The last quarter was undoubtedly the most volatile period we have encountered in recent history. From its high point in early July, equity markets plummeted 13% before turning around and recovering 16% to end the quarter back on its previous highs! Not for the fainthearted and certainly not for short term traders who most likely bailed out in the lows and missed the sharp recovery. If ever there was a time for cool heads and a long-term investment outlook, it was the past quarter. The fund returned 2.9% for the quarter despite the extreme levels of volatility.

A lot has been written about the causes of the recent global instability. In summary, it was the result of the excesses that built up in global, and mainly developed, economies due to too much liquidity having been pumped into markets by central banks in previous years. As central banks started tightening it was inevitable that some of theses excesses would be squeezed out, it is unfortunate that the main central banks have chosen to address this by opening up the taps again of global liquidity. The potential risks to inflation worldwide, as a result, remain high.

What this means to local investors is that the bull market in commodities has been extended further, as the attraction of investing in real hard assets which outperform inflation during times of excess liquidity remains strong. Fundamentally however it means when the slowdown does come, which it inevitably will, the fall will be that much further and harder.

The fund was protected during the market fall by a greater exposure to more defensive assets and put options that had been purchased in much more benign times. At the equity markets worst the fund was only down 7% from its highest level, roughly half the fall. All of this had been recovered by quarter end.

A number of stock picks worked for the fund this quarter, in particular Sasol, which we have mentioned a couple of times in these commentaries. The negativity surrounding the potential windfall tax disappeared and, helped along by higher oil prices, the stock made a stunning comeback. Staying with resources our holding in Impala Platinum also had a great period on the back of the strengthening platinum price.

Domestic focused stocks did not perform that well as mounting interest rate concerns weighed on investors' minds. We however believe that most of this is in the price and towards the end of the quarter saw evidence of this trend starting to turn. During the sell-off the fund took the opportunity to add to some of its holdings as well as one or two new positions. The main new addition was Investec which fell hard on the back of its lending exposure in the UK and contagion from Northern Rock. We know the bank to be in good condition and it offers good value at these levels.

We switched some of our international exposure from bonds, which rallied quite hard on the international rate cuts, into equity close to the lows. On the local fixed interest side, we have started adding some credit exposure as spreads have moved out dramatically on global concerns. The fund still has a fairly large exposure to preference shares which we continue to believe are one of the best low risk investments available in the market currently.

Looking forward: in the short term all we can promise you is volatility but firmly believe that the fund's long-term investment outlook and track record will continue to deliver long-term inflation and market beating performance.

Neville Chester
Portfolio Manager

Equities remained the best asset class in which to be positioned for the second quarter, although the ride has become somewhat bumpy. Bonds had an extreme sell-off as inflation and interest rate expectations rose locally and globally. Property stocks could also not hold onto gains in this environment and produced negative returns. The fund returned 2.5% for the quarter against its benchmark of 2.3%, which was a good result in a difficult market especially when the commodity shares continued to outperform against our long-term view.

The biggest news globally has been the recent sell-off in bonds. US and UK 10-year treasuries have risen well above 5% due mainly to the rise in global inflation expectations. The UK central bank has continued to hike rates and these now stand at 5.75%, the highest for some years. The lower level of rates in the US has seen the US dollar weaken further against Sterling and the Euro, which may ultimately be the saviour of the US's deficit. In the meantime the weaker US dollar has helped keep commodity prices high, as well as from continued demand out of emerging markets.

Higher interest rates, if they persist, can threaten the emerging market boom we have enjoyed recently as returns from low risk investments start to increase and global growth starts to slow as the years of 'easy money' come to an end. In addition we have seen the appetite for high risk credit, which has helped reduce the cost of equity in many emerging markets, start to reduce on the back of sub-prime implosion. All these are warning signs that one should be cautious in the coming months.

Despite this, the long-term outlook for equities remains reasonable as valuations generally are not stretched. There are certainly sectors which have become overheated, but it is still possible to find reasonably valued equities both locally and globally. The fund is still overweight equities but with some protection in place in the event of volatility.

The fund sold out of property early in the second quarter and we have recently started nibbling again. However, the majority of the property stocks haven't stayed down for long so we are unlikely to build up much of a stake at current levels. Cash and NCDs are offering very attractive returns of around 10.5% currently, as well as preference shares which have re-rated since last quarter yet still offering good returns.

While bonds have sold off locally, we have shied away from the local bonds in favour of longer dated NCDs. We have also started investing in global bonds due to their attractive returns. Looking forward into the second half of the year we expect continued good results from SA companies, but share prices will be determined by foreign investor sentiment and the direction interest rates take due to inflation. We believe the fund is still well structured to continue to deliver inflation and market beating performance in the medium to long term.

