The past quarter was memorable for its extreme volatility on a day to day basis driven by global fears around the sub-prime and credit problems. The slide in asset prices was firmly arrested by the 50 basis point interest rate cut announced by the US Federal Reserve Board in September. The US dollar weakened sharply and commodity prices surged as investors latched on to the view that global growth will be boosted by looser monetary policy from the major central banks of the world. The rand appreciated by 2.6% against the dollar during the quarter.

The best performing asset class over quarter was domestic equities, with resources performing very well. Bond yields also moved lower resulting in positive returns for investors.

From an asset allocation point of view, the fund added to domestic equities early in the quarter but reduced again in September following the recovery in prices. We have kept our global exposure to 15% with two thirds of that in equities and the balance in cash. We established a small holding in 10-year US treasuries in June at a rate above 5% and disposed of it in September at just below 4.5%.

On the domestic interest bearing front we prefer cash to bonds. This view is partly driven by the fund's low risk mandate but is supported by our own view of valuation and risk.

Looking forward we are by no means certain that the global liquidity scare is fully behind us. We think global growth is likely to slow somewhat and domestically consumer spending is showing clear signs of weakness. Within our equity portfolio we are therefore defensively positioned with little exposure to highly cyclical stocks.

The Balanced Defensive Fund is a low risk product with a limited exposure to equities. It behaved very well during the quarter and showed positive returns for every month despite the volatility in equities, interest rates and the currency. The fund's total return of 2.3% was exactly in line with cash, but slightly behind the cash plus target.

Charles de Kock and Mark le Roux Portfolio Managers

The wonderful investment environment that has prevailed over the past four years suffered a setback during the past quarter. The change in investor sentiment was sparked by rising global interest rates, especially the bell weather 10 year US treasuries. The upward move in interest rates globally had a knock-on effect in emerging markets in general and South Africa did not escape its impact. In fact, poor inflation data forced the SARB to raise the bank rate by 0,5% again. Money market rates, bond rates and yields on listed property all moved higher, while interest rate sensitive stocks on the JSE suffered a fairly sharp correction.

The fund was defensively positioned with only 26% of the portfolio invested in domestic equity and a further 8.5% in global equities. Following the correction in prices we added another 2.5% in domestic equities towards the end of June. Within the interest bearing market we were likewise very defensively positioned with a lot of cash and very little in bonds. As interest rates moved higher we lengthened the life of the portfolio by making money market investments in the 1-3 year area at yields above 10%. We also bought a few long dated RSAs at around the 8.5% as well as a very small amount of US treasuries at an average yield of 5.11%.

The fund returned 1.50% for the quarter.

Charles de Kock and Mark le Roux
Portfolio Managers