Global equity markets have continued to recover from the depths of despair experienced in February and March. At the same time, given increased risk appetites, the ZAR has continued to strengthen against the USD and other major currencies. Given this backdrop, the fund has appreciated by 13% year to date (in USD terms the fund's return is north of 40% this year). As one reference point, the MSCI World Index's year-to-date return is rather anaemic (-1%) given the 30% appreciation of the ZAR against the USD. Over the past 5 years, the fund has compounded at 10.5% p.a. and by 14.4% p.a. over 10 years. In both cases these returns have been achieved with significantly less volatility than either the MSCI World or JSE/All Share indices.

We continue to find very good value within global markets and the equity exposure of the fund has therefore remained in the 80%-85% level which is towards the high end of its historical range. At the same time we are struggling to find significantly undervalued companies in SA and we also believe that the ZAR's strength is unsustainable - we have therefore continued to reduce the fund's SA exposure, which is now down to 17% of the total fund. We also continue to hold the view that global bonds are ridiculously overvalued and the fund has limited exposure to this area.

Over the past few months we added to the fund's holding in Vodafone and also bought a stake in Tesco. These two companies are now two of the largest holdings in the fund and we believe that both offer potential multi-year double-digit returns (in GBP) at below average levels of risk given their current valuations. Vodafone is the world's largest mobile telephony company. Today, the majority (80%) of earnings come from the mature developed markets, primarily Europe and the US, with 20% of earnings coming from faster growing emerging markets. Vodafone controls (and consolidates) many of its operations, but it also has stakes in many operations that it doesn't control (and therefore are typically equity accounted). Taking Vodafone's proportionate share of the free cash flows of these associates together with subsidiary free cash flows results in Vodafone currently trading on less than 8 times adjusted Free Cash Flow. Vodafone's equity currently offers a 6% dividend yield. In addition to this, Verizon Wireless (45% owned by Vodafone) currently doesn't pay dividends, but at some point will, which in turn will provide an additional cash flow stream to Vodafone.

Tesco is the UK's largest food retailer and has successfully continued to take market share in their home market over the past several years. Today the UK still generates over 70% of profits, however Tesco has significantly expanded its international business over the past number of years to the point today where 60% of selling space sits in its international business (which in turn is primarily in emerging markets). There are numerous reasons why the international business, with 60% of the selling space, generates less than 30% of group profits - some of these reasons are structural, but some are temporary in nature in our view, with international profits for example being depressed by significant start-up costs (US and Indian businesses for example) and ongoing investment costs (the Chinese business for example). We don't believe that the current rating of Tesco gives enough credit for the long-term prospects of the international business and in addition to this we believe there is also optionality in Tesco's recent more aggressive move into the UK financial services market.

The fund also bought new positions in a number of companies that the fund has owned at points over the past 5 years including Vivendi, DirecTV and Limited Brands. Vivendi is a French-based media and telecommunications conglomerate. The company was a serial acquirer during the height of the TMT boom in the late 90's and got itself into financial difficulty (and destroyed significant value for shareholders) by overpaying for a number of acquisitions. The CEO from those days has long gone (a French gentleman by the name of Jean- Marie Messier, who was a former Lehman Brothers investment banker which in itself partly explains the acquisition spree). Over the past several years, two successive CEO's have been reasonably successful in getting the group back into shape again. A potential bid for African mobile telecommunications assets (Zain) appeared to open old wounds amongst the investment community and the share price suffered a sharp decline as a result. At that level we felt that the risk/reward relationship was in our favour, with a cheap valuation (8x current earnings and over a 7% dividend yield) outweighing potential acquisition risk.

