The fund was relatively flat for the quarter as gains in July and August were offset by declines in September. Over a one-year period, the fund has returned 9.8%, slightly below its CPI + 5% objective. The fund continues to provide positive absolute returns ahead of inflation, with low to moderate risk.

Economic and market overview Volatility across global financial markets increased over the quarter following heightened speculation around the timing and extent of US monetary policy normalisation. The rand dropped sharply in September, posting a 5.7% decline for the quarter against a generally strong US dollar. Although their rhetoric continues to signal a tightening bias in the face of higher inflation, the SARB kept rates on hold this quarter. A weak growth and employment outlook remains a significant threat and we therefore expect the moderate rate hiking cycle to continue. Local market news was dominated by African Bank over the period as the business was placed under curatorship. Equity holders (ordinary and preference) and junior debt holders lost all of their investments, while senior bondholders were subject to 10% losses and deposit holders did not suffer any losses. The fund had zero exposure to African Bank equity, preference share or debt instruments. While the SA equity market reached an all-time high in late July, it experienced a sharp pull-back in September, resulting in a 2.1% quarterly loss. This decline was led by the resources sector, which was down 7.1% over the period. The platinum mining sector was down nearly 20% for the quarter. Given the recovering demand for platinum group metals (PGMs) and the decline in supply this year (due to the five-month strike at the large Rustenburg mines), the weakness in the platinum price is surprising. It is clear that existing above ground stocks were higher than we had initially estimated and this depressed platinum prices when the striking mines started producing again. The labour strikes have caused large cash drains to the heavily affected miners (Impala and Lonmin) and seem to have led to market concerns about whether these companies will need to raise equity capital at a time when their share prices are very low. We maintain our view that future SA platinum supply will be severely constrained by current underinvestment in new shafts. As demand continues to recover, PGM prices will rise substantially, boosting company cash flows. We therefore believe that PGM miners are currently significantly undervalued. Aided by a slight compression in longer dated yields, the ALBI returned 2.2% over the quarter, outperforming cash by 1.5%. Conventional government bonds outperformed inflation-linked bonds over the period.

Fund performance and positioning The fund has a particularly large exposure to PGM miners and platinum and palladium ETFs. Given the weakness in the platinum sector, equity stock selection was disappointing this quarter, with Lonmin, Anglo Platinum and Aquarius Platinum all detracting. However, this was largely offset by strong performances from Tongaat, Sun International and FirstRand - the fund's top performing holdings over the quarter. Exposure to certain real estate counters, notably New Europe Property, contributed to performance. The fund's offshore assets also performed well, particularly Growthpoint Australia, Deutsche Annington and Deutsche Wohnen. The fund's substantial position in AECI differentiates it from many of its larger competitors. AECI is well positioned for improvements in operating efficiencies, potential volumes and product quality due to its investment in modern technology and capacity. Our assessment of normalised earnings is substantially higher than current levels. The company's Chemserve division supplies specialist chemicals to the SA mining and industrial sectors and is increasingly expanding its reach into Africa. Its explosives division, AEL, is a leading producer of commercial explosives, initiating systems and blasting services for the mining, quarrying and construction markets in Africa, Indonesia and Australia. In addition, AECI has a significant cash balance from the sale of its land in Modderfontein, providing management with interesting strategic options. SA equity markets are generally looking vulnerable due to very high ratings and elevated earnings bases. Many sectors are expensive and we therefore remain defensive - prioritising capital protection while restricting exposure to undervalued opportunities. We have largely reduced concentration in the fund and are finding more opportunities in mid-cap stocks relative to their larger counterparts. We retain some hedging through put option strategies as an alternative to cash. We are gradually increasing the fund's holdings in fixed-rate bonds as inflation appears to be peaking and foreign holdings are being sold down. However, South Africa's deteriorating fiscal position remains a concern and capital flight remains a risk given the relatively high foreign holding. The fund retains a significant allocation to foreign assets, where we are finding opportunities in certain technology stocks, healthcare stocks, oil refiners and pipeline operators as well as specific listed property exposures. Listed property's recent underperformance of equities has improved the relative attractiveness of this sector. We are therefore selectively increasing the fund's exposure to foreign property (Intu, New Europe Property and Capital & Counties) and certain high quality local counters.

