The third quarter of 2007 was very eventful in world financial markets, which exhibited very high levels of volatility.

A slowdown in the US housing market and troubles with sub-prime mortgages had negative repercussions in global credit markets as liquidity tightened considerably. Investors across most asset classes immediately demanded more compensation for taking risk as evidenced by the tightening of credit spreads and the rise in volatility (the US VIX volatility index rose during the quarter from the 20 level to 32 and has eased back since then). Importantly the US Federal Reserve Bank responded by cutting interest rates and there are expectations of further monetary easing. Amid the uncertainty, the dollar weakened by 5.1% against the euro, and gold surged by 14.5% over the quarter.

As a result, developed equity markets had a very poor third quarter. The FTSE 100 index declined 2.1%, the CAC 40 index was down 5.6%, and Japan's Nikkei 225 index was down a substantial 7.5%. An outlier was the US market which reacted well to the Fed's easing monetary policy and the weak dollar. The S&P 500 index was up 1.6% and the NASDAQ was up a respectable 3.8%.

Against this back drop, the MSCI Emerging Markets index posted exceptional gains of 13.7% for the quarter. This however masks significant intra-quarter volatility. This index was down 17% from mid-July to mid-August, at the height of the crisis, and then it posted an exceptional rally, aided by the buoyant Hong Kong and Chinese equity markets. The FTSE/JSE All Share index posted a respectable 5.7% for the quarter, after being down 13% from mid-July to mid-August.

In total return terms the FTSE/JSE Top 40 index was up by 7.68% for the quarter. Resources shares surged by 13.46% and Industrials were up 3.29%. Financials performed poorly (down 1.56%) - affected by a 50 b.p. hike in interest rates during the quarter and expectations of a further rate hike in October.

For the quarter, the Fund performance was marginally below that of its benchmark the FTSE/JSE Africa Top 40 Index. The fund produced a total return of 7.5% (net of fees) relative to the benchmark which was up 7.7% for the quarter. Index rebalancing costs and a marginal drag from the fund's futures position were largely responsible for the slight performance mismatch.

Aslam Dalvi
Portfolio Manager

Developed international equity markets experienced robust increases in the second quarter of 2007, with the S&P 500 Index up 6.3%, the FTSE 100 up 8% and the Frankfurt DAX up a massive 17.5%.

Developed market buoyancy carried through to emerging markets with the MSCI Emerging Market Index up 15.1% for the quarter. Locally the FTSE/JSE Top 40 Index was up by a respectable 4.3% for the quarter. Resources and Industrials performed well at 6.8% and 4.3% respectively. Resources counters were supported by the apparent consolidation of commodity prices at higher than expected levels. Financials underperformed considerably on the back of interest rate hikes and a slowing consumer expenditure market.

The top 3 performing stocks in the FTSE/JSE Top 40 Index for the quarter were all Resource counters: Kumba Iron Ore (24.2%), Lonmin (20.6%) and BHP Billiton (20.2%). The bottom 3 performing stocks reflected the poor performance of Financials and the tough cost inflation environment for gold counters: Gold Fields (-18.7%), AngloGold Ashanti (-17.8%) and RMB Holdings (-8.7%).

For the quarter, the Fund performance was 4.11% (net of fees) versus 4.27% for the FTSE JSE Top 40 Index. As per the June 2007 Micropal figures the fund is ranked number 2 in the Large Cap Category over 3 months, 6 months, 3 years and 5 years. All index changes that occurred during the quarter were timeously acted upon so as to minimise the risk in the fund.

Gavin Wood
Portfolio Manager

World markets ended the first quarter of the year in positive territory with the MSCI World Index returning 2.1% in dollar terms. US and European markets continued to build on last quarter's positive performances with the S&P 500 and FTSE 100 returning 0.2% and 1.4% respectively.

The local market performed well over the quarter with the FTSE/JSE All Share Index returning 10.4%. Early signs of moderating inflation, a still buoyant consumer and robust corporate earnings provided a positive backdrop for performance, particularly for the local financial and industrial counters. Over the quarter, the FTSE/JSE Financial and FTSE/JSE Industrial indices returned 7.3% and 7.1% respectively.

The FTSE/JSE Resources Index, supported by generally stronger commodity prices and a weaker currency, had an exceptional quarter delivering a return of 15.2% over the period.

For the quarter, the fund performance was marginally below that of its benchmark the FTSE/JSE Africa Top 40 Index. The fund produced a total return (net of fees) of 9.5% relative to the benchmark which was up 9.7% for the quarter. The fund remains the top index tracker within the unit trust General Equity Large Cap sector over the 3- month, 1-year and 3-year periods.

All index changes that occurred during the quarter were timeously acted upon so as to minimise the relative risk in the fund.

Kagiso Asset Management Portfolio Managers

World markets had an excellent fourth quarter with the MSCI World Index returning 8.0% over the period. US and European markets continued to build on last quarter's positive performances with the S&P 500 and FTSE 100 returning 6.7% and 9.9% respectively.

Commodities in general had a good quarter with industrial metals, in particular zinc and nickel, soaring to new highs. A notable exception to this trend was the spot price of copper which came under significant pressure over the quarter. Rising copper inventories and concerns around slowing demand saw the copper price close the quarter down 17.3%. The spot price of gold ended the quarter 5.5% higher than its Sep-06 closing level while the price of platinum closed the quarter down 2.0%.

The local market performed well during the final quarter of the year with the FTSE/JSE All Share index returning 11.8%. Early signs of moderating inflation, a still buoyant consumer, robust corporate earnings and strong global markets provided a positive backdrop for performance, particularly for the local financial and industrial counters. Over the quarter, the FTSE/JSE Financial and FTSE/JSE Industrial indices returned 18.9% and 17.3% respectively.

The FTSE/JSE Resources index, supported by generally stronger commodity prices, delivered a pleasing return of 4.5% despite a sharp strengthening of the currency over the period. The SA rand ended the quarter at 6.97 to the US dollar, 9.9% stronger than the previous quarter's closing level.

For the quarter, the Kagiso Top 40 Tracker Fund performance was ahead of its benchmark the FTSE/JSE Africa Top 40 index before management fees and only marginally below the benchmark after fees. The Fund produced a total return (net of fees) of 10.6% relative to the benchmark, which was up 10.7% for the quarter. The Fund remains the top index tracker within the unit trust General Equity Large Cap sector over the 3-month, 1- year and 3-year periods.

All index changes that occurred during the quarter were timeously acted upon so as to minimise the relative risk in the fund.

Kagiso Asset Management Portfolio Manager