The fund returned +3.8% for the quarter while the index lost 4.0%. In these turbulent times, this performance was pleasing, as it goes some way to restoring the one-year relative performance picture, which sees the fund at -14.9% vs. the index at -11.1%. At one stage in May the fund had trailed the index by as much as 11%. This shows that we really do not construct the portfolio against a benchmark; also that we have the courage to stick to our convictions when things are tough. These thankfully carried us through this difficult period. On a 3- year basis, the fund delivered 13.1% vs. the index at 15.6%, still not where it should be, but getting closer.

We shall spare you yet more comment on the credit crisis and its effect on the economy and stock markets. It is not constructive to dwell too much on these uncertainties. We would rather remain focused on valuing assets on an individual basis, comparing such values with their prices on the day, and (based on the risk-reward ratio as we see it) deciding whether to take it or leave it. Periods of volatility such as this one offer great opportunity to those who are dispassionate, and we have again been able to take advantage of this.

A brief run-down of how this extraordinary year has played out so far, goes something like this: we saw significant value in local industrial companies earlier in the year, but as you recall we were cautious about the economic outlook and hence kept the fund positioned defensively. By the middle of the year however, the market seemed to shrug off such fears. It was already looking through the peak in interest rates to lower inflation and a consumer recovery. In July an astounding rally lifted most financial and industrial shares. At the same time fears about global growth intensified, and the 5-year trend of outperformance by commodity companies and global cyclicals finally started to unravel.

In the past quarter the fund benefited from this rebound, even through its relatively defensive holdings. We had not lost our caution however; the local rally looked overdone to us. Meanwhile the credit crisis started hitting home, investors cut their expectations for global growth and the softness in global cyclicals became a rout. The local rally stalled. In our universe, the big index industrials, being liquid, were swept along in the global sell-down. It is among these that, late in the quarter, we found most opportunity.

In previous commentary we discussed how the three large industrial shares (MTN, Richemont and SAB Miller) contribute some 45% of the weight of the index. By coincidence, MTN, SAB Miller and the luxury business within Richemont are now all being offered around a similar rating, a forward PE of 11x. These companies are globally diversified with SA a small (or small and declining) portion of the overall value. Being exposed to many countries, they offer a significant rand-hedge element. The internal portfolio effect in these groups provides stability. Their exposure to cyclical middle class consumers in developed markets is limited. They are all growing strongly. All have bestin- class business models, management and execution. In recent years, one could buy these attributes only at a significant premium. Investors have now abandoned their faith in the longterm growth of these companies and their growth premium has disappeared. This is typical of the kind of market we're in: a focus on short-term risks rather than the evaluation of both risk and reward, over the long term. We know things will be tough for a time, yet our work on the fundamentals of these companies give us the conviction that an investment now will be very rewarding. Together with another old portfolio favourite Naspers, the three groups in question are SA-linked businesses that have found scalable business models and have been able to take on the world. We like such models. While of course there are risks, there is great scope for growth. We also like sheer size, believing that large companies are inherently less risky and more robust than small ones.

The investment case for SAB Miller is made in more detail in this month's edition of our newsletter, the Corospondent and will not be repeated here. The case for Richemont too is compelling. While the stock sold-off with the rest of the market, this ignores the internal dynamic triggered by the announced unbundling of its tobacco interests. While tobacco is fairly valued, we think the luxury business is very under valued. Once BAT is unbundled, this great business will bask in the full glare of the market's attention, and will no doubt be rerated. MTN, having touched highs of R160 in the early part of the year, is again at R105. Mobile telephony has become as much of a consumer staple as maize or beer. MTN has become a very robust company, and is now one of the pre-eminent global growth stories in the telecoms space. Given low mobile phone penetration rates in most of its markets, we think the growth is structural and sustainable. On top of global risk aversion, the disappointment of failed corporate deals offered an opportunity here.

