The FTSE/JSE All Share Index advanced 8.7% in September, which means that it is now up 6.5% for the year to date. The resources sector has lagged significantly this year. We have taken advantage of this relative underperformance to add to the Fund's position in Sasol. You can read more about the investment case for Sasol in the Equity Fund commentary.

We reiterate our message to clients that we believe that real (or inflation-beating) returns will prove much more elusive over this decade than they were over the first decade of the century. This is simple mathematics based on the much higher starting prices for South African shares for this decade than we had in the early 2000s.

The Fund currently has 58.8% of its portfolio effectively exposed to the equity markets (mainly in South Africa, but 12.2% of this exposure comes from foreign equities). This net equity exposure is relatively low compared to the Fund's history. The sale of the Fund's holding in Didata to NTT will reduce net equity exposure by 1.8% within the next couple of weeks.

One factor mitigating against an even lower equity exposure is the exchange rate of the rand, which we consider unsustainably strong at the current R6.90/US$. Many of the shares in the Fund are potential beneficiaries of rand weakness - all else being equal (which is of course seldom the case in the real world!).

While the 20% of the Fund invested offshore has been a drag on recent returns, we believe that it can be a substantial contributor to future long-term returns and we thus maintain the maximum foreign exposure of 20%.

Approximately 64% of the Fund is invested in equities (either locally on the JSE, or on offshore stock markets through the Orbis mutual funds). We sell exchangetraded stock index futures to partially reduce the Fund's exposure to local and offshore equities. After taking account of this hedging activity, the Fund is presently carrying a 55.8% 'net' equity exposure. This is lower than the average net equity exposure of 65% since the inception of the Fund; and significantly lower than the 70.8% net equity exposure it was carrying at the end of the first quarter last year. It is also lower than that chosen by many of our South African peers.

The Fund's relatively defensive composition helped performance in a quarter where the local equity market fell almost 9%. Despite the equity market being down year to date we are still yet to see enough attractive valuations that would result in a meaningful increase in the Fund's exposure to equities.

History has shown (United States and Japan) that lower interest rates on cash do not automatically translate into high equity returns.

For a discussion of the sectors of the market offering the best relative value, please refer to our Equity Fund factsheet.

Approximately 66% of the Portfolio is invested in equities (either locally on the JSE, or on offshore stock markets through the Orbis mutual funds). We sell traded stock index futures to partially reduce the Portfolio's exposure to local and offshore equities. After taking account of this hedging activity, the Portfolio is presently carrying a 57.14% 'net' equity exposure.

This is lower than the average net equity exposure of 66.6% over the Portfolio's 10-year life; and significantly lower than the 70.8% net equity exposure it was carrying just 12 months ago. It is also lower than that chosen by many of our South African peers.

However, one should be careful in judging the suitability of one's exposure to the stock market based on a peer comparison. The danger is that the majority of managers will tend to be full of shares close to stock market tops and low in shares close to stock market bottoms. By way of example, a JP Morgan study shows that the average US pension fund allocated just over 30% to equities in the early 1980s, but after a 20-year bull market the average US pension fund was allocating about 60% to equities in the early 2000s.

We believe it better to allow the Portfolio's net equity exposure to be determined by the values we are finding in the market, rather than by blindly following the herd. With many South African financial and industrial shares trading close to their 2007-2008 highs, and the FTSE/JSE All Share Index up by over 40% over the last 12 months, it should be no surprise that our value-based approach is resulting in a lower equity exposure for the Portfolio.

The first decade of the 21st century was a remarkable one for the Fund. It returned 20% per year for the decade, which amounts to a significant growth in the real purchasing power of Fund investors' capital, as the inflation rate averaged only about 6% per year over the same period. Although the Fund has outperformed its benchmark, it should be recognised that the Fund's strong absolute returns are also attributable to the very strong performance of emerging markets and commodity producers from what would now seem very depressed valuations at the turn of the century. It would be extraordinary if the Fund were to enjoy a second consecutive decade of such favourable conditions; we expect real returns to prove much more elusive over the next decade. One of the keys to long-term wealth creation is the preservation of capital in bear markets. The Fund continues to reduce its exposure to equity markets by selling shares and holding short-dated bank paper and government bonds.