"The answer to your question is I don't know, and the answer to all of your questions is I don't know. What I do know is that either the world is coming to an end or the world will get through this and these stock market declines present an incredible buying opportunity, and I'm in the latter camp" Barton Biggs, 9 October 2008.

The words above were the response of Barton Biggs to a Bloomberg TV interview when asked about whether we had reached capitulation point and when he thought stock markets would recover. Those words perhaps best sum up our views today. The near-term future is extremely uncertain and we are not sure how long the global financial system will remain frozen; neither are we sure whether the world is about to enter a recession and we definitely don't know when stock markets will recover. No-one does. What we do believe is that the world will eventually get through this and whilst corporate profitability will be under pressure in the next year or two, over time good businesses will continue to grow their earnings and dividends in real terms. What is also clear is that irrational panic selling as well as forced selling has now set in, particularly in the week preceding the writing of this commentary (12 October 2008). Daily individual share price moves of 10, 15, 20% (both up and down, but predominantly down) are quite common and the US and European markets can swing from being -7% at one moment to +3% a few hours later. The last, and most important, thing that we do know is that equities are very cheap.

As always, we come back to valuation. We are of the firm belief that markets cannot be timed and that valuation is everything. This approach has cost the fund over the past several months as valuation has mattered very little. In hindsight, of course, we should have had 50% of the fund in cash and not 15% as was the case. The fund avoided the two key bubble and trouble areas (commodity stocks and US financials respectively) but was negatively impacted by its high equity exposure as well as its holdings in the stock exchanges and the emerging market exposure. The fund is therefore down 15% over the past year, which is naturally very disappointing. It has however compounded at 14.5% per annum over the past 5 years and 15.0% per annum since inception 9 years ago. In both cases with volatility levels far below those of the MSCI World index and the JSE All Share.

The MSCI World index is now trading on a 9.3 forward P/E. The dividend yields on European equities (over 5%) are now higher than European bonds (less than 4%). This is the first time this has happened since 1973. Large blue-chip corporates like Nokia, Microsoft and Dell are now trading on single-digit multiples and have large amounts of net cash on their balance sheets. The list of examples of these types of apparent valuation anomalies can go on forever. Today one has the opportunity to buy some of the best businesses in the world at fire-sale prices. Two such businesses that fall into this category (in our view) are Nokia and Inditex (Zara), which were the fund's two largest new purchases in the past few months.

Nokia is the world's 5th most valuable brand (2008 Interbrand survey) and is the dominant global mobile phone manufacturer with 35% - 40% market share. In addition to this, Nokia are dominant in emerging markets (the higher growth area for mobile phones); have unrivalled distribution, and generate an ROE of around 45%. Given the global slowdown, Nokia's earnings are likely to be under pressure over the next year or two. But the business is certainly not distressed - Nokia are in a net cash position and have been buying back shares. Its share price, however, is distressed. The share has more than halved from EUR 28 in late 2007 to EUR 12 today. This means that the share price is now back to its trading level of 2003/2004. In the 4-5 years subsequent to this period, Nokia have doubled their earnings. The de-rating has therefore been dramatic and today one is able to buy Nokia on an 8 P/E and 5% dividend yield, which we think is a great opportunity.

Inditex are a Spanish clothing retailer that owns the Zara brand (70% of earnings) and several other retail concepts. The company started off as a textile manufacturer in 1972 and the first Zara store was opened in Spain in 1975. The company then continued to open stores all over Spain and the first international store was opened in 1988. Zara is now present in 70 countries globally. Over the past 15 years the company has grown both its sales and earnings at over 20% per annum compounded. The uniqueness of Inditex's business model is that it is vertically integrated (meaning design, manufacturing, distribution and retailing are all done by the group). This gives the company a cost advantage as well as short lead times and flexibility; qualities which are all very important in the world of fashion retailing. The market is currently focusing on the slowdown in the global economy and in particular the mess in Inditex's home country, Spain, and as a result the share price has almost halved over the past year. For us, this short-term focus creates the opportunity. In our view Zara and the other brands owned by Inditex have 10 years plus of growth from global store roll-out, and at the current share price one is paying very little for this.

The decline in global stock markets over the past few weeks has been as severe as both the 1987 market crash and the 1929 stock market decline that marked the start of the Great Depression. Parallels are now being drawn with 1929 and whilst the world is indeed a pretty grim, uncertain place at the moment, we would highlight two relevant differences between 2008 and 1929:
-Valuations were much more expensive in 1929. The several years preceding 1929 saw a more than 5-fold increase in the Dow with a frenzy for shares, whereas the several years preceding this crash were characterised by luke-warm appetite for shares (other than certain areas like commodity and emerging market equities). The S&P500 in fact was broadly flat over the 2001 - 2008 period pre the crash and is now back to 2002 levels post the crash.