DirecTV is the leading US satellite pay-TV company. The US pay-TV market is a very competitive market with the satellite, cable and telecommunications companies all competing for subscribers. Despite the 'triple-play' (broadbrand, telephone and pay-TV) offering of the cable and telecommunication companies, DirecTV continues to add subscribers through a combination of tailored and exclusive content and a strong focus on customer service, marketing/branding and superior picture and sound quality vis-à-vis the cable companies. Besides having a massive base (18 million) of high-end subscribers in the US market (which in turn would arguably be attractive to the large US telecommunication companies), DirecTV also have a substantial Latin American business, primarily in Mexico and Brazil. Today this business contributes around 15%-20% of group earnings and is growing at a reasonable rate. DirecTV also has low levels of debt and has been a consistent buyer of its own shares over the years. In fact, over the past three years the company has bought back (and retired) 30% of the company's total shares in issue. The company continues to buy back shares and given the good free cash flow generation and low levels of debt, it is not inconceivable that over the next 3 to 4 years the company could buy back a further 30% of the shares in issue. Additionally in John Malone, DirecTV has a controlling shareholder who has on numerous occasions shown his ability to create wealth for himself and minority shareholders in the businesses that he owns. Finally, at the current share price in the mid 20's DirecTV is trading on around 11x our estimate of next years free cash flow, which we believe is very attractive.

Over the past few months the fund also bought a combination of Limited Brands equity and corporate bonds (2% of fund in total). Limited Brands are the owner of Victoria's Secret, La Senza (both lingerie brands) and Bath & Body Works (personal care). What appeals to us about Limited Brands is firstly that earnings are currently depressed due to the tough US economy (operating margins are 6.5% versus a 20-year average of 10%-11%). Secondly, and more importantly, we believe there is a massive opportunity to internationalise the Victoria's Secret brand - something the company has been talking about for years but has hitherto been slow to execute. Today there are 1 000 Victoria's Secret stores and all of them are situated in the US. The La Senza acquisition that was made a few years ago was partly to acquire the knowledge of taking a brand global (as La Senza have successfully done). The company has now finally started to take the first concrete steps towards internationalising Victoria's Secret. We believe that without international expansion, Limited Brands is worth over $20 a share (the fund bought its stake at an average price of around $12 a share). With successful internationalisation of Victoria's Secret, however, the equity could be worth closer to $30 a share in our view.

We continue to believe that, after 10 years of effectively 0% return from developed markets (US, Europe and Japan), there are today numerous attractive opportunities in global markets available to the long-term investor and the fund is invested in a range of these companies which we believe places it well to generate above-average long-term returns.
Portfolio manager
Gavin Joubert

The fund ended the first half of 2009 broadly flat (-0.25%) in what was another very difficult period in global markets; a significant decline in the first few months of the year followed by a sharp rally in the subsequent months. As reference points, over this same period the MSCI World Index declined by 13.5% (in ZAR) and the FTSE/JSE All Share Index appreciated by 4%. Over the past five years the fund has compounded at 9.5% per annum (slightly shy of the fund's target of inflation +5%, but double the MSCI World Index's return of 5% per annum over this same period). Over 10 years the fund has compounded at 12% per annum, comfortably ahead of the target of inflation +5% and well ahead of the MSCI World Index's 2% per annum return. Additionally, the volatility of the fund over the past five and 10 years has been almost half that of both the MSCI World and the All Share Indices.

The impact of the strong ZAR on the fund's performance year to date merits some brief discussion. During the first 6 months of 2009, offshore cash would have given you a negative 22% return in ZAR due to an extremely strong ZAR (23% appreciation vs. the dollar YTD). As the fund is now 80% invested offshore, the strong ZAR has had a large impact on the fund's returns and masks a very strong underlying performance in many of the fund's holdings. In other words, in dollar terms the fund actually appreciated by 23% in the 6 months to June. To add further perspective, year to date the fund ranks second in the 12 Worldwide Flexible Funds and is the fourth best performing fund out of the 65 funds that are in the Worldwide Flexible, Foreign Flexible and Foreign Equity categories, with only one of the 27 Foreign Flexible funds and one of the Foreign Equity funds having performed better than Optimum.

