enterprise and Beijing Jingkelong owing to high valuations and expectations of profit growth. These disposals allowed the manager to focus on a more concentrated portfolio of stocks offering greater unexpected earnings.

Outlook
The global macroeconomic outlook continues to be mixed with positives from the US and negatives from Europe. Within China, growth is strong but moderating from the heights of the first quarter. Market concerns continue to mount over the impact of China’s property tightening policies. These measures are being enacted just as the economy has already begun to witness moderating economic momentum. At the same time, macroeconomic concerns have resurfaced globally, particularly in Europe. Nevertheless, economic news has been generally positive and suggests that the Chinese economy continues to expand with a healthy rebalancing. Notwithstanding many global macroeconomic uncertainties, we expect any pull-back in the Chinese market to present a good opportunity to top up our most compelling positions. We expect China to continue to benefit as a recovery gathers momentum and we remain confident that Chinese equities represent decent value. There are still many doubters on China which continues to offer the potential for unexpected earnings growth particularly within the consumer sector.

Review
July brought a reversal of fortunes for equity markets around the world as investors were reassured by the positive outcome of European bank stress tests and an easing of sovereign debt worries. Significantly for the UK market, BP’s share price saw some recovery after making progress in capping the leak in the Gulf of Mexico.

The Fund gained 0.3% for the month of July, leaving the year to date return still fairly flat at 0.4%. While the long book performed well the short book detracted, and a short index position also dragged on returns in the rising market.

Tullett Prebon performed well over the month as a beneficiary of volatile market conditions. We began to lower our exposure to take profits and keep the position at a comfortable size. Since the end of the month good first half results and broker upgrades have seen further gains.

We initiated a small long position in support services provider, Cape, early in July. The position performed well following the release of its pre-close trading statement, with the company rising by more than 30% over the month. Rank Group was also a positive contributor, after good first half results prompted broker upgrades.

A long in Lloyds also performed well. Over the second quarter, we held a short position which was closed in July, and a long position initiated. Following the bank stress test results, which were positive for UK banks, Lloyds delivered gains in keeping with the sector overall. We have been fairly active in our trading in UK banks over recent months and expect this to continue for the foreseeable future.

The main detractor on the long book was GlaxoSmithKline. We added to the position as legal worries surrounding diabetes drug Avandia were resolved, removing some uncertainty, and provisions were made for settlements. But enthusiasm was short-lived as investor preferences swung towards the more cyclical, high-beta stocks and the share price fell sharply towards the end of the month.

Outlook
Little has changed from last month, with both gross and net exposure at similar levels. Among stocks, our preference is still for those companies with defensive characteristics and strong balance sheets. However, we have taken a more positive view on some financial and life insurers recently, closing out shorts and adding long positions.

As always the portfolio’s structure is a function of our stock selection process, but there are themes that emerge within this. Top line growth, secure cash flows, and strong balance sheets are typical characteristics of the companies that we feel offer the most attractive valuations for the long book at the moment.

Review
Asset class performance reversed in July, with equities performing very strongly and gilts suffering a decline. Corporate bonds also gained. Equities benefited from the positive bank stress test results, easing sovereign debt concerns and BP’s improving fortunes, and it was banks, mining and oil & gas producers that contributed the bulk of the 6.9% gain in the FTSE All-Share Index.

The Fund delivered a gain of 3.0% this month. This places us in the first quartile of the IMA Cautious Managed Sector for the month, with the Sector Average return at 2.0%.

The equity book was only a little behind the FTSE All-Share Index return this month, a good result given the market preference for cyclicals. The greatest contribution to returns came from an overweight position in Lloyds, which rose strongly on the back of the bank stress test results. Our holding in BP also benefited, as good news finally started to emerge from the Gulf of Mexico. Other overweights which delivered gains were International Personal Finance, Reed Elsevier and Standard Life.

Detractors, on the other hand, included an underweight position in Barclays and renewed weakness in our largest holdings. We remain confident that GlaxoSmithKline is significantly undervalued and expect the shares to perform better in the second half of the year.

We were a little more active in the portfolio this month, adding four new equity and two new corporate bond positions. Among equities, we added Home Retail Group, London Stock Exchange, Scottish & Southern Energy and Severn Trent, and increased GlaxoSmithKline, Greencore and Northern Foods. The debt of Conti-Gummi and DSG was also purchased. We remain supportive of fixed interest, with corporate bonds comprising 23% of the Fund at the end of July.

