This quarter was characterised by significant labour unrest within the local resources sector, which placed South Africa high on the international news agenda. The unprecedented tragedy that occurred at Lonmin's Marikana mine was the catalyst for further strikes, which have subsequently spread to other sectors of the local economy. Despite this, the South African equity market held up well over the quarter and reached an all-time high during September.

Globally, most developed economies continue to grapple with slower economic activity and high unemployment. The US economic weakness has brought about yet further quantitative easing measures by the Fed. The economy has become a key focal point of the upcoming US presidential elections and the US faces automatic fiscal tightening in 2013, unless further action is taken to extend current fiscal stimulus measures.

Economic weakness persists in Europe, with the latest data indicating that this region went into contraction during the second quarter of this year. GDP growth in the world's second-largest economy, China, has begun to slow. Given that its major trading partners are facing tough economic conditions, the South African economy continues to be weak, with the situation exacerbated by recent labour unrest.

Global markets were generally up during the quarter, with the exception of Japan, which was down 1.5%. The US (S&P 500 Index) was up 5.8%, the UK (FTSE 100 Index) was up 3.1% and the MSCI Emerging Markets Index was up 7.9% (in US dollar terms).

The FTSE/JSE All Share Index gained 7.3% during the quarter, with the recent material sectoral diversion continuing - industrials were up 10.5%, financials were up 6.5% and resources were up 2.9%. Foreigners were net sellers of equities, particularly in the resources sector where they appeared to be unnerved by the labour challenges facing miners. However, this sell-off was offset by significant foreign inflows into our bond market. Foreign investors continued to favour local consumer-oriented industrial shares, causing these exceptionally expensive shares to accelerate upwards to new all-time high.

Commodity prices strengthened this quarter, with most commodities relevant to South African miners gaining - platinum was up 16.8%, gold was up 11.1% and copper was up 6.8%. After a significant fall last quarter, the oil price (Brent Crude) increased by 16.1%.

The rand weakened by 1.8% against the US dollar and 3.2% against the euro. Inflation has dropped back into the upper region of the South African Reserve Bank's target band, where we expect it to remain in the medium term. The Reserve Bank dropped the repo rate by 50bps in July, and left it unchanged at their most recent Monetary Policy Committee meeting. Interest rates are currently at multi-decade lows.

The fund continues to be defensively positioned from an asset allocation point of view, with hedging in place. The Kagiso Protector Fund was up 3.5% over the quarter, and is up 5.6% year to date. Performance has been negatively impacted by our stock selection this year. We have a large position in undervalued platinum miners and low exposure to overvalued consumer-oriented industrial shares. While our current overweight position in resources shares and underweight position in industrials is affecting our short-term performance, we believe it is appropriate to position our clients in deeply undervalued shares in anticipation of strong capital gains and avoid the permanent capital losses we expect in vastly overvalued shares.

Our meaningful position in physical commodities (Platinum Group Metals) added to performance. The fund is at its maximum limit on offshore exposure (offshore cash and offshore stocks). The currency depreciation over the quarter has added to performance.

Implied option volatility (an indicator of the cost of hedging equities), as measured by the South African Volatility Index (SAVI), remained very low over the quarter averaging ending at 18%. Since inception, fund volatility has been 9.4% versus 18.5% for the FTSE/JSE Top 40 Index.

Looking ahead, we remain cautious over prospects for developed economies with high levels of government debt, high levels of unemployment and demographic trends moving slowly against them. On the positive side, we believe that there are strong prospects for companies focused on emerging market consumers, although much of this optimism seems to be priced into South African consumer stocks.

We remain defensively positioned from an asset allocation point of view, with significant hedging in place. The fund continues to be appropriately positioned in our best stock selections, based on our team's proven bottom-up stock picking process.

The South African equity market held up relatively well at aggregate level in rand terms over the quarter and touched its all-time high during the period. The weaker currency also supported the market, given the heavy weighting towards rand hedge shares in our market.

The FTSE/JSE All Share Index gained 1.0% during the quarter, with considerable sectoral diversion as resources shares (down 3.6%) substantially underperformed industrial (up 2.6%) and financial shares (up 4.6%). Foreigners were net buyers of equities again this quarter, with a particular appetite for consumer stocks.

The fund was defensively positioned from an asset allocation point of view, with hedging in place. Our equity exposure remained low (lower than 30% effective).

The Kagiso Protector Fund was down 0.4% over the quarter, but is up 2.1% for the year to date. This result has been negatively impacted by our stock selection this year. We have a large position in platinum miners - which were very weak - and a low weighting in consumer facing industrials which were very strong.

Tongaat Hulett (up 20.3%) and FirstRand (up 11.4%) were strong performers for the fund. Our exposure to Lonmin (down 20.7%), AECI (down 13.5%) and Sasol (down 6.1%) detracted from performance.

South African inflation contracted during the quarter from 6.1% in March to a 5.7% print in May. Primary drivers of this reduction have been subsiding food prices and falling oil prices. Inflation is now expected to continue to subside in the medium term and to stay below 6%. Risks to this view are sustained rand weakness above R8.50/$ and a rebound in oil prices.

We continue to hold government inflation-linked bonds, which we expect to outperform cash and offer valuable protection should inflation be higher than expected. The performance for inflation-linked bonds was 1.6% (underperforming conventional bonds at 5.2%, but beating the cash return of 1.4%).

The fund is close to its maximum limit on offshore exposure (cash and equities). The currency depreciation over the quarter has added to performance.

Implied option volatility (an indicator of the cost of hedging equities), as measured by the South African Volatility Index (SAVI), remained low over the quarter ending at just below 22%. We have used these low levels to purchase more put protection at reasonable prices. Since inception, fund volatility has been 9.5% versus 18.7% for the FTSE/JSE Top 40 Index.