Our key views today are broadly unchanged and can be summarised in a few points:

· The global economy is messy and the newsflow is terrible.
· We are, however, in our view not facing another Great Depression and the world will get through this.
· Valuations are extremely attractive - as attractive as they have been for many years.
· Global equity valuations (both first world and emerging markets) are far more attractive than South African equity valuations.
· Cash returns, particularly globally, are dismal (and will be eaten away by inflation over time) and bonds are still expensive and at risk of capital loss due to a de-rating over time.
· We have no idea what the ZAR will do over the short-term, but believe that it will depreciate over time (as it has done so for the past 10 years).

As a result of these broad views the fund continues to hold high equity exposure (80% - 90%), has negligible bond exposure (in early July we have bought a 1.5% position in the bombed-out Irish government 10-year bonds, which were yielding 5.7% on purchase) and has the bulk of its assets (80%) invested internationally. It must be noted that as important as the overall equity exposure, is where that exposure is invested. In this regard, the bulk of the fund's holdings have earnings streams that are more defensive in nature and where we can get higher conviction in the trajectory of those earnings over the next few years - areas like mobile telecommunications, beverages (beer, spirits and soft drinks), tobacco and US/global technology stocks. We also continue to find new ideas and two of the fund's larger purchases over the past few months are new positions in Japan Tobacco (1.7% of fund) and Pernod Ricard (1.8% of fund).

The share price of Japan Tobacco has declined from a peak of 700 000 yen in late 2007 to around 260 000 yen today. A decline of that magnitude for a supposedly defensive tobacco stock is enough to peak our interest and further work leads us to conclude that the sharp share price decline does indeed present an attractive opportunity. Despite its name, Japan Tobacco has over time become a global tobacco business through both the 1999 acquisition of RJR International (owner of the Camel and Winston brands) and the 2007 purchase of Gallaher (owner of Benson & Hedges brand amongst others). Today, approximately 45% of Japan Tobacco's earnings come from the declining domestic Japanese market. The other 55%, however, comes from the group's international business and a large part of this from growing emerging market countries, in particular Russia. As a result of this mix of businesses we believe the group can grow in the mid to high single-digit level for a number of years and today one can buy this defensive cash stream on a very attractive double-digit free cash flow yield.

Pernod Ricard is the second largest global spirits group (behind only Diageo) with an enviable portfolio of spirits brands that include amongst others Absolut vodka, Chivas Regal, Jameson, Martell and Kahlua. The share price of Pernod has also halved over the past two years, in part due to the global equity sell-off, but also due to the arguably expensive (and debt-funded) purchase of Absolut Vodka. The company, however, recently raised additional equity capital and this issuance provides adequate balance sheet stability in our view. Current trading conditions are tough, with continued pressure on volumes, but it is our view that Pernod's earnings three or four years from today will be substantially higher than current earnings. Today, the share trades on a 10 multiple which we believe is a very attractive price to pay for this collection of global spirit brands.

The vicious (and often indiscriminate) global market sell-off has provided us the opportunity to buy some of the highest quality businesses in the world at very attractive valuations. We are more excited about the portfolio than we have been at any point in the past five years and believe that the fund is well placed to generate well above average returns over the next few years.

Portfolio manager
Gavin Joubert

The extreme volatility of 2008 did not abate going into 2009. At one point in the first few months of the year, global markets declined (in dollars) by another 25% after last year's 40% decline. March, however, saw a sharp reversal in markets and the MSCI World Index ended the first quarter down 11.3% (in ZAR) after being down more than double this at one point. Additionally, there are signs that differentiation between individual stocks has started to emerge and, compared to 2008 when correlations between individual stocks were 100% and the selling was indiscriminate, valuation therefore has started to matter.

The fund declined by 4.6% during the first three months of the year, with the US technology holdings and the fund's emerging market exposure being the main positive contributors within the fund's equity exposure, which obviously was a negative contributor overall. We have maintained the fund's high equity exposure (80% to 90% range) as a result of our view that the extremely cheap valuations globally far outweigh the negative macroeconomic outlook. Approximately 70% of the fund is invested offshore with 30% in South Africa, largely concentrated in two individual positions - MTN and Naspers. The balance of the fund is invested in cash as we hold the view that government bonds are ridiculously overvalued and that, whilst the spreads in corporate bonds are attractive, a de-rating in government bonds would largely offset any narrowing of corporate spreads.