-Central Banks globally have learnt from their inactivity in 1929 and are taking rapid, extensive and globally co-ordinated action to deal with the crisis. We are fully aware that these are trying times for investors in the fund and there appears to be no end in sight to the global turmoil and carnage in the stock markets. Bear markets are gut wrenching but for long-term investors the opportunities that arise in these markets are huge. We believe that now is the time to be invested in equities and not cash, and whilst the fund has the flexibility to hold 50% or even more in cash, we believe that the best approach, given the silly valuations out there, is to be just about fully invested with 85% - 90% in equities.

Gavin Joubert
Portfolio Manager

The turmoil in both global and SA equity markets continued over the past few months. The oil price reached new highs which led to concerns of rising global inflation and subsequent rising interest rates and slower economic growth. This, all on top of the subprime mess of course. Global equities (MSCI World Index) had their worst first half in 25 years, the Dow Jones (US) index had its worst June since 1930 and the share price of General Motors fell to the level that it was trading in 1953. Even Warren Buffet was not immune, with the share price of Berkshire Hathaway falling by 20% over the past 6 months, its worst start to the year in the past 20 years.

Given this backdrop, Optimum has had a terrible past few months, particularly June which was the fund's worst month since inception. As a result, the shorter term performance of the fund (-4.3% over the past year), is very disappointing. The longer-term performance track record is more in line with the type of returns that we would expect, with the 3- year return being 14.3% per annum, the 5-year return 17.4% per annum and the annual return since inception of the fund over 9 years ago being 16.8%.

There has been very little in global stock markets (except a few commodity stocks) that have not gone down over the past few months. Similarly, most holdings in Optimum have declined, with the stock exchange operators being the mostly severely impacted (25% - 30% declines in June alone). As the exchanges make up 12% of the total fund this has had a significant impact on shorter-term performance and we believe it is therefore worthwhile re-addressing our views on the exchanges:

o The operators of stock exchanges are, in our view, some of the best businesses in the world due to: dominant (or even monopolistic) positions in many cases, pricing power, structurally increasing revenue lines over the longer-term, high operating margins and ROEs, and limited need for capital reinvestment with resultant great free cash flow generation.
o It is our view that whilst equity and derivative volumes and values will come under pressure at times during the short-term, over the longer term equity and derivative volumes and values will continue to increase. This is due to increasingly more short-term focused 'investors' (who therefore trade more), an ever increasing presence of hedge fund and quants fund, rising markets, and the ongoing launch of and demand for new products, particularly derivatives.

With regard to the current concerns about the exchanges (volume declines and increasing competition), we believe firstly that whilst volumes may well decline over the shorter term, over the longer term they will continue to increase. Secondly, on the issue of increased competition, whilst there is no doubt that increasing competition will have a negative impact on the exchanges, we would also make the point that many of the fund's exchange holdings are monopolies (JSE, Hong Kong Exchanges, Bovespa Holdings and Hellenic Exchanges) and in the case of the exchanges facing more competition (NYSE Euronext, Nasdaq OMX, LSE and Deutsche Bourse) we would argue that the overall pie is growing and that the exchanges mentioned have very strong positions (technology, critical mass, provision of liquidity and resultant low spreads). They have fought competition before: the 90's saw the launch of a few small exchanges, none of which survived or were merely bought out by the large, well-capitalised exchanges (eg: NYSE buying Archipelo).

In conclusion, we believe that the decline in the share prices of the exchanges has been driven by short-term fear and not by a deterioration in the long-term fundamentals of these businesses. It is our view that the several stock exchange operators held by the fund are, on average, worth double their current share prices and that current depressed levels provide a great opportunity for long-term investors.

As difficult as equity markets are at the moment and as disappointing as the fund's shorter term performance has been, it is our view that there is exceptional value in all of the fund's large holdings, with upside from current share prices to what we believe the businesses are worth typically being in the 50% - 100% range - not seen since 2003. As a result, we have maintained the fund's equity exposure in the mid-high 80% level, which in turn is at the high level of its historical range.

The consensus economic outlook in both South Africa and globally for the next year or two is terrible and it appears that the equity markets are directly (inversely) correlated with the oil price at the moment. We have no idea when the oil price will fall, when the economic outlook will improve, or when equity markets will recover. However, whilst we are cognisant of the potential economic risks ahead (particularly the impact of oil), and in our view have taken this into account at the overall portfolio level, the one thing we do know is that valuations are currently extremely attractive and that valuation is the only variable on which one can lay one's hat. We also know from history and past experience that investors are quite often most pessimistic at exactly the wrong time.

