The fund had an excellent quarter in a strong market. It has outperformed its benchmark by 2.9% p.a. over a rolling 3- year period (10.5% p.a. versus 7.7% p.a.) and 2.3% p.a. over a rolling 5-year period (19.0% versus 16.7% p.a.). The fund is the top performing fund in its sector over virtually all meaningful periods.

The third quarter proved to be another bruising quarter for the bears. Many clients have questioned how global markets can rally in such a difficult economic environment (up around 50% off the March bottom). We ascribe the rally to three things:

The global economy stopped haemorrhaging. Economic activity stabilised and, more recently, started showing signs of the inevitable inventory-driven recovery that always follows a material destocking by industry.
Unprecedented levels of cash. After heavy declines in the last quarter of 2008, many investors sold out of equities in a desperate rush for 'safety' of cash and bonds. This 'wall of cash' has consistently supported the market on the way up and prevented any meaningful correction.
Bargain-basement valuations. Good long-term work done by Jonathon Wilmot of Credit Suisse concludes that in March 2009, risk assets offered the 3rd best buying opportunity of the last 150 years. At that point, regrettably, most investors wanted nothing to do with equities (as valuation-driven investors we got it right, not because we knew what was coming, but simply because we are so committed to disciplined, long-term investing).

While equities remain our preferred asset class, we have taken profits in this rally. Equities are no longer compelling and we now have a more neutral exposure (66% of fund as opposed to 75% earlier in the year). We continue to believe that global equities are more attractive than local equities. When one considers the very strong rand, we believe that investors currently have an excellent opportunity to diversify their portfolios. We have taken full advantage of this in all our funds.

Local equities returned 13.9% in the quarter in a fairly broadbased rally. Industrials led the market up with a return of 16.3%, while financials returned 15.1% and resources 11.1%. We remain underweight resources. The sector has recovered strongly in the hope that Asia will lead the world out of recession. We remain of the view that the upside to longterm valuations, based on mid-cycle earnings, is not attractive enough to justify higher exposures. Notwithstanding the above, we do think that Sasol is a good opportunity at current levels. Oil has good long-term prospects, with many of the world's major oil-fields in decline and the high extraction costs of most new discoveries. Sasol is well positioned for such an outcome with its long-life assets and low cost base.

Within industrials, Richemont, Woolworths and Naspers contributed strongly to performance. Naspers has been a top 5 equity holding in our portfolios for the last 7 years. We believe that South Africans often underestimate the quality of assets right on their doorstep. There is no better example of this than Naspers - a company with a balanced portfolio of some of the best media assets in the world, an undemanding rating and a management team that has created more value for local shareholders than any other in the last 10 years.

Small caps currently present a compelling opportunity for longterm investors. The sector has crashed after reaching absurdly high levels at the top of the bull market. We do expect some company failures as the sector deals with the recession coupled with tighter credit markets. In addition, many poor quality companies were cobbled together for a listing in the bull market and these are now unraveling. Notwithstanding these challenges, we have identified many quality companies trading at 5 times our assessment of normalised earnings and have therefore significantly increased our exposure to small caps over the last few quarters.

The bond market had a better quarter, returning 3.0%. Bonds have performed poorly this year (-2.0%) after reaching very overvalued levels in December as investors ignored valuations and stampeded into 'safe haven' assets. We are still underweight bonds. The risk of inflation exceeding expectations in the next few years is high, given the cost pressures Corporate SA is experiencing (high wage settlements and extraordinary increases in electricity prices). In our opinion, yields are not attractive enough to compensate investors for this risk. Credit still remains an opportunity, although we note with regret that the juicy (and possibly once-in-a-lifetime) opportunities we took advantage of at the height of the banking crisis have dried up.

In conclusion, while we have taken profits on equities, we remain of the view that equities offer the best prospect of inflation-beating long-term returns. Markets are likely to remain volatile and difficult for some time to come. To the long-term investor this is not bad news. The last few quarters have produced extraordinary opportunities in both the equity and corporate credit markets. We remain committed to 'cutting out the noise' and focusing on the long-term fundamentals.