We are in a period where the fund is defensively positioned and our focus is on drawdown protection.

It was an excellent start to the year for the US market with the S&P 500 Index enjoying its best first quarter in 14 years, up by 12.0%. The UK market lagged and was up by only 3.5%. The MSCI Emerging Markets Index was up 14.1% in USD, outperforming the MSCI Developed Markets Index (up 11.7%) and the Japanese market had a strong quarter with the Nikkei up 19.3%.

The FTSE/JSE Top 40 Swix Index gained 6.6% during the quarter, with significant sector dispersion: resources shares (-3.3%) substantially underperformed industrial shares (+10.5%) and financial shares (+12.8%). Equity markets experienced continued volatility, with most of the positive performance coming through in January. Foreigners continued to be net sellers of equities in the first quarter (-R4.1 billion), but bonds remained positive with further strong inflows (+R21.2 billion).

The rate of South African inflation has picked up with March 2012 CPI coming in at 6.1%. With a stubbornly high oil price, electricity tariff increases and increasing food prices, inflation is expected to remain above the 6% upper target level for much of 2012 before returning within the target range. However, it is important to note that any sustained rand weakness from current levels will mean that inflation will be higher than expected. The fund has maintained a meaningful position in government inflation linked bonds.

Implied option volatility (an indicator of the cost of hedging equities), as measured by the South African Volatility Index (SAVI), moved further down to end the quarter at 20%, and we have purchased some put protection at these reasonable levels. As always, we will aim to minimise the cost of the fund's downside protection through an optimal blend of our dynamic asset allocation model, outright put options, and tactical cash overlays. Since inception, fund volatility has been 9.6% versus 18.9% for the FTSE/JSE Top 40 Index.

Going forward, we remain cautious about developed economies that face long-term challenges in the form of high unemployment, high government debt levels and negative demographic trends. In the short- to medium-term these economies will have to grapple with the implementation of austerity plans. Our equity exposure therefore remains low (lower than 30% effective). Over the last year we have moved the portfolio significantly out of industrial shares, many of which are trading further above their all-time highs, and into selected resources stocks, especially platinum group metal miners. Over the year, we have built up some exposure to attractive international stocks, and have a holding in platinum group metal exchange traded funds.

Outside of equities, we hold a meaningful position in inflation-linked bonds, given our views on inflation risks and short-term interest rates.

The long-term goal of the fund is to balance the return targets (to produce strong real returns) with the risk tolerance (to minimise drawdowns). This is a challenging remit and will mean, at certain times, more of a focus on returns, and at other times, more of a focus on drawdown protection. We are in a period where the fund is very defensively positioned and our focus is on drawdown protection, given our views on equity valuation levels and market risk.

The fourth quarter of 2011 was a very strong period for global equities, bouncing off their third quarter low points, amidst high volatility. Positive US economic data emerged amidst the European gloom and co-ordinated central bank measures were announced to provide Europe with much needed banking sector liquidity. Many South African companies, especially among the industrials, ended 2011 at all-time high share prices.

The US market was particularly strong this quarter (the S&P 500 Index was up by 11.2%), as was the UK market (up 8.7%), outperforming most emerging markets (MSCI Emerging Markets Index was up 4.4% in USD) and the negative Japanese market (the Nikkei Index fell 2.8%). The FTSE/JSE Top 40 SWIX Index gained 8.3% during the quarter, coming off a low base at the end of the third quarter, ending the year just 2.6% up. There was little sectoral diversion for the quarter: resources shares (+7.3%) underperformed industrial shares (+9.2%) and financial shares (+8.7%). Equity markets experienced continued volatility, with most of the positive performance coming through in October (+9.4%) and thereafter fluctuating in a range, influenced mainly by developments in Europe.

Food inflation continued to rise significantly, with the November 2011 reading at 11.1% year-on-year, from 1.6% year-on-year in December 2010. If the Rand depreciation (21.9% vs the Dollar in 2011) does not reverse, it is almost certain that CPI will materially breach the 6% upper target level in 2012. Implied option volatility (an indicator of the cost of hedging equities), as measured by the South African Volatility Index (SAVI), moved down to a more reasonable 24.8% from 32.7% at the start of the quarter. As always, we will aim to minimise the cost of the fund's downside protection through an optimal blend of our dynamic asset allocation model, outright put options, and tactical cash overlays. Since inception, fund volatility has been 9.6% versus 19.0% for the FTSE/JSE Top 40 Index.

Going forward, we remain cautious about developed economies that face long-term challenges in the form of high unemployment, high government debt levels and negative demographic trends. In the short- to medium-term these economies will have to grapple with the implementation of austerity plans.

Our equity asset allocation is low (currently 31% effective). Within our equity exposure, we remain defensively positioned with a strong focus on quality, lower risk companies, which are attractively priced. Over the last year we have moved the portfolio significantly out of industrial shares, many of which are trading at all-time highs and anticipating very strong earnings prospects, and into selected resources stocks, especially platinum group metal miners.

Over the year, we have built up some exposure to select high quality international stocks, and have a holding in platinum group metal exchange traded funds.

Outside of equities, we hold a meaningful position in inflation-linked bonds, given our views on inflation risks and short-term interest rates.

Looking at the calendar year of 2011, the FTSE/JSE Top 40 SWIX Index gained 4.1%. Mainly due to the direct costs of protection (the cost of purchasing puts), the fund was flat for the year (up 0.2%).

The long-term goal of the fund is to balance the return targets (to produce strong real returns) with the risk tolerance (to minimise drawdowns). This is a challenging remit and will mean, at certain times, more of a focus on returns and, at other times, more of a focus on drawdown protection. We are in a period where the fund is very defensively positioned and our focus is on drawdown protection, given our views on equity valuation levels and market risk.