"the argument is made that there are just too many question marks about the near term future; wouldn't it be better to wait until things clear up a bit and maintain cash reserves until current uncertainties are resolved? Before reaching for that crutch, face up to two very unpleasant facts: the future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values"
Warren Buffet, Forbes interview, 6 August 1979.

Gavin Joubert
Portfolio Manager

The fund has had a relatively disappointing start to the year, with the benefit of rand depreciation being offset by declines in many of the SA and global stocks in the portfolio. As a result, the fund is marginally positive year-to-date and has appreciated by 5.7% over the past one-year period. Over longer time periods the performance remains compelling with a 19.9% annual return over the past 3 years, 21.6% over the past 5 years and 18.4% since inception 9 years ago. Importantly, these returns have been achieved with relatively low volatility (7.5% over the past 3 years and just over 10% since inception - which is almost half the volatility of both the MSCI World Index and the JSE all share index)

The fund's two largest SA equity holdings, Naspers and Tiger Brands, have both declined by around 30% over the past few months and this has had a negative impact on performance. The Naspers decline was driven largely by the announcement of an acquisition in December (Tradus) and the market's view that Naspers were overpaying for the asset and may issue equity to fund the transaction. Tiger Brands was impacted by the bread fixing scandal followed shortly thereafter by allegations of price fixing within Adcock Ingram.

We have maintained the fund's positions in both of these companies as our view appears to be somewhat different to that of the market:
- Naspers: we have done a considerable amount of research on Tradus (which can simplistically be described as the ebay of Eastern Europe) and hold the view that the potential for this asset is significant and that the price paid is quite likely to turn out to be far more attractive than the view taken by the market. Equity was not issued.
- Tiger Brands: while the allegations of price fixing are naturally disappointing and raises concerns about this being a wider practice within the Tigers group, we back the board under Lex Van Vught to fully investigate this issue and take appropriate corrective action. At the same time, it is rare that one is able to buy a stake in a company with the collection of great brands that Tigers owns on such an attractive valuation (8.5 forward PE multiple and dividend yield of almost 6%). One typically only gets such an opportunity when a company stumbles and investors are too focused on the short-term. It is our view that today is one such opportunity.

Global markets have declined by around 10% in dollars year-todate. This decline has largely been indiscriminate, with the US, European, Japanese, Asian and most other Emerging Markets all declining by similar amounts. As a result, most of the fund's international stocks declined in their home currencies, with only the weakening rand providing some buffer to the fund, as over 70% of the fund is invested offshore.

The fund has a large position in the owners and operators of stock exchanges around the world and added to this position during the past few months with new purchases of the Hong Kong Exchanges & Clearing and Bovespa Holdings (operator of the Brazilian exchange). It is our view that stock exchanges are great businesses: they are typically monopolies with high barriers to entry, they enjoy positive operational gearing over time (due to an increasing revenue line driven by increased volumes, new products and rising equity markets over time, and a cost base that is largely fixed), and they require very little capital reinvestment, resulting in very attractive ROE's and large amounts of free cash flow generation. They are also the biggest beneficiaries of market volatility. Somewhat perversely they behave exactly the opposite (as though increased volatility has a negative impact on their businesses) over the shorter-term and typically experience large declines during periods of volatile, declining markets. Year-to-date, the Hong Kong Exchange has declined by 34%, Bovespa Holdings by 27%, the JSE by 25% and the NYSE by 22%, which in all cases is at least double the decline of the respective equity markets.

Let us considers the example of the JSE (although similar logic can be applied to all the exchanges): Year-to-date (January to March) volumes are up over 70%. With a cost base that is largely fixed we estimate that their net profit would be up approximately 150% over this period. While this is an extremely short period, there is little doubt that with these sorts of numbers, the JSE is growing its intrinsic value. Yet the share price declined by 25% over this same period, which in our view creates a great opportunity for the long-term investor (increasing business value and a decreasing share price). The fund already held positions in the JSE, NYSE, Nasdaq and Hellenic Exchanges and used the declines to add positions in the Hong Kong Exchange (the gateway to Asian/Chinese capital markets) and Bovespa Holdings (the gateway to Latin American capital markets).

We believe that the decline in global markets, as well as South African industrial and financial shares, has left many companies trading on the most attractive valuation levels seen in many years. The fund has taken advantage of this and is now just about fully invested in equities (89% in equities with the balance in cash) and in our view will benefit significantly over time from this positioning.