Neville Chester
Portfolio Manager

The first quarter of 2007 started off very strongly in most asset classes. Equities were particularly strong and our overweight position has once again proven to be the correct position. Within equities, the stock picking also proved to be correct, with good value being added for investors. The strength of the domestic economy and our heavy weighting towards domestic stocks was confirmed by the good results reported in the first quarter. Consumer demand remained strong, despite higher interest rates, and this has now stimulated further corporate investment as capacity utilisation in all spheres of the economy is close to 100%. As a result, it is difficult to find any corporate entity that had a poor 2006. Fears of a prolonged and restrictive interest rate cycle have proved unfounded and into the new year volumes have remained strong. The fund returned 9.3% versus its benchmark of 7.5%, which was a pleasing result.

The rand has remained around its new level of between R7.10 and R7.30 to the dollar for the past six months, mainly through the SARB interventions - without which it would most likely be stronger. In this environment we continue to invest offshore, predominantly in equities due to the relatively attractive valuations offered, although we have been investing a portion into the fixed interest market at attractive yields.

Late last year property stocks failed to follow the government bond index stronger and appeared to be an easy opportunity which the fund took advantage of by upping its weighting. This paid off later in this quarter and we have subsequently started reducing this position in favour 12 and 24 month NCDs, which are still offering great returns close to 10%. When comparing bonds to the alternative cash returns they do not look attractive at all. As a result we have reduced our bond weighting significantly and mainly hold a few credit positions which offer a decent spread. International bonds are looking more attractive with yields around 5% in hard currencies. We have added to these holdings.

Another great investment we have been taking advantage of is the preference share market. Yields on preference shares are at an all time high, thanks to continued uncertainty around the tax treatment post the changes to STC. Despite all the issuers putting out statements that they will pass on all benefits to make good the final yield to investors, they are trading over 75% of prime. This is a post-tax yield which is better than cash! We have recently launched a standalone preference share fund for investors who want to access this instrument on a direct basis.

Overall the fund is positioned with an overweight holding in equities with a bias to move more into international equities. The underweight position in bonds is offset by holdings in cash, NCDs and preference shares.

I believe the fund is well positioned to continue to deliver on its mandate of outperforming its benchmark and over the longerterm, inflation.

Neville Chester
Portfolio Manager

The final quarter of 2006 was impressive for most domestic asset classes, with equities, property and bonds all delivering a substantial positive return. Markets around the world shrugged off the volatility experienced in May/June, and in South Africa market participants began looking through the tightening rate cycle to what was actually happening in the underlying economy. In particular, in December the outlook on interest rates seems to have changed dramatically with the long end of the yield curve rallying sharply. Domestic focused equities which had underperformed up until this point came back strongly, vindicating the fund's overweight position in these shares. For the quarter the fund returned an impressive 14.7% ahead of the FTSE/JSE All Share Index return of 11.8%. For the calendar year the overall return was 29.1%, which was once again well ahead of inflation. For the past 5 years the fund has compounded at 26.6% per annum, which is well ahead of inflation as well as the balanced benchmark of 21% per annum.

The fund has been overweight equities for the year, having built up further weightings during the brief May/June meltdown in local markets. This has proved to be the correct strategy to date. Clearly on the back of the number of years of great returns (4 years of strong positive returns in a row) the asset allocation call becomes even more difficult as valuations in certain sectors and asset classes have changed. Looking at the local economy all signs indicate that the benign growth story should remain firmly on track, aided by increased government spending on infrastructure projects. The peaking of the domestic interest rate cycle should also add further impetus later on in the year and going into 2008. All this should bode well for earnings growth of local companies. Demand appears to have held up strongly, although higher interest rates have resulted in slowing growth for durables and semi- durables. With this background equities still appear to offer some value although once again stock selection will be very important. Foreign purchasing of domestic equities is at an all time high and any change in this phenomenon could result in sharp price fluctuations (but little impact on the fortunes of the actual companies).

With the December rally that occurred bonds are looking fully priced, although with SARS collections overrunning expectations and the economy unable to deliver further capital expansion, further issuance of government bonds will be limited. This could result in a squeeze due to no stock available to fund annuity portfolios. Some of this will be met by issuances from corporates although the appetite for this kind of paper is limited. Listed property has also had a very good quarter driven by the changing interest rate outlook. There does still appear to be some value in specific counters in this sector.

As the rand firmed into the last quarter we have taken the opportunity to increase our offshore exposure. As and when opportunities present themselves we will continue to increase exposure up to our maximum of 15%. The offshore exposure is currently split 60:40 between equities and cash. We deem it prudent at these rand levels to hold some currency diversification.

It has been an extremely eventful year which has resulted in great returns. We believe the fund is well positioned to continue to deliver good inflation beating returns over the medium- to long-term investment horizon.

Neville Chester
Portfolio Manager