We are living through history in the making. Fears of a global economic recession and deleveraging after the credit bubble are forcing stock prices to new lows daily. The S&P 500 Index was down 9% in September. At the time of writing, it is down more than 20% so far in October. We have not escaped these chill winds in South Africa, and the FTSE/JSE All Share Index has now more than halved from its peak in US dollar terms.

The Fund is showing negative returns over the last one year period, and we are mindful that this is always painful for investors in the Fund. However, we take some consolation from the fact that the negative returns are substantially smaller than the decline in the overall stock market. The Fund's hedging strategy, exposure to other asset classes and stock selection ameliorated the negative returns from the stock market.

The Fund has now received the necessary permissions to increase its foreign exposure to 20% of total assets. Unfortunately the rand has weakened substantially in the last quarter, but we will be looking to increase the Fund's offshore exposure at opportune times over the next quarter.

Although the equity market declines which started in late May continued in June, the Fund retained a net equity exposure of 65%, substantially below the maximum allowed 75%.

The Fund's position in Anglogold Ashanti increased significantly when it followed its rights to subscribe to the company's share offering in June. We believe that Anglogold's successful rights offering is a positive development for the company, which will give it much more flexibility in allocating capital to early deliveries into its hedge book and its promising exploration and development projects, particularly those in Colombia (where it has already found some prospects in a permit area twice the size of the Kruger National Park). We are attracted to the following aspects of Anglogold: a new management team with a value based approach, a portfolio of assets with unrealised potential, a promising exploration pipeline and a declining hedge book. We believe that Anglogold offers better value than the big diversified miners such as Anglo American and BHP Billiton, which are currently earning unsustainably high profits. You can read more about the investment case for Anglogold Ashanti in our June 2008 Quarterly.

Volatility in equity markets creates opportunities. The allocation of the Fund to equities was increased at opportune times in the first two months of the year and the Fund had a net equity exposure of 66% at the quarter end. However, this is some way off the maximum allowed net equity exposure of 75%. The South African stockmarket has rebounded to levels close to its all-time Rand high and we are once again worried about its high valuation. Our concerns about the unsustainably strong Rand have proven well-founded, with the Rand weakening substantially against most major currencies this year. While there is always the possibility of a short-term pullback when a currency loses value with such alacrity, we remain concerned about the long-term sustainability of the Rand's value, even at these weaker levels. We expect that many of the shares in the Fund will benefit from a weaker Rand. The pending increase in the Regulation 28 limit on the Fund's foreign exposure from 15% to 20% will present the Fund with further opportunity to diversify and protect itself from Rand weakness.

The Fund ended the year ahead of its benchmark, after a strong performance in the last quarter. The Fund has continued to deliver pleasing outperformance over the last 3 and 5 year periods, but its performance relative to its benchmark will be much more volatile over short time horizons. This is because of the wide difference between the Fund's portfolio and the portfolios of its peers. Two of the principal differences are: 1. We find better value in gold miners and paper manufacturers than we do in the two heavyweight resources companies, Anglo American and BHP Billiton, whose profits have been buoyed to above-normal levels by unsustainably high (in our view) base and ferrous metal prices; 2. We find better value in the big industrial companies such as Remgro, SABMiller, MTN and Richemont, which have substantial business interests outside South Africa, than we do in many other South African industrial companies, especially the construction and credit retail companies. Our longstanding clients will know by now that we don't shy away from different and contrarian investment portfolios, because while they may result in volatile performance relative to our peers in the short-term, this relative volatility has historically been handsomely rewarded by the compounding of superior returns over the long run.