The largest industry exposure in the fund is now in emerging market mobile telecommunications (12.5% of fund), which we feel is one of the most attractive areas globally today. The biggest position by some way is MTN (8.1% of fund), followed by smaller positions in America Movil (2.3% of fund), China Mobile (1.0% of fund) and Vodafone (1.0% of fund). Mobile penetration (the percentage of the population that have mobile phones) in emerging markets is still low, the earnings streams are relatively defensive (mobile phones have become more of a necessity than a luxury for the average user) and the valuations are in the single digits, with many years of above average growth ahead.

The table shows the subscriber progression of three of the emerging market mobile operators held in the fund. China Mobile, for example, had 246 million subscribers in December 2005. They then added 55 million subscribers in 2006, 68 million in 2007 and 88 million in 2008, taking their total subscribers to 457 million as at 31 December 2008. Together, the three operators had 730 million subscribers - an astonishing number - between them at the end of 2008. Penetration rates in China are only 48% (48 out of every 100 individuals in China has a mobile phone), in Nigeria (one of MTN's main markets) they are 36% and in Mexico and Brazil (America Movil's two key markets) they are around 70%. This compares with 100% to 150% penetration rates in first world countries. It is our view that these three companies will add at least another 500 million subscribers between them over the next five years, resulting in strong earnings growth for some time to come. Another important point to highlight from the table is the subscribers that were added in the fourth quarter of 2008 - from this, and from our discussions with the companies, there has been only a marginal negative impact on their businesses from the global credit crisis. MTN is now on an 8.3 forward PE on our numbers, America Movil an 8.7 PE and China Mobile an 8.5 PE excluding their $20 billion net cash pile.

Another area that we continue to find particularly attractive is that of the large US technology companies, including Microsoft, Google, Cisco, Dell and eBay - these five holdings represent 11% of the fund. Most of these businesses have dominant market positions (in particular the former three), diversified geographic earnings streams (approximately half of their earnings coming from outside the US in all cases), strong balance sheets (all have net cash positions, ranging from 10% to over 40% of their current market capitalisations) and four out of the five trade on single digit multiples, excluding these cash piles.

The list of high quality stocks that we find extraordinarily cheap today can go on forever - the big global brewing companies (Heineken and Carlsberg), some of the large global food companies (Nestle and Heinz) and a few of the stock exchanges (Deutsche Boerse, in particular). It is our view that the fund is now invested in some of the best businesses in the world that are trading at all time low valuation levels. We have no idea what markets will do over the shorter-term but we do believe that the fund is extremely well positioned to generate above average returns over the next few years.

2008 saw the worst year for global equity markets since the market crash of 1929, with most major global indices down 40% (in dollars), or more. In rands, the JSE All Share index ended the year down 23%, the MSCI World Index down 17% and the MSCI Emerging Markets Index down 35%. Against this backdrop, the fund had a very disappointing year, declining by 24% (its first negative year since inception ten years ago) and as such faring broadly in line with the headline indices. In hindsight, the equity exposure of the fund was too high (in the 80% to 90% range for most of the year) and the exposure to Emerging Markets and operators of the stock exchanges also detracted. We apologise for the past year's poor performance and look forward to 2009 and beyond when unit holders will hopefully be rewarded for their patience in the fund. We also look forward to see returns more in line with the fund's long-term track record and objective of compounding returns at around 15% per annum, with approximately 10% volatility.

There is no doubt that technical factors (de-leveraging by investment banks and hedge funds as well as forced selling by mutual funds) have played as large a role as fundamentals in the share price declines. As a result, there are many indicators today signalling that equity markets are cheap: lowest P/E multiples in 50 years, highest level of both dividend and earnings yields to bond yields in several decades, record amounts of cash in money market accounts, all-time lows for US Treasury yields (indicating the extent of fear). But perhaps the most important measure for us is the difference between current share prices and fair values (what businesses are worth as calculated by discounting the future free cash flows using a sensible discount rate). This gap between current share prices and fair values is as high as we have seen it and is at least 50% for all the portfolio holdings, and well over 100% in many cases.