Portfolio manager
Karl Leinberger

The fund had an excellent quarter in a volatile market. It has outperformed its benchmark by 2.5% p.a. over a rolling 3- year period (8.6% p.a. versus 6.1% p.a.) and 2.4% p.a. over a rolling 5 years (19.6% p.a. versus 17.2% p.a.). It continues to be one of the top performing funds in its sector over all meaningful periods.

The second quarter proved to be a bruising reminder of how dangerous it is to try and time markets. In early March, markets rallied when investors least expected it. Before investors had time to 'wipe the sleep from their eyes' the MSCI World Index had rallied 45% and the MSCI Emerging Markets Index by 64% (21.0% and 34.8% respectively in the quarter). The fund benefited from an aggressive overweight in domestic and offshore equities, not because we had any special trading insights but because we had high conviction that equities (particularly offshore equities) provided an extraordinary opportunity for the patient, long-term investor.

The global economy stopped hemorrhaging over the past three months. This sparked numerous references to 'green shoots', despite the fact that virtually every news release still showed a meaningful decline (year on year) in economic activity. We believe that the global recession will be measured in years, not months, and expect any recovery to be anaemic. The headwinds from deleveraging (from households, banks and governments) will provide a headwind for years to come. Notwithstanding this, we remain of the view that offshore equities provide a compelling opportunity for the long-term investor. Cash sitting on the sidelines remains at record levels, with most investors unwilling to buy at a time of such poor newsflow.

Domestic equities gave an 8.6% return in the quarter, with industrials leading the market - up 14.0%. Financials also had a strong showing with a return of 12.3%, while resources lagged with a 2.7% return. We remain significantly underweight the resource sector. While one would expect a depressed commodity market to be fertile ground for the long-term investor, we are not finding enough value to justify a contrarian view. Our underweight in gold counters contributed to performance in the quarter. We remain of the view that gold has become a crowded 'fear trade'. The gold price is not low and we expect costs to remain under significant pressure with the miners likely to be forced into giving above-inflation wage settlements.

Within the industrial sector, Naspers, Netcare, Aspen and MTN all contributed to performance. In bear markets one often finds quality companies with good growth prospects trading at attractive valuations. This is very much the case in the market today and we have taken advantage of this with MTN and Naspers now being the number one and two sized positions in the fund. Small caps showed some signs of recovery in the quarter. We are finding many quality counters trading at 4 times normal earnings and we have added significantly to our small cap exposure in the last two quarters.

Banks recovered late in the quarter. We continue to believe that banks offer value. The current earnings season will be bleak, but we are close to the bottom of the interest rate cycle. Earnings should recover strongly once the heavy impairments in this earnings season have been taken.

The bond market stabilised in the quarter, returning 0.3%. In previous quarters we commented that bonds were overvalued. After a negative 4.9% return this year we think they are only starting to offer some value. The corporate bond market, in contrast, offers compelling value. In the quarter we bought inflation-linked bonds at real yields of between 5.5% and 8%. We continue to look for opportunities in what remains a paralysed credit market.

In conclusion, while we have taken some profits on our overweight equity position, we remain of the view that equities offer the best prospect of inflation-beating long-term returns. Market volatility is unlikely to subside in the near term. To the long-term investor this is not bad news. The last few quarters have produced extraordinary opportunities in both the equity and corporate credit market. We remain committed to 'cutting out the noise' and focusing on the long-term fundamentals.

Portfolio manager
Karl Leinberger

The fund had a good quarter in a tough market, outperforming its benchmark by 0.8% p.a. over a rolling 3- year period (6.4% vs 5.6%) and 2.2% p.a. over rolling 5-year period (17.9% vs 15.7%). It continues to be one of the top performing funds in its sector over all longer-term periods.