During the quarter, we increased exposure to these counters. We now hold some 10% in Richemont, 8% in MTN and 6% in SAB Miller. We switched our Remgro into Richemont; the rest of the funding for these buys came from Reunert, Mvela Group, CIC and Distell. While the thinking evolved bottom-up, it became a theme: we reduced local mid-caps (at still reasonable ratings) in favour of global large-caps. Naspers is back in the top five holdings. We like owning these businesses without having to pay a premium multiple.

e may have availed ourselves of some growth opportunities, but uncertainties clearly remain. The defensive balance in the portfolio is retained with chunky holdings in our stalwarts Bidvest, Tiger Brands and Famous Brands. This is bolstered by the food retailers Spar and Shoprite. With two thirds of exposure in the top ten counters, the portfolio is more concentrated than ever. Our 'local-to-global' switch has the added benefit of increasing the rand-hedge element, something we never want to overlook. It is tempting to sit on the fence in challenging times. We have elected to do the rational rather than the emotive thing and to concentrate our bets where our conviction leads us. This makes us face the period ahead with surprising confidence.

Dirk Kotzé and Quinton Ivan
Portfolio Managers

The outlook for the domestic economy has deteriorated as inflation remains stubbornly high and higher interest rates continue to bite. Confidence has waned and political uncertainty has aggravated an already fragile situation. These factors have culminated in an aggressive sell-off of domestic financial and industrial shares. Amid this sell-off, the fund delivered -7.37% for the quarter, compared to the benchmark return of -2.70%.

As investment returns attest, the bull market has ended. The duration of the bull market resulted in a 'rising tide that lifted all boats' and virtually all sectors delivered handsome returns. Over the last 12 months returns have diverged, with resource stocks continuing their rampant run and domestic stocks coming under significant selling pressure. We are of the view that this, despite the significant volatility, remains a normal cycle. Negative sentiment has found its way into the pricing of local equities to such an extent that they are currently priced for a material decline in earnings over the next few years. While there is no doubt that corporate earnings are under pressure, we have been able to find many quality companies with strong franchises and good earnings prospects at very attractive ratings.

The fund remains defensively positioned with large holdings in Bidvest Group, Tiger Brands and Famous Brands. Approximately a third of Bidvest's value is derived from its offshore food service business. This is a high quality, diversified business, unaffected by a deteriorating domestic economy, which an investor is able to buy on a South African rating. The terminal and services businesses have low capital requirements and generate high returns. These businesses are exposed to the corporate sector and tourism industry and not directly to the consumer. McCarthy Motors, operating in an industry that is falling on tough times, makes up less than 10% of the value. We believe that Bidvest is extremely undervalued and have added to our holding during the quarter on the back of price weakness.

We added to the defensiveness of the fund with new buys in Spar and Shoprite Holdings. These businesses, despite being beneficiaries of rampant food inflation, are down 23% and 17% off their respective peaks - further evidence of the panic selling that has plagued our market. Spar continues to grow its volumes and take market share as its predominately rural footprint benefits from an increasingly affluent consumer. Approximately 12% of Shoprite's value sits in its African operations, which is currently benefiting from the enormous wealth created by the commodity boom. Locally, Shoprite also benefits from downtrading as consumers feel the pinch of rising fuel prices and interest rate hikes.

Given the deteriorating macro environment, the fund remains positioned for rand weakness, with approximately 38% of the fund in rand hedges such as Naspers, Richemont and Mobile Industries. Naspers continues to be an anchor tenant of the fund. The Pay-TV business (a third of which is Africa) remains a large component of the valuation. This is an annuity-based, defensive business that generates large amounts of cash. Management has a proven track record of making good acquisitions. Its first foray into the internet space was via the acquisition of Tencent, the value of which has increased one hundred fold over a period of six years. This position has been strengthened through the acquisition of Tradus, which will add another growth vector as it expands rapidly into emerging markets such as China, Poland and Russia.

On the sales side, we reduced our holding in ArcelorMittal on the back of significant share price appreciation, the proceeds of which were deployed into more attractive opportunities. We also switched some of Woolworths into more defensive food retailers such as Spar and Shoprite. Woolworths remains a significant holding with troubles in clothing masking a great food business that constitutes half of the valuation. Finally, we sold out of Steinhoff to fund better quality rand hedges such as Richemont and Bidvest.