Outlook
The outlook for the world’s economies and markets is still unclear, with data sending mixed messages. But an interesting possibility is emerging: that the UK may become more attractive, relatively speaking, than other economies. Austerity measures, favourable currency and the strength among corporates are all positive influences. Should this come to pass, it could spell a move away from the overseas earners with an increased focus on domestically-focused businesses. Clearly this is by no means assured, but we feel it is important to remain alive to the possibility and keep a watchful eye on progress.

We remain sterling-based, and with performance having been adversely impacted by its weakness it is worth remembering that, if sterling continues to recover then the Fund should be in a position to benefit.

The recent market turbulence witnessed over the last couple of months was sparked by a variety of macro level developments. The threat of European sovereign debt contagion, Germany’s shock short selling ban, uncertainty over the future of financial regulation and the threat of the Chinese economy slowing down, were some of the major factors which rocked global markets.

However, despite this surge in risk aversion we don’t believe the UK will suffer a double dip recession. In fact, our funds are all currently invested with a bias towards equities.

There are a number of factors we think should be considered. The co-ordinated global policy witnessed at the beginning of the credit crisis has restored credibility and confidence in monetary authorities around the globe. It appears that financial Armageddon has been avoided and banks have remained solvent.

It is true that the credit crisis has morphed into a sovereign debt crisis but again governments are taking strong measures to reduce the effects of contagion. For example, in Europe the ECB has proposed a massive €720 billion package to protect the financial stability of the eurozone. It also announced in conjunction with the IMF, a €110 billion package to help bailout Greece over the next three years.

In the UK, although some investors fear that government spending cuts may damage the UK’s fragile economic growth, the news has been warmly received by rating agencies, foreign governments and supranational bodies (such as the OECD and G20). It is generally accepted that the UK’s budget deficit (currently 12.6% of GDP) is untenable, and will damage future economic growth if it is not addressed soon. The UK government’s budget slashing proposals seems to address these concerns.

It also appears that the Bank of England seem prepared to keep historically low interest rates on hold for the foreseeable future. They are willing to tolerate higher levels of inflation in the long run in order to generate economic growth. This should also help to further quell fears over a double dip recession.

Given this backdrop, we are underweight cash and avoiding gilts which appear unattractive in the current market environment. Property is becoming more interesting and we are positive on equities. We have been overweight cyclical equities but defensive names now appear to offer good value. In terms of regional allocation, we have been taking some profits in GEM and Asia and are reinvesting into preferred regions like the US and Japan.

It is true that the outlook appears muddied by recent events. However, it is important not to lose sight of the bigger picture. Despite the rise in risk aversion over the last few months, by and large, economic fundamentals remain positive.

In part, this has been due to the generally positive economic data which increasingly supports a broadening economic recovery. Additionally, many companies have beaten their earnings and profit forecasts this year, exhibiting stronger and more robust balance sheets than they did a year ago.

Recent market volatility has created many value opportunities across a number of asset classes. A prime example is large cap equities which are trading at valuations which do not reflect corporate balance sheet strength. We believe that the current market offers many buying opportunities, whose returns will realise once markets have normalised.

Review
The Gartmore China Opportunities Fund lost 2.5% over the month, while the MSCI Zhong Hua Index fell 1.2%. Year to date, the Fund has performed in the top quartile in its sector.

Overweight holdings in Hong Kong Aircraft Engineering, Singamas and Bosideng all delivered the month’s strongest returns. Hong Kong Aircraft Engineering (Haeco) rose strongly after Swire Pacific Limited, the biggest shareholder in Cathay Pacific Airways offered $1.2 billion for all of Haeco’s remaining shares as travel demand rebounded. Singamas is a beneficiary of improving dynamics in the shipping containers market. As the container shipping industry enters its peak season, Singamas is well positioned to benefit from an unprecedented shortage of containers. Menswear company Bosideng is set to deliver impressive FY2010 results due to the unseasonably cold and lengthy winter and a shift in product mix towards higher margin new products. We believe Bosideng continues to offer good value relative to its sector.

The Fund’s overweight positions in Baidu, China Shenhua and Lenovo all detracted from performance. After a prolonged period of outperformance, Baidu pulled back slightly due to profit taking. We retain our conviction for the company given its control over 64% of China’s search market and its target for 79% next year. Coal miner China Shenhua was sold off as China announced a 5% resource tax on crude oil and natural gas sales and a 2-5% tax on coal in the Xinjiang region. This policy is expected to boost production costs for Shenhua. PC maker Lenovo fell over the month following China’s announcement that it would allow the yuan to move freely. Lenovo earns more than half its income from sales overseas.

