During September the JSE reduced in value by 15% in sympathy with falling world equity markets. The fund lost 7.5% and the benchmark (75% Alsi 40 plus 25% cash, both reinvested) was reduced by 10.1%.

The relative defensiveness was achieved by the smaller exposure to resources and the larger cash proportion held. It is envisaged that the fund will reduce resource exposure and increase that to blue chip industrials which have become quite cheap.

We believe that selling the equity choices of the fund at this late stage of the declining market after so much have been done by governments all over the world to address the credit problem, is a high risk trade. We also believe that even if much of the developed world goes into a recession, those governments have a stimulatory toolbox and that earnings multiples and dividend yields are most certainly in buying territory.

As mentioned in the previous report, Charles Snyman is the portfolio manager from 1 September 2008.

Your fund continued to perform well in June, outperforming the All Share index by 1.3% in spite of all the negative news dominating financial markets both globally and at home. We continue to favour the resource sector over financials; this can be seen by the fund's 50% weighting in resources. Over the month of June the JSE financial index fell 10%, while the resource index managed a positive return of 1%. A 2% weakening of the Rand vs the US Dollar over the month helped the outperformance of our favoured sector.

While we still remain positive on resource equities (see last month's factsheet at www.valugro.co.za), one cannot ignore the value that certain other sectors are finally starting to show. For example, the financial sector is on a historic PE of 7.5x and a dividend yield of 6%, while the listed property index is down some 32% since the beginning of the year and now offering attractive forward yields. However, we are in no hurry to buy these latter 2 sectors as we believe there could be more downside to come as current high and rising interest rates really start to bite the SA consumer.

One of our primary objectives in this fund is to attempt to provide you with a real return on your investment over time. With inflation currently running at 11.75% a year this goal is extremely difficult. Resource equities are among the few asset classes we can identify that will comfortably grow their earnings, cash flows, and dividends well above this 11.75% level over the coming year.

Valugro took over management of your fund on the 1st of March 2008. Since then we have reduced the number of stocks held in the portfolio from over 100, to currently less than 30. The Eskom power crisis and its unknown effects on our economy, political instability around the future leadership of the ANC and the country (not too mention Zimbabwe's current issues), global market volatility due to the subprime mortgage crisis (a subprime loan is a home loan made to an individual who would not normally qualify) and the more recent credit crisis, has led us to adopt a negative house view on the South African Rand and certain sectors of the local economy. In light of our house view we have increased our exposure to resources and reduced the funds holdings in financials. We remain positive on sectors, which are due to benefit from governments R 500 billion planned expenditure.

January 2008 has been an extraordinary month on the markets, with fears over a possible US recession and continued losses from subprime lending-related asset-backed security derivatives weighing heavily on global market. As if this wasn't enough, local markets had to contend with the fall-out from Eskom and the government's incompetence, which is likely to result in periodic electricity shortages for years to come. To muddy the waters even further, all of the above conspired to trigger a massive rate cut in the USA and send commodity prices skyrocketing, supporting the markets. Buying opportunities no doubt abound at the moment, but the volatility is of such a nature that the path-sensitive investor best tread warily.