The fund returned 2.2% for the quarter and 8.5% for the year. Since inception the fund's annualised performance of 11.1% is in line with its CPI+5% objective. In an environment of elevated volatility and high assets prices, the fund continues to provide positive absolute returns ahead of inflation and cash, with low to moderate risk.

Economic and market overview
A plummeting oil price was the standout feature during the last quarter of 2014, and it triggered large price moves in the relative winners (oil consumers and importers) and losers (oil producers and exporters). Spot Brent crude oil was down 49.7% for the year, having reached a high of US$115 per barrel in June, before falling to a four-year low of US$55.8 at year end. Since oil is the largest commodity traded by value, its price decline is particularly important for the world economy. The cause of the decline was increased production from North America at a time of weak demand from Europe and China and growing use of substitutes (natural gas and renewables), with OPEC making no change to their production intentions. The growth deceleration in China, the world's largest non-oil commodity consumer, came as 2014 saw an increase in supply of many of the commodities it imports. The result was large commodity price falls, with iron ore almost halving and thermal coal down 22%. Precious metals were little changed in 2014 off already low levels as supply was curtailed. The local economy is beginning to recover after prolonged strikes in 2014, but growth is expected to remain sluggish. Lower fuel prices are likely to outweigh the effect of the weaker rand on inflation, giving some purchasing-power relief. The rand depreciated by 9.3% against the US dollar in 2014 as we saw SA's worst economic performance since 2009, the beginning of power shortages that are likely to continue into 2015 and current account and budget deficits weighing on SA's credit ratings. Despite disappointing economic performance, the SA equity market returned 10.9% in 2014 (21.4% in 2013). Financials were the top performing sector, with a total return of 27.3%, followed by Industrials (+16.8%). Resources lagged, declining by 14.7% for the year. Similarly, for the fourth quarter, Financials (+10.8%) and Industrials (+7%) showed strong outperformance, while Resources (-19.3%) posted its worst quarterly performance since the 2008 market crash. Bonds and cash outperformed local equities during the quarter. Bonds are offering some value as the inflation outlook and interest rate cycle have improved significantly with lower commodity prices, especially oil and maize. The SARB kept rates steady at the November MPC meeting and, with inflation expected to decline significantly in 2015 and growth likely to be weak, rate hikes are unlikely in 2015. This is a significant change from our expectations last quarter and makes cash a particularly unattractive asset in the medium term. Foreign capital flight remains a key risk to the exchange rate and elevated SA equity valuations. In general, large emerging markets have seen foreign outflows in 2014, particularly Brazil and Russia. In contrast, SA experienced cumulative inflows, particularly into Industrials and Financials.