The first quarter gave no respite to investors, with the MSCI World Index declining by 10% in the first two months of the year (after a 40% decline in 2008!). In such a brutal market very few investors have the stomach to buy equities. Most hedge funds ended February with low net equity exposures and many institutional equity managers seem to have 'thrown in the towel' and turned to cash as a source of alpha! As is so often the case, markets rallied when everyone least expected it; in March the MSCI World Index rallied by 7.6%, the MSCI Emerging Markets Index by 14.4% and gold declined by 2.4% (gold has become a very crowded place to hide). In all this volatility we continue to hold the view that:

· The global economy is likely to continue to perform poorly for a sustained period.
· Global equities have discounted the bad news and offer an extraordinary opportunity to the long-term investor.
· In a volatile market those investors who try and time the market will get it wrong more often than they will get it right.

Equities declined by 4.2% in the quarter, with resources increasing 1.6%. Industrials declined by 9.2% and financials declined by 7.0%. We feel that commodity stocks currently offer good opportunities to stock pickers. Some commodities are significantly above their long-term mid cycle levels, while others trade at distressed levels (below industry cost curves). We continue to find good value in Sasol and, more recently, in Exxaro (whose low cost, long-life coal assets are currently not being recognised by the market).

Banks led the Financial index down with a decline of 9.8%. We have been very underweight banks but bought aggressively in the quarter. At the market lows they were trading at price to book ratios of 1 and price earnings ratios of 6. While earnings are under pressure in a tough economic environment, we have full confidence in the stability of our banking system and its ability to ride out the cycle. Our banks are well capitalized and we do not expect them to have to make the extraordinary write-offs that have besieged their global peer group.

We have not made many changes in our industrial holdings. MTN remains the biggest holding in our fund. We continue to believe that it offers extraordinary value to the long-term investor. It currently trades at 8 times earnings a year out and we expect it to deliver above-market earnings growth for the next five years.

The bond market had a very weak quarter, returning -5.1%. In the previous quarter we commented on how unattractive bonds are and the fact that we had sold out of our position entirely. This remains the case today. Bond yields would need to increase significantly before we they offer value. However, we have recently bought corporate inflation-linked bonds, which we think offer great value - partly for their inflation protection but also because of the high credit spreads available in the market.

In conclusion, although the recent rally has calmed a few nerves, we cannot offer much insight as to whether it will hold these gains. This bear market has truncated investors' time horizons and we remain of the view that the opportunity set increases for long-term investors whenever emotion trumps reason (as is currently the case in many of the world's equity and fixed income markets).

The fund had a good year, returning 10.7% p.a. over a rolling 3- year period (compared to 10.4% from the benchmark). Over a rolling 5-year period the fund outperformed its benchmark by 1.8% p.a. (19.3% vs. 17.5%). The fund remains one of the best performing funds in its sector over all longer-term periods.

Markets around the world experienced record declines in 2008. Whilst we did not escape the brutal realities of a declining market, the fund delivered an excellent performance against its peer group. We were heavily criticised for our contrarian views on commodity and construction shares. However, resisting the temptation to buy into these (deeply cyclical) sectors late in the cycle ended up contributing significantly to performance for the year.

The investment environment for investors is currently more challenging than at any time since the 1930s; the world's financial system feels as if it is unravelling, credit markets are paralysed, and the decline in stock markets and house prices has destroyed $9 trillion in wealth in the US alone (60% of GDP). In times like this, the temptation to sell risk assets and sit in cash is immense. Many are saying that this is not the time to be brave and that at this point in the cycle you should be more concerned about preserving capital than about making returns.

While cash might help one sleep better at night, we do not think it is the right move for the long-term investor. The Fed has demonstrated that it will stop at nothing to reflate the US economy. This will ultimately prove to be inflationary, and in time the safety many see in bonds and cash will prove to be illusionary as inflation erodes the real value of their hard-earned savings.