As managers, we remain excited about the investment opportunities currently on offer. In a world of collapsing time horizons it is not always easy to hold a firm course and make the correct long-term decisions. It is essential that investment decisions are evaluated through the course of a full cycle. The cycle will turn, and when it does, we intend to be correctly positioned in the stocks that offer long-term value.

The fund currently trades on a forward price earnings multiple of 8.5x and offers an attractive 68% upside to our assessment of fair value for the underlying counters. We know that the past two quarters have been bruising from a performance perspective, but we urge investors to stick to the proven principles of long-term investing. Buying high-quality assets at low prices is the route to wealth creation. The current negative sentiment and indiscriminate selling has provided us with this opportunity.

Dirk Kotzé and Quinton Ivan
Portfolio Managers

Recent instability in global financial markets did not spare the local industrial sector. The fund delivered -10.7% for the quarter against the benchmark return of -6.4%. On a one-year view the fund returned -8.2% while the index delivered +3.0%. Disappointingly, the magnitude of this 11% gap pulled the fund below the benchmark over three years.

The divergence in performance of the fund and the index over one year (and the recent quarter) warrants further analysis. SAB Miller, MTN and Richemont each constitute approximately 15% of the index weighting. Each of these counters has outperformed the index over one year. The fund has been underweight these three index heavyweights and until recently, did not own any MTN. While we are cognisant of the benchmark, we manage the fund on a clean slate basis, taking large positions in our high conviction ideas. This philosophy has served us well in the past and we have every confidence that our patience will again be rewarded.

We are certainly being visited by 'interesting times' as promised by the infamous Chinese curse. It has been a time of adapting to rapid changes in the macro environment. As managers, we feel optimistic for a number of reasons: Firstly, we are pleased with our positioning going forward, secondly the big setback in the market, move in the rand and adjustment to economic prospects have been made and we look ahead with more certainty and from a lower base; lastly the predictable pendulum between optimism and pessimism has swung low and we are again offered good quality at attractive prices. What more could an investor want?

The performance drivers highlighted in previous quarters remain largely in place. We foresaw headwinds for the consumer and probable weakness of the rand and sought to hedge against both. We bargained on our larger positions in Naspers, Bidvest, Woolworths, Remgro, Richemont and AVI, to weather these storms. Last quarter we reported that the position in Tiger Brands had been raised. The after-effects of the price-fixing issue and management changes have inhibited the performance of this stock, whose defensive earnings streams and superb branded portfolio are now offered at excellent value, particularly in an otherwise frail consumer market. Generally, we saw SA industrials badly affected by global instability and rising risk premiums. As so often in the past, foreign investors were especially active in abandoning ship. Almost every company we spoke to recently, confirmed that their foreign shareholding had declined significantly. The resultant sell-off has been indiscriminate and as such, the strategy of holding better quality stocks has not yet been rewarded. But times are getting tougher still, and we remain comfortable with the view.

Given volatile times, numerous opportunities to acquire quality companies at bargain prices present themselves. We continue to take advantage of these opportunities. The fund continued to build on its small starter position of MTN, using points of weakness to do so, and has managed to build up a stake of just under 5% at a very good average price of R111. An interrogation of the investment case suggests that we may have overemphasised political and regulatory risks in the past and not fully appreciated the enormous growth potential of the emerging market countries in which MTN operates. We feel more comfortable with our current position and will look to increase, but will be very price sensitive.

New additions during the quarter (all small) were Barloworld, Group Five and Iliad. Despite our caution on the ratings of construction stocks generally, the outlook for Group Five remains very robust and January weakness provided an opportunity to re-enter this old favourite. We bought SAB as we believed the share price fall from £15 to £10 more than discounted the poor near-term outlook of this long-term winner. We added to the Truworths position. While it may be early, this company has a great track record of managing the risk of fashion and growing earnings even in times of rising interest rates. We suspect that once there is a hint of better news for the consumer, it will be too late to buy this quality company anywhere near the cheapness that it currently offers.

On the sales side, we sold out of Value Group, Amalgamated Appliances and Astrapak, all 'lower quality' cyclicals for which the worsening consumer outlook spells further trouble. We also sold Johnnic on the likelihood of gaming eventually wilting under the consumer's increased burden. Finally, the last portion of Spar and the Pick 'n Pay holding were sold in favour of more attractive opportunities.