Fund performance and positioning
Given the continued weakness in the platinum sector, Lonmin, Anglo Platinum and Aquarius Platinum detracted from performance this quarter. Tongaat and AECI were the fund's top performing holdings over the period. The fund's exposure to certain real estate counters (notably New Europe Property, the rapidly growing Romanian property company) once again contributed to performance. The fund's offshore assets performed well, particularly German residential property company, Deutsche Annington; US hospital group, HCA; and US health insurer, United Health. Sasol has been a key holding for several years. Its core business is to produce synthetic liquid fuels and chemicals based on its proprietary coal to liquids and gas to liquids technology. Sasol uses in-house Fischer-Tropsch technology to convert coal and gas into a synthetic crude oil and wax, which are in turn refined into petrol, diesel and various chemical feedstocks. The rand/dollar exchange rate and the dollar price of oil are the most important determinants of Sasol's earnings. The oil price plunge will therefore severely reduce Sasol's near-term cashflows, despite an ambitious cost cutting programme that was under way even before the oil price decline. We believe that OPEC's reluctance to cut supply in the face of much lower oil prices marks a structural change in oil market dynamics. OPEC is handing over the job of being the marginal producer that balances the market. The higher cost producers, especially the new shale oil players in North America, will be taking over this role, having been able to expand production in recent years with little impact on oil prices. There will be considerable fallout as this market change occurs, and we believe the oil price will settle at a new, lower level in future and will exhibit more volatility than it has in recent years. Sasol is therefore worth less than we had previously thought and we have sold all of the Sasol shares in the fund. The SA market remains heavily influenced by global markets, central bank activity and the resultant portfolio flows. Markets have started 2015 in a volatile fashion, which we believe is likely to set the tone for the year ahead. Broadly, we have been reducing concentration in the fund by selling down some of the outperformers and are finding significantly more opportunities in mid-cap companies relative to the larger stocks. We continue to hold large weights in the platinum and palladium ETFs, given the tightened supply situation with the SA platinum miners in the face of gradually increasing global demand for the metals. We are employing significant equity hedging in the fund via put option strategies. This enables us to benefit from our stock-picking ideas, without taking too much equity market risk and without needing to hold too much low-yielding cash. The fund retains close to maximum allocation to foreign assets, where we are finding value in certain large technology stocks, healthcare companies, automakers, property and casualty insurers and specific listed property exposures. We favour companies with strong intellectual property and consequent high margins. We continue to hold a broad spread of yield instruments, taking advantage of credit spreads while carefully diversifying credit risk. We have moderately increased our holdings in fixed-rate bonds as inflation has peaked, and the current lower oil price should provide additional downside risks to inflation. In 2015, however, the weak growth outlook and public servant wage pressures will likely weigh on fiscal performance, further delaying fiscal consolidation and posing risks to bond yields.

The fund returned 1.1% for the quarter and 7.1% over the one-year period to 31 March 2015. The fund continues to provide positive absolute returns ahead of inflation, with low to moderate risk.

Economic and market overview
Since the financial crisis of 2008-2009, the developed world's central banks have generally maintained near-zero interest rates and have undertaken significant unconventional monetary easing in the form of quantitative easing. In 2015, the US Federal Reserve and the Bank of England delayed the onset of expected monetary tightening in response to tepid economic growth and falling inflation. In addition, the ECB launched its long-awaited sovereign quantitative easing programme in January and the Bank of Japan continues with its substantial quantitative easing program. Together, this has amounted to monetary stimulus in excess of prior expectations and as a result, asset prices have been very buoyant so far this year. In particular, high quality South African Industrials and Financials have been bought up to very high price levels as they find favour with investors looking for the stable and (sometimes) growing cash flows they have exhibited over the last few years. While earnings yields are very low relative to history, investors seem to be focused on their 'relatively high' earnings yields when compared to the very low bond yields on offer in developed markets.

South African GDP growth expectations have been materially marked down, influenced by continued electricity supply issues, expected labour disruptions, lower commodity prices and lower business confidence. Higher income consumers remain very strong, boosted by strong financial markets.

Inflation has troughed in the quarter and is likely to head higher and breach the upper end of the SARB's target band in the coming year due to higher petrol, food and electricity prices. For now, the uncertainties related to US policy normalisation and weak domestic growth momentum has prompted the SARB to keep rates on hold at 5.75% at both the January and March MPC meetings. However, they were explicit that the deteriorating inflation outlook had narrowed the scope for a pause in monetary policy normalisation since January and their tone has shifted from neutral (January) to more hawkish (March) on potential rate hikes. The risks toward a rate hike having now shifted toward the upside.