There was some portfolio activity over the month. We bought medical devices producer Mindray and the offshore oil and drilling company, China Oilfield Services. After a sell off following a weak quarterly report on delayed government spending, we took the opportunity to buy Mindray. Mindray is a strong company operating in an attractive industry. The company is benefitting from domestic growth and strong export markets. Following a pullback in the market, we also bought into China Oilfields at an attractive valuation. The industry is offering good long term potential and should allow the company the opportunity to repair its balance sheet. The Fund disposed of a number of small positions in several cyclical companies over the month. This allowed the manager to focus on a more concentrated portfolio of stocks offering greater unexpected earnings.

Outlook
The global macroeconomic outlook is mixed with positives from the US and negatives from Europe. Within China, growth is strong but moderating from the heights of the first quarter. Recent action by the authorities to reduce property prices has been prudent but is causing a tighter monetary environment. Chinese authorities have also announced plans to make the Chinese yuan exchange rate more flexible. We expect China will benefit as the move allows for more flexibility in policy going forward and should in turn drive consumption higher. Nevertheless, with European economic weakness hindering export growth, we don’t expect to see any large currency moves in the short term.

US macroeconomic data appears robust while Europe is dealing with economic and political issues that look set to rumble on. Chinese economic activity is robust but concerns over tightening in the property sector have caused investors to take a more cautious approach. Notwithstanding many global macroeconomic uncertainties, we expect any pull-back in the Chinese market to present a good opportunity to top up our most compelling positions. We expect China to continue to benefit as a recovery gathers momentum and we remain confident that Chinese equities represent decent value. There are still many doubters on China which continues to offer the potential for unexpected earnings growth particularly within the consumer sector.

Review
Equity markets were volatile in June and risk aversion increased. Data was generally weaker than expected, Europe’s debt problems continued to worry investors, and China reported a slowing of manufacturing growth which raised doubts about the strength of the global recovery. Gilts performed well as investors sought safe havens, with corporate bonds positive but equities lagging. Within equities, cyclical sectors in general performed poorly, and traditional defensive sectors fared much better.

Our underweight exposure to BP was again the largest contributor among equities. We have been purchasing shares as the price has fallen, as it seems likely that the drop in its market capitalisation is excessive in relation to the possible costs of the events in the Gulf of Mexico. We also benefited from an overweight in AstraZeneca which received upgrades as its Crestor patent was upheld in court. The largest detractor was an underweight exposure to British American Tobacco, which rose over the month.

We had a fairly quiet month in terms of activity. We switched our Allied Irish Banks debt for an issue with an earlier maturity, and also added the debt of National Express and Taylor Wimpey. Our only new equity position was a fairly small holding in food producer Greencore.

The Fund dropped 1.8% over the month of June, which is slightly behind the IMA Cautious Managed Sector Average, which declined 1.3%. Our equity book outperformed the FTSE All-Share Index, but investor fondness for gilts contrasted with our preference for corporate bonds.

Outlook
Renewed fears of a downturn have surfaced over recent weeks, specifically brought about by signs of weakness from the US consumer. This has only served to add to the worries of investors already troubled by European sovereign debt fears.

Where we share many of these concerns, we are mindful of how volatile such short term data can be, and there is not yet sufficient evidence to confirm that Western recoveries are slipping back into recession. However, doubts must be raised about the strength of recovery and the impact a loss of momentum would have on corporate earnings. The economies of the west are plainly not prospering, even with the stimulus programs that remain in place.

On a final note, we like the budget from the new Chancellor, George Osborne. This plan makes sterling a more secure currency, but we still must acknowledge the reliance on GDP growth to provide the bulk of the deficit reduction, and that is by no means assured in the present climate.

Review
Over the month the Fund delivered –2.6%, outperforming the IMA Europe ex UK Sector Average (-3.7%) and the FTSE World Europe ex UK Index (-3.0%).

We continued to add to the telecoms sector, which we believe is now beginning to exhibit the attributes we look for in these companies. These include strong balance sheets, attractive valuations and the beginnings of M&A (Mergers & Acquisitions). We expect the latter to develop further in 2010. We also see a number of technology stocks as capable of above average top line growth: something that will come to be appreciated in a world of low, slow recovery. New holdings in Telenor and TeliaSonera, Scandinavian telecommunication companies, were established during the month. Their strong core businesses, strong balance sheets and significant Emerging markets exposure place them in a strong position to capitalise on infrastructure spend. The holdings in Cap Gemini and Veolia Environnement were sold as we focused on more attractive positions elsewhere.

In a month dominated by difficult economic conditions and increased risk aversion, the portfolio benefitted from astute stock and sector selection. The largest sector contributors to performance during the month came from the technology and health care sectors where we held overweight positions relative to the index. At the stock level our holdings in Ericsson and SAP produced the strongest returns following positive data forecasts for global telecom equipment providers and broker upgrades of technology names. Novartis also performed well as it won US approval for its leukaemia and MS drugs.