The economic outlook (and hence the earnings outlook) remains challenging for now. That said, with our long-term time horizon we are excited about the current investment opportunities and in particular about the pricing level at which good companies are being offered. Those with short attention spans may still be fearful, but long-term investors will be well rewarded by capitalising on these opportunities.

Dirk Kotzé and Quinton Ivan
Portfolio Managers

The fund delivered a return of -0.9% for the quarter, disappointingly trailing the positive 1.7% of the FTSE-JSE Industrial index. On a one-year basis the fund similarly trailed the index (11.2% vs 17.8%). The three-year comparatives stand at 28.4% vs 31.3%.

Aside from relative performance, the progression of one-year returns tells the story of what has happened in markets. At end June, the fund's one-year return was 57%; by September this had fallen to 39% and a mere quarter later we are now at 11%. The long-expected correction in markets has largely happened. We reported last quarter that the portfolio did not prove to be as robust (or as defensive) as we hoped. The quarter under review did little to change this.

The lack of exposure to telecoms and construction remained the biggest reason for underperformance, especially relative to the index and competitors. Telecoms and MTN in particular contributed very strongly to the performance of the index, given the large weighting it carries. Corporate activity on this front (MTN's possible bid for Telkom, Vodafone's possible interest in Telkom's Vodacom stake, a possible international bid for MTN) resulted in a flurry of share price moves that does not necessarily relate to the long-term value of the assets involved. Regrettable as it may be for short-term performance, the view remains that MTN does not offer much valuation upside. The fund did manage to secure a smallholding at R115 per share during a sharp sell-off in December, but it was not enough to offset what had been lost earlier. The construction story played out rather differently. In an economy where the outlook weakened by the day, these stocks were strongly underpinned by the visibility in their near-term earnings, itself a result of the government's capital spending plans. Here too our view remains. Despite their obvious earnings momentum, these shares simply do not offer valuation upside.

The stocks that we continue to hold again performed below our expectations. Naspers and Woolies remain the two largest holdings. In December Naspers acquired a very large business offshore in a deal that was not well received by the market. Our conviction in the investment case remains. While we have every faith in management's strategy and track record, we are evaluating the transaction specifics. Woolies suffered along with other consumer plays as the macro environment weakened appreciably in the quarter. The investment case remains intact (a stable, growing food business, continued turnaround in the clothing business, blue sky financial business), but the deteriorating cyclical environment caught the food business with a high cost base in mid-expansion, a cool summer did the clothing business no favours, and a nasty credit environment revealed cracks in the lending book.

To avoid sounding like Lemony Snicket and his series of unfortunate events, it is perhaps better to move swiftly on. Given market instability and strategies that were not working all that well, there was much soul-searching, and some trading activity. While quite a few counters were involved, it was actually at the margin, with the core stock positions (Naspers, Woolies, Famous Brands, Bidvest, AVI) unaffected. Spar was one large position that was trimmed down, having held up well, in favour of new positions. The Tiger Brands and Remgro holdings were beefed up. In an attempt to broaden the base of the fund and capture some alpha, small positions were added in a number of counters, mostly under the headings of 'small cap' or 'cheap cyclicals'. Among these were Omnia, O-line, Seakay, Freeworld Coatings, CIC Holdings, Astrapak, Country Bird and Truworths. Funding came from Stefanutti & Bressan, York Timber, PPC, Afgri and Medi Clinic.

The offer for Tiger Automotive brings to an end a long and trying involvement for the fund. At a 5% holding, the premium to spot price that was achieved here was one of the few highlights of recent months and vindicated the earlier decision to stick with an undervalued situation. The capital thus released will provide handy firepower in a falling market where there is increasing value to be had.

Lastly, a hearty welcome to colleague Quinton Ivan as new comanager. He comes with new ideas and much enthusiasm: may they make a difference soon.

Dirk Kotzé and Quinton Ivan
Portfolio Managers

The fund seeks steady capital growth by investing primarily in South African consumer stocks. The fund will also seek international exposure in global consumer stocks.