The FTSE/JSE All Share Index touched a record peak in February, before entering a choppier period for the remainder of the first quarter, ultimately delivering a total return of 5.8%. Financials and Industrials were the best performing sectors, delivering 11.2% and 5.6% respectively, while Resources, plagued once more by weakness in platinum and energy names, were down 0.2%. The rand depreciated by 4.6% against the US dollar in the first quarter.

The ALBI delivered a solid 3% total return over the quarter, outperforming both government inflation-linked bonds and cash (STEFI: +1.5%). Our view is that the long end of the curve is offering the most value, with yields at the shorter end having already priced in rate hikes. More specifically, looking at the FRA curve, the market is pricing in approximately 100 bps over the next 18 months.
Fund performance and positioning
With continued weakness in the platinum sector, Lonmin, Anglo Platinum and Aquarius Platinum were again the primary sources of performance detraction in the quarter. Platinum group metal (PGM) prices have continued to be very weak and platinum mining share prices have plumbed new depths, currently discounting very little upside to spot metal prices. We maintain the view that demand for PGMs will grow steadily in the years ahead and supply will be very constrained. This is a recipe for much higher metal prices, which are currently depressed by the continued liquidation of above ground stocks by commodity investors who seem to be reacting to macroeconomic developments rather than longer-term metal market fundamentals. When metal prices inevitably move higher, the PGM miners should react very strongly as they become significant cash flow producers again.

Naspers, Standard Bank and Mondi were the fund's top performing holdings over the period. In addition, the fund's exposure to certain real estate counters, such as Hospitality Property B and New Europe Property, contributed to performance once more. The fund's offshore assets performed well, particularly Smurfit Kappa (Europe's leading corrugated packaging company), Westlake Chemical (global supplier of petrochemicals, plastics and building products) and US health insurer, UnitedHealth.

Capital & Counties plc. (Capco) has been a star performer in our funds since we added exposure in 2014. This real estate development company gives investors exposure to two key assets in central London - Covent Garden and Earls Court. London is a vibrant, growing global city, with strong economic prospects, an affluent population and a shortage of centrally located residential accommodation. At Covent Garden, Capco's focus continues to be on further upgrading the premium area by attracting new luxury retail brands and upmarket leisure offerings to the area. This upgrading is gaining momentum, resulting in strong rental growth, which we believe has a lot further to go. In Earls Court, Capco has a unique opportunity to provide thousands of new homes in a centrally located area with great transport links, bordering on Kensington, Mayfair, Chelsea and Fulham. Lillie Square, the first opportunity to bring new residential product to the Earls Court Masterplan area, was successfully launched in 2014 and established a very positive pricing benchmark for the area as it sold out in a very short time. Capco's balance sheet is strong and flexible, strengthened over the year with their new bank facilities, a US private placement and the successful equity raise in 2014. Capco's strategy is clear and focused and with two unique assets in prime central London. They are well positioned to deliver long-term value for our clients.

The SA market remains heavily influenced by global markets, central bank activity and the foreign resultant portfolio flows. Markets have started 2015 in a volatile fashion, which we believe is likely to set the tone for the year ahead. We continue to find value and opportunities in the mid-cap space. Master Drilling and Clover are two such smaller company holdings, which offer our clients strong return prospects. We are employing significant equity hedging in the fund via put option strategies. This enables us to benefit from our stock-picking ideas, without taking too much equity market risk and without needing to hold any low-yielding cash.

We have moderately increased our holdings in fixed-rate bonds as inflation has peaked, and the current lower oil price should provide additional downside risks to inflation. In 2015, however, the weak growth outlook and public servant wage pressures will likely weigh on fiscal performance, further delaying fiscal consolidation and posing risks to bond yields.

The fund retains close to maximum allocation to foreign assets, where we find opportunity in certain large technology stocks, healthcare companies, automakers, property and casualty insurers and specific listed property exposures. We are favouring companies with strong intellectual property and consequent high margins. At a time of very high global asset prices, we are adopting a contrarian positioning with the intention of delivering positive returns in potentially downward moving markets.