Gavin Joubert
Portfolio Manager

The fund generated a return of 10.4% for the year ended 31 December 2007. Over the past 3 years the annualised return has been 21.5% per annum and over the past 5 years 19.4%. Importantly, the volatility in generating these returns has been relatively low at less than 10%.

2007 saw a large divergence of returns between different global markets. The MSCI World index appreciated by 7%, with most developed markets being flat or negative and emerging markets producing very strong returns. Within developed markets, the largest market (US) was up by only 3.5% (S&P500), Europe was flat (DJ Stoxx 50) and Japan declined by 11%. Emerging markets on the other hand almost without exception produced strong gains, ranging from Mexico (+11%) and South Africa (+19%) at the lower end, to Brazil (+43%) and China (+97%) at the top end.

The fund has a large part of its capital invested in developed markets (where we believe the valuations are generally more attractive on a risk-adjusted basis than emerging markets) and as such this had a negative impact on the fund. The rand also showed slight appreciation over the course of the year and with 70% of the fund being invested internationally this also detracted from performance. We continue to hold the view that whilst there is value to be found in selected emerging markets, there is far more value to be found in developed markets in general, and the asset allocation of the fund (which is merely a by-product of individual stock selection) reflects this view.

The largest new purchase over the past few months is typical of the kind of stock that we are finding attractive at the moment. Domino's Pizza, like any company that has anything to do with the US economy or US consumer, has fallen sharply over the past several months. Domino's is the largest pizza delivery company in the US and has an almost 50 year operating history (founded in 1960). Although it does operate some of its own stores, the bulk of the business is a franchise model, and like any good franchise business the return on shareholders equity and free cash flow generation is extremely high due to negligible capital investment. Whilst the US business is relatively mature, there is still potential for significant growth in the international business (which contributes around 20% of EBIT today). Additionally, the management team have shown themselves to be very shareholder friendly and several months ago the company geared up the balance sheet to return large amounts of capital to shareholders. The company has also undertaken to continue share buybacks once the debt levels have reduced somewhat from today's relatively high (but manageable) levels. Today, largely due to a short-term focused market, it is possible to buy Domino's on a 10% free cash flow yield which we consider to be very attractive given the qualities of this business.

Another new purchase, Adidas, provides a good example of how one can benefit from the growth in emerging markets without paying ridiculous valuations for that growth. Adidas are one of the largest footwear manufacturers globally with an iconic brand. The company is rapidly expanding its presence in emerging markets (opening 80 -100 stores in Russia and 400 - 450 in China per annum for example) and benefiting from the growth and rising disposable incomes in these markets.

Besides the strong top-line growth that these markets generate, the margins in emerging markets are significantly higher than in developed markets (5 -10% higher at the GP level), which means that the swing in mix over time from developed markets to emerging markets will produce margin uplift. The company also recently bought Reebok, and revitalisation of this neglected brand along with cost synergies will also add to earnings growth over the next 5 years. Management have also committed to further share buybacks once the Reebok acquisition has been bedded down. We bought Adidas on a 14 forward P/E multiple which we consider to be a very attractive price given this brand and the long-term earnings power that comes with it.

There were no significant new purchases of South African shares, although we continued to add to the fund's positions in Remgro, Tiger Brands and Woolworths, all of which we consider to be significantly undervalued. The share prices of the latter two in particular continue to decline, yet our assessment of their business values has remained largely unchanged and as a result it makes sense to buy more, not less, of an asset when the difference between where the market is valuing the share (current share price) and what the business is worth (long-term business value) increases. In our view investors, as always, are taking a particularly short-term view with regards to both Tiger Brands and Woolworths and not a 5-10 year view as we prefer to do.

In the case of Woolworths in particular, the next year or two will be very tough for the company as a result of pressure on the consumer due to 7 interest rate increases. Most investors don't like investing in companies where the short-term outlook and newsflow are negative: they want feel good, positive momentum stories (like construction and commodities at the moment) and valuation comes second (or all sorts of reasons are made to justify current valuations). The value of a company is made up of what happens over the next 10 years, and not what happens over the next year or two. As a result we prefer to look through short-term periods like 1 or 2 years and rather take a 5 -10 year view and value the company as a businessman would. In this regard it is our view that Woolworths has a very exciting future over the next 5 -10 years with many years of growth ahead and based on normalised earnings (taking into account this growth in years 2,3,4,5 and onwards) the share is substantially undervalued.

We continue to hold the view that the equities, both international and South African, held by the fund are undervalued and continue to grow their business values. We also hold the view that the rand will depreciate over longer time periods and with almost 70% of the fund invested internationally this will benefit the fund. As a result, we expect the fund to generate attractive real returns over longer time periods.

Gavin Joubert
Portfolio Manager