A feature of the South African market over the last two months has been the renewed weakness of the Rand. With the Rand:US$ exchange rate now approaching 8, our currency has depreciated by 22% from the R6 level it had in May 2006. Against the Euro and Sterling the depreciation has been even larger. Where the currency goes from here is difficult to predict, but in the absence of foreign investment flows, an even weaker currency might be necessary to balance our trade account which is currently in deficit. We have for some time now expressed our preference for non-Rand denominated assets. With the Funds' full offshore allocation and a preference for Rand hedge type domestic shares, the Fund has benefited from the currency weakness. It is however our view that the full effects of the currency weakness, should it be sustained, will only be realised over time. We continue to see the best prospective returns from Rand hedge type domestic shares, Rand based commodity producers and offshore assets. Domestic consumer orientated shares, which have been the major beneficiaries of Rand strength, are most vulnerable, and we see very little value here.

The Fund improved both its absolute and relative returns during June as the market recovered from the sell-off during May and the early part of June. The recovery was mainly driven by Rand hedge stocks on the back of a weaker Rand. As predicted domestic resource producers performed best during the recovery, aided by the leverage their operations have to a weaker Rand. The Fund, with its overweight position in platinum and gold shares, benefited from these movements. Although we used the sell-off to increase the Fund's share exposure, investors should note that the market is within 5% of its previous all time high. Our previous concerns regarding the level of domestic asset prices have returned and investors are again cautioned against too optimistic return expectations going forward. We continue to favour offshore assets, as is reflected in the Fund's 15% offshore allocation and its preference for domestically based exporters and companies with offshore operations.

The Fund continues to have very pleasing absolute and relative returns, with a 12-month return of 41.5%, versus that of the average prudential fund, its benchmark of 37.6%. After the small correction in February the JSE advanced to a new high in March. The latest move is largely driven by escalating commodity prices, which is very beneficial for emerging market economies in general and especially South Africa. Although commodity prices have advanced very strongly, many are still well below previous highs in real terms. The upside downside dynamics for these prices are now very unclear with risk on both sides. The same holds for domestic share prices, where in many instances the upside is more fully expressed, and the downside risk therefore increased. Interestingly, the largest beneficiaries have been domestic industrial shares, especially credit retailers, where levels of profitability are now at unprecedented levels. On the other hand, we still manage to find high quality companies, on normal levels of earnings that are competitively priced. Share exposure is cautious at 59% and foreign diversification is utilised at near to the maximum level of 15%.

The fund is conservatively invested, which was a help in February, when the JSE was down 3,3%, as the fund fell just 1,1% over the month. It was less well positioned, however, for the March recovery. Allan Gray is currently betting on growth shares which are not at a cyclical high, such as Sun International, Remgro, Shoprite and MTN. It prefers domestic resource shares such as Harmony to diversifieds. It holds no BHP Billiton.

Financial Mail - 13 April 2006

One thing those familiar with Allan Gray expect is an investment stance more often than not at odds with the general market view. This has stood the company in good stead, as Allan Gray Balanced Fund's (AGB) 218% return over the five years to December 2005 bears testimony to. This return was almost double its sector's 122% average.

AGB's success has come from usually being one step ahead of big changes in market fundamentals. In 2001, it was an early backer of domestic industrials, which went on to lead SA equities out of the bear market. The "domestic is best" theme became the favourite of most fund managers, and still is. But not with Allan Gray, which in early 2004 began moving along another maverick path favouring rand hedges and resource shares.

The strategy retarded AGB's performance in 2004, but in 2005, while the rand did not play along, resource shares did. It's a strategy AGB's manager, Arjen Lugtenburg, says is here to stay for now.

But his enthusiasm for resource shares has cooled. Though they remain the favoured domestic asset class, he says the value gap between share prices and resource prices is no longer that big.

If his view on resources has cooled, it's ice cold on domestic industrials. "Many industrials are expensive," says Lugtenburg, who believes many companies' earnings, particularly in the credit retail sector, are way above sustainable trends. He says Edcon, on a 13 p:e may look fair value, but its return on equity (almost 50%) is unsustainable.

Where Allan Gray is in tune with general thinking is on banks. Their earnings are more robust than industrials and far less above trend, says Lugtenburg.

But for Allan Gray nonresource offshore equity is the big attraction with markets in Asia in particular trading at similar valuation levels as SA but offering better quality earnings.

As always, Allan Gray's strategy is based on its tried and tested ability to assess the comparative valuation of assets. And, as the past has shown, with patience it has an uncanny habit of being spot-on.

Financial Mail - 24 March 2006

2005 was another exceptional year for the Fund with a return of 36.5%. This was well ahead of its benchmark, being the average prudential fund, which returned 28.0%. Investors are again cautioned that these returns are exceptional and unlikely to be sustained into the future. These returns were mainly driven by an equity market which has now appreciated by 145% since its low in April 2003. The Fund has maintained a reasonably full exposure to the equity market for most of the year, but reduced exposure towards year-end, as we now view sections of the market to be expensive. This is especially so in the case of domestic industrial companies where we believe the market to be over optimistic on the long-term prospects for earnings growth, as levels of profitability are already at unprecedented levels. Being overweight resource shares, especially those with domestic cost basis, and the decrease in the Funds holdings of domestic industrial shares during 2004, have generally benefited the Fund. Although the valuation gap has narrowed, we remain more optimistic on the former. The Fund also maintained a full offshore weighting, especially towards Japan and Asia, where we now see more attractive valuations.