The fund is fully invested in global equities to take advantage of what we see as a once-in-a lifetime buying opportunity. Clients have asked us how we can recommend global equities when the world is in recession; we have just experienced the first-ever run on the global banking system and we are about to enter the first synchronized global recession since the 1930s. To add salt to the wounds, de-leveraging and inflated house prices (pretty much throughout the Anglo-Saxon world) mean that the recession is likely to be deep and long. This is a great example of the paradox of investing: 'buying low' often requires investing when newsflow is poor, and 'selling high' often requires selling when the outlook is good.

Our case for global equities is as follows:
1. This is a crisis, but it isn't financial Armageddon. While the economic outlook is poor, and the newsflow is unlikely to improve in the near term, we are not in financial Armageddon. In the 1930s unemployment in the US went to 25%, protectionism damaged trade, early monetary and fiscal responses were restrictive and several farming disasters damaged what was then a very agrarian economy. Today, unemployment is in single digits and the authorities are responding to the crisis with unprecedented stimulus.

2. Prices have already corrected. As an investor, one should never allow oneself to become too negative after a major sell-off. The market is a very efficient discounting machine and at these levels already prices in a recession, with the Dow Jones having had its 2nd worst year in history and the Nikkei its worst.

3. Valuations are compelling. We believe that global equities present a once-in-a-generation buying opportunity. The last time the MSCI World Index traded at current ratings was the early 1980s (also a time of very poor newsflow, but a time that proved to be an extraordinary wealth creation opportunity). Dividend yields in Europe exceed bond yields for the first time in history, Japanese stocks trade at a price to book of 0.8, 75% of stocks have dividend yields exceeding government bond yields and there are several hundred stocks with market caps below the net cash on their balance sheets (i.e. you get the business for free).

4. When markets turn, they move quickly and no-one sees it coming. Markets turn at the point of maximum pessimism, and always before the underlying economy. In every bear market of the last 40 years (1974, 1987, 1998, 2003) markets have posted massive gains when investors least expected it (the Dow Jones returned 64% in the 18 months after 1974, 48% in the 24 months after 1987 and 43% in the 12 months following 1998).

The pendulum has swung from greed to fear. Investors will be tested by the very poor newsflow that is likely to come from a 'wheels-off' for the global economy in the fourth quarter. We, however, remain committed to focusing on the long term. As was the case with our heavily-criticized view that commodities were overvalued, we don't know when markets will turn. But when they do, we intend being correctly positioned. Buying high quality companies with good franchises at low prices will always be the only sure path to wealth creation.

Equities declined by 9% in the quarter (resources -13%, financials -11%, industrials -4%). Although we have bought certain resource stocks (from very underweight levels), we do think that one needs to be careful. Many stocks still trade at levels significantly ahead of mid-cycle levels. We have increased our holdings in BHP Billiton and Sasol: two quality companies that offer long-term value and have the balance sheets and assets to endure a downturn.

We took profits in banks as they continued to outperform the market in anticipation of declining interest rates. Within industrials we took profits in interest rate sensitive retailers and continued building a position in MTN, now the biggest holding in the fund. We have for many years admired the company and are now able to build a substantial position in the company at very attractive ratings. We have resisted the temptation to buy construction shares. Although they have collapsed, we remain concerned that they are currently achieving unsustainably high margins. The construction market has been very tight, allowing contractors to secure unusually good terms (good margins with little contract risk). This may last for a good while longer, but it will not last forever.

The bond market had another astonishing quarter, returning 11%. We used the strength in the market to sell out of our position entirely. At current yields, bonds do not offer the longterm investor a sufficiently attractive inflation-adjusted return. Property, up 8.5%, also had an excellent quarter. We have started to reduce the big position that we had built up in the sell-off of the first half of the year. At current levels, we remain of the view that they are more attractive than cash.

In conclusion, while we do not expect markets to get easier any time soon, we will continue to take advantage of the many opportunities that volatile markets inevitably offer the long-term investor.

Louis Stassen and Karl Leinberger
Portfolio Managers