Market Highlights
In rand terms, SA Equities (ALSI) advanced by 2.34% on a total return basis in September 2006 (a gain of 26.3% y-t-d and 6.3% for the 3rd quarter of 2006). The All Bond index gained 1.4% over the month, while Cash delivered it's steady dose of 0.6%. Listed property lost 1.5% for the month and inflation-linked bonds generated a positive return of 1.2%. The rand weakened significantly against a broad basket of currencies in September 2006. From a foreigner's perspective, the strength of the local equity market was off-set by the rand weakness, resulting in a 4.9% decline in US dollars.

Within equities the best performing sectors were Personal Goods (+11.4%), Mobile Telecoms (+9.9%) and Paper (+9.3%). The worst performing sectors were Food Producers (-4.8%), Diamond mining (-4.7%) and Gold (-3.8%).

Outlook
Domestic equities have performed exceptionally well over the last three years and are now in the upper range of historic valuation levels and on peak earnings. Equity returns at 26.3% for the year to date, remain significantly above the long-term average for the market and relative to a high base, would constitute an exceptional result even if the market were to trade sideways for the remainder of the year. This remains the biggest challenge in the domestic investment environment and when considered together with a dearth of significantly undervalued equity ideas, makes us very cautious. In addition, history has shown that markets tend to struggle in periods of upwardly trending inflation and interest rates. We would therefore, re-iterate the need for investors to tone down expectations of a continuation of recent equity returns.

It is our view that we are experiencing a welcome recovery in asset prices (most notably in equities), that may very well continue, but that this is neither the start of a bull market or a pre-cursor to a sustained bear market. The market's advance has exhibited very narrow leadership (large-cap and dual-listed stocks) and as a result we remain unconvinced of the sustainability of the advance, unless the rand weakens significantly from here. If recent trends continue, we anticipate establishing positions in domestic financial and industrial stocks that have continued to underperform large-cap, resource and dual-listed stocks.
While we remain positive on the longer-term outlook for equities and hold a portfolio of stocks that are both defensive and cheap relative to the market, we remain cautious due to the high level of downside risk in margins and commodity related earnings. The resilience of the domestic bond market, in the face of seemingly obvious negatives, continues to both surprise and perplex us. We remain of the view that both Bond and Property yields are not fully discounting future inflation and remain equally vulnerable to changes in interest rate and inflation expectations. In this regard, the actions of the SARB over the next few weeks remain crucial to how events will unfold.

The rand remains at risk of large scale capital flight by disillusioned foreign investors, as well as sustained dollar strength as the US current account deficit diminishes on the back of a weakening US economy and strong portfolio flows into the US equity market

Portfolio Strategy
The portfolio reflects our continued concern about index valuation levels and high investor expectations. The domestic equity weighting remains below-average and is simply the result of a lack of equity opportunities that meet our strict criteria for investment. The fund has increased it's weighting in African Bank into price weakness and continues to hold selected megacap US stocks that are offering significant value, particularly relative to equivalent domestic stocks.

Individual stocks have been selected on the basis that they are both safe and cheap and should adequately protect investor capital over the medium term. We remain significantly under-weight bonds and listed property. The cash weighting remains intentionally high and places the fund in a good position to exploit future opportunities that we believe are likely to arise.

The fund continues to have a full off-shore weighting, in line with our rand view and to gain exposure to high quality global franchises, that are currently available at very attractive prices.

Market Highlights

In rand terms, SA Equities (ALSI) gained 3.4% on a total return basis in June 2006. The All Bond index shed 3.6% over the months while Cash delivered its steady dose of 0.6% for the month. Listed property declined by 3.2% for the month and inflation-linked bonds generated a positive return of 0.40%. The rand continued to weaken against a broad basket of currencies in June 2006. From a foreigner's perspective, the strength of the local equity market was off-set by the rand's weakness resulting in a 3.2% decline in US dollars. Within equities the best performing sectors were Platinum (+19.4%), Gold (+10.3) and Oil & Gas (+9.4%). The worst performing sectors were General Retailers (-12.8) and Technology (-10.5%).

Outlook
The domestic investment environment remains very challenging mainly because all major asset classes have done well over the last three years and are now in the upper range of historic valuation levels and on peak earnings. We would re-iterate the need for investors to tone down expectations of a continuation of recent equity returns.

The recent market correction, combined with the weakening domestic currency and interest rate concerns, have resulted in some opportunities within domestic financial and industrial stocks. Certain industries (most notably the local banks) have been unfairly punished, notwithstanding the weaker medium-term outlook. While we remain positive on the longer-term outlook for equities and hold a portfolio of stocks that are both defensive and cheap relative to the market, we remain cautious due to the high level of downside risk. The local market remains vulnerable to increased interest rates, due to the inflationary impact of a weakening currency and higher oil prices.

We remain of the view that both Bond and Property yields are not fully discounting future inflation and remain equally vulnerable to interest rate increases. The rand has already weakened considerably and remains at risk of large scale capital flight by disillusioned foreign investors. Investor optimism and complacency remains at high levels and the probability of a sharp correction in equities is very high.

Market Highlights
Equities declined 2.7% on a total return basis in May 2006. The All Bond index declined 1.1% while Cash bucked the trend and delivered its steady dose of 0.6% for the month. Listed property declined by a whopping 5.1%, while inflation-linked bonds generated a positive return of 0.40%. The rand weakened by 10% against the US dollar and 12.5% against the Euro in May 2006. From a foreigner's perspective, the weakness in the local equity market was exacerbated by the rand's weakness resulting in a 13% decline in US dollars.
Within equities the best performing sectors were Mining (+2.3%), Platinum (+1.5%) and Chemicals (+2.6%). The worst performing sectors were Transportation (-11.7%), Leisure goods (-12.6%) and Pharmaceuticals (-12%).
The big sell-off was due to a myriad of factors, including increased risk aversion with respect to emerging markets, inflation fears and anticipation of synchronised monetary tightening by central banks world-wide.

Outlook
The domestic investment environment remains very challenging mainly because all major asset classes have done well over the last three years and are now in the upper range of historic valuation levels. We would re-iterate the need for investors to tone down expectations of a continuation of recent equity returns. The local equity market is expensive relative to its own history and there a very few extraordinarily cheap stocks available. While we remain positive on the longer-term outlook for equities and hold a portfolio of stocks that are both defensive and cheap relative to the market, we remain cautious due to the high level of downside risk. The local market remains vulnerable to increased interest rates, due to the inflationary impact of a weakening currency and higher oil prices.
We remain of the view that both Bond and Property yields are not fully discounting future inflation and remain equally vulnerable to interest rate increases. The rand has already weakened considerably and remains at risk of large scale capital flight by disillusioned foreign investors.
Investor optimism and complacency remains at high levels and the probability of a sharp correction in equities is very high.

Portfolio Strategy
The portfolio reflects our concern about valuation levels and investor complacency. The equity weighting is below-average. Individual stocks have been selected on the basis that they are both safe and cheap and should adequately protect investor capital over the medium-term. We are significantly under-weight bonds and property. The cash weighting remains high and places the fund in a good position to exploit future opportunities. We are actively moving towards a full off-shore weighting, in line with our rand view and to gain exposure to high quality global franchises that are currently available at very attractive prices.