Nokia was a drag on performance during June as the company cut its second quarter earnings guidance due to pricing pressure and low volumes. Fugro, the Dutch oil services company, was a negative contributor as the sector continued to weaken following events in the Gulf of Mexico. Our holding in Banco Santander also detracted. Whilst short term ‘beta’ rallies in the financials sector are inevitable we remain underweight the sector, much of which continues to look over-indebted as well as opaque in its accounting.

Outlook
While it would be refreshing to focus solely on the fundamentals of stocks and sectors, we are alas not afforded such luxury. The fact remains that we are at the mercy of global economic events. It is striking that following a substantial currency devaluation and highly attractive equity valuations, Europe remains the epicentre of ‘debt threat’ fears. Yet, even more worrisome, indebtedness exists elsewhere: namely the USA. Our sense is that as the year progresses a growing realisation of the scale of the US fiscal and trade problem, coupled with weakening growth, may yet catalyse Quantitative Easing 2. It is our sense that the US authorities may be preparing another monetary ‘all-in’ response. This time it may well be in parallel with the Europeans. Such might prove the decisive moment for popular bonds versus unpopular equities. These days equities don’t come more unpopular than in Europe.

After months of speculation, the Chinese government has announced its plan to allow its currency to move freely. Charlie Awdry, Manager of the Gartmore China Opportunities Fund, considers the repercussions of such a move for the markets and his Fund.

What has happened? Chinese authorities have announced plans to make the Chinese yuan exchange rate more flexible. The Central Bank will aim to keep the currency stable and has stated that there will be no immediate revaluation of the currency. The yuan has been pegged to the US dollar since July 2008, as China sought to insulate its export sector from the financial crisis. That policy has come under attack in the west, especially in the US.

Why has this happened? The Chinese have found themselves in a tough situation over the yuan in recent months. By ensuring the currency remained low, China was providing its exporters with an advantage at the expense of foreign competitors. More recently, US dollar strength has meant that the yuan has strengthened against other emerging market currencies. It is this volatility against other trading partners which has perhaps become more difficult. As a result, China has come under increasing international pressure to change its currency policy. The move, which came ahead of the G20 summit later this month, has reduced fears of a possible trade war between China and the US.

How is the news being received? Global stock markets and Asian currencies initially rose strongly following the announcement but have since fallen back. Foreign currency forwards had moved sharply higher as traders expected the currency to appreciate over the coming year. General market consensus suggests that the Central Bank will allow the yuan to appreciate some 2-3% over the next 12 months.

Our view: Despite the move making Chinese exports less competitive, the announcement will undoubtedly be welcomed by the rest of the world and will improve China’s diplomatic relations with the west and, in particular, with the US. We expect China will benefit as the move allows for more flexibility in policy going forward and should in turn drive consumption higher. Those businesses with assets denominated in the yuan should also benefit as the currency appreciates. The change in policy will make it easier for Asian countries that compete with China for exports to allow their own currencies to rise. Nevertheless, with European economic weakness hindering export growth, we don’t expect to see any large currency moves in the short term.

A much anticipated fiscal tightening by the new Con-Lib government coalition is likely to increase pressure on the Bank of England to keep rates on hold. It appears that the Monetary Policy Committee (MPC) is prepared to continue maintaining extremely low interest rates despite the current above-target level of inflation, says John Anderson, manager of the Gartmore Corporate Bond Fund.

This week revealed that the CPI, the government’s preferred measure of inflation, dropped from 3.7% in April to 3.4% in May, still well above the government’s target of 2%. John’s view is that the Bank of England has few options available to tame long term inflation expectations:

“The primary reason for this is their fear that raising rates will thwart any economic recovery. Given the current economic environment, interest rates are likely to remain static for the foreseeable future”.

The UK gilt market remains sanguine with regards to inflation, with 10 year yields at just 3.5%. Low interest rates, coupled with concerns of sovereign debt contagion in Europe (highlighted by Moody’s decision to cut Greece to junk) have underpinned the short-end in particular.

John believes that the MPC’s reluctance to raise rates during a period of fiscal tightening reflects fears that UK growth will suffer as a result:

“The most effective pain free way to reduce a budget deficit is to engineer economic growth. During 1993 to 2000, a period of sustained economic growth, the UK saw its 8% budget deficit move to a 3.7% surplus”.

The yield curve in the UK remains extremely steep, which is likely to persist for some time. It is difficult to see value at either end with low rates and risk aversion underpinning the short-end, while realistic inflation and funding concerns justify higher yields on the long-end.