The Fund continued to reduce its net equity exposure by selling shares into the recent stock market strength. The Fund's net equity exposure is down to 63.2% and its net exposure to SA equities is down to 50.6%.

The FTSE/JSE All Share Index has doubled in US dollar terms from its low in October last year, and the South African equity market and many other emerging equity markets are close to their record highs relative to developed markets.

The strength in the rand continues to surprise us, but we are making use of the opportunity to top-up the Fund's foreign exposure to its maximum 20% limit.

The Fund has recently increased its position in the Newgold debenture to 4% of the Fund. What happens to the gold price in the short term is anyone's guess, but we believe that the Fund's gold holding provides it with some further protection from a potential weakening of the rand.

The Portfolio has been steadily reducing its net equity exposure after the rapid rebound of global stock markets off their lows. We are expecting corporate profits to come under considerable pressure over the next year or so, but this has probably already been priced in by the market. It is not clear where company profits will settle thereafter, but it is possible that the market is being over-optimistic in its expectations of a subsequent recovery. Certainly, the current high levels of 'insider' sales in the US suggest that American business managers don't share the stock market's enthusiasm for the 'green shoots' thesis.

Long-dated RSA bonds have sold off quite sharply as the market digests the news that more new issuance may be required to finance a government budget deficit that is widening beyond expectations. The strong bias in the Portfolio towards the short-end of the yield curve served it well.

As discussed in February's commentary the Fund's equity exposure is fairly high relative to its maximum of 75% despite us not being very enthusiastic about the level of future real returns. This is simply an outcome of our belief that the four year returns offered by our chosen equities are more attractive than those offered by rand cash. This would be more true within the foreign portion of the Fund where we have increased the weighting to equities. Whilst it may not feel that way to local investors many South African shares have held up well relative to world markets. In our view many foreign equities appear to be offering more attractive returns than their domestic counterparts.

However as highlighted in previous commentaries we remain aware that the current environment is different from that many businesses and indeed investors have experienced in their lifetimes. We have attempted to invest the Fund in a portfolio of assets that we believe can preserve, and given our view of current valuations, hopefully grow the Fund's value in real terms. This will enable the Fund to be ready to take advantage of any future opportunities which we believe with high conviction offer outstanding value.

We cannot predict the future but we can offer a view that these opportunities are likely to present themselves domestically when profits are depressed and investors are willing to pay very little for that depressed level of profits.

The Fund suffered negative returns of 1.8% in 2008. While this is disappointing, it is hopefully of some consolation that the Fund outperformed its benchmark by 8% in the year.
The Fund's outperformance can mainly be attributed to its defensive positioning over the last year. An important element of this defensive positioning was the Fund's investment in companies with relatively stable demand patterns and strong franchises. However, the Fund's relatively defensive asset allocation and use of stock index futures to hedge against the risk of declining stock markets further contributed to the Fund's outperformance.

While the Fund continues to be defensively positioned in terms of its stock selection, the stock index futures have been closed out and the net equity exposure of the Fund has increased.

One of the risks that faces investors is that the world's central bankers and politicians may not call a halt to their very aggressive fiscal and monetary policies in time to prevent the genesis of a new era of higher inflation. Equities, being real assets, tend to provide superior protection from inflation than do bonds or the money markets.