The argument is often put forward that the 'E' in the 'P/E' is wrong and equities are therefore not cheap. In our view, this is a very common and short-term way of thinking often heard by the market commentators on TV and radio. Our counter argument to this would be twofold. Firstly, share prices have declined by so much that the 'E' would have to be very, very wrong for equities not to be cheap. Secondly, the value of a business is ultimately determined by what a company will earn over the next 20 years, not just the next 12 months. Most investors are typically fixated on the next 12 months of earnings and this fixation provides great opportunity for any investor with a longer-term time horizon. The year or two ahead are undoubtedly going to be very difficult from a global economic point of view. Is it possible that Nokia's earnings disappoint by 30% in 2009 and the P/E is actually 12 and not 9? Absolutely. However, while a 9 P/E for the leading brand in the growing global mobile handset market is a steal a 12 P/E, in our view, is still pretty attractive. In other words, a large amount of bad news has been priced into global equities. Additionally, it is our view that mobile handset sales in China, India and many other countries will be significantly higher in 3, 4 and 5 years time than they are today and as a result, so will Nokia's earnings. What Nokia will earn over the next 12 months may be relevant to the short-term share price but it isn't relevant to the share price over the longer-term. What it will earn over the next 5 and 10 years will determine what the business is worth, and ultimately the share price. Similar arguments can be made for all of the fund's large holdings.

The indiscriminate selling over the past few months (correlations between individual stocks are at 20 year highs) created a great opportunity to the long-term investor to buy some of the best companies in the world at very cheap valuation levels, and in this regard the 12 largest individual holdings (excluding holdings in other funds) of the fund today are:
-Naspers: Owner of some of the best Emerging Market media assets, including a dominant position in pay-TV in South Africa and Africa as well as a stake in what is arguably the dominant and highest quality internet asset in China (Tencent), trading on a single-digit normalised free cash flow multiple.
-MTN: Leading market positions in several African and Middle East mobile markets, all of which have low penetration rates and trading on a 5 P/E multiple based on what we believe the company will earn 3 years from today.
-AVI: Branded food company with leading positions in several categories including coffee, tea and biscuits; trading on a 10 P/E multiple. ?? Pfizer: World's largest pharmaceutical company trading on an 8 P/E and 7% dividend yield.
-America Movil: The dominant mobile operator in Latin America with leading market positions in Mexico, Brazil and Colombia; trading on a 10 P/E and applying significant free cash flow generation to ongoing share buy-backs.
-Nokia: Number one player in global mobile handset market trading on a 9 P/E and 5% dividend yield.
-Microsoft: Dominant global software company with 15% of its current market in cash and trading on a 9 P/E excluding its $20 billion cash pile.
-EBay: Leading e-commerce auction site in the US, with large growing international operations trading on a 9 P/E and 6% dividend yield.
-Google: World's dominant search engine trading on a 15 P/E but with superior long-term growth prospects through being the prime beneficiary of the continued switch from traditional print advertising to internet advertising.
-Mastercard: The second largest credit card transaction processing company in the world, trading on a 15 P/E with above average long-term growth prospects through continued growth in transaction volumes and operational gearing.
-Carlsberg: One of the world's largest beer brewers with a dominant position in the under-penetrated Russian beer market and trading on a 7 P/E.
-Inditex: Owner of the Zara brand and one of the largest global clothing retailers, trading on a 13 P/E but with above average growth prospects through continued store rollout globally, particularly in under-penetrated Asia.

It is truly rare to be able to buy this collection of assets on the multiples that one is currently able to buy them on. We are not sure if today's share prices present a once-in-a-decade buying opportunity or the more clichéd once-in-a-lifetime opportunity. However, we do believe that the opportunity is massive; when a fat person walks through a door one does not need to know exactly how much the person weighs in order to know that he or she is fat.

Gavin Joubert
Portfolio Manager