The emphasis on this fund has been to attempt to get the balance right between equities (the dominant risk asset class) and the non-risk assets. We believe that the correct balance, at present, is around the 25% exposure level to equities with a less than ALBI duration to bonds of around 50% and the balance in other assets such as property, Gold ETF and floating rate notes. Property has continued to be diluted down to 1.7% as we believe that this sector is now expensive. International Property via the MET Global Property Fund was added during the month.

Our strategy goning forward is to be patient with respect to equities - in other words, we believe that overall value is not compelling enough to warrant much more exposure than we currently have. In addition, we will be looking at increasing our international exposure via cheap building block ETF type instruments.

Investment Overview

After the positive start to the year which produced robust equity returns in the first quarter, the markets, particularly on the global front, changed dramatically as the second quarter proved to be sharply negative. The JSE All Share Index managed to eke out a gain in the last few trading days of June to produce a 1.0% quarterly return. This was in contrast to the MSCI World Index Which dedined by -4.9% in US$'s. Note that the much vaunted Emerging Markets declined by even more over the quarter producing a poor -8.8%. This volatility illustrates the "risk on, risk off' environment that is arguably frustrating investors at the moment. Much of this behaviour can be exlained by the deteriorating global macro-economic outlook. This is being exacerbated by the problematic austerity measures being implemented in the Euro periphery arising out of their public sector debt problems. The issues in the Eurozone remain the single biggest risk to the world's economic well being.

However, bonds proved to be the big winner over the second quarter with the All Bond Index producing a strong 5.2% over the period. The fixed interest market in South Africa has been strong all year, with the yield flattening steadily since the beginning of the year and more dramatically towards the end of Q2, especially in the three to five year area. The yield on the 4 year government R157 bond reached a lifetime low of just below 6% in June, partially owing to the continued search for yield in an uncertain risky assets environment, but also as a result of the news South Africa bonds are to be included in Citigroup's benchmark World Government Bond Index from October.

Portfolio Overview and Asset Allocation

The portfolio has been positioned defensively at present with 28% in equities and 7% in property, with the balance split 30% in bonds, and 18% in inflation linked bonds with the balance in cash and money market instruments. These are all local assets with no off-shore exposure at present. The strategy going forward is to be cautious in the fixed income space as the bonds have had a tremendous rally but be constantly on the lookout for potential opportunities should they arise. This also applies to adding more property exposure and the emphasis within equities will be to focus on areas of the market that we believe should display relative better earning's visibility and have solid balance sheets that can support dividend growth.

Overall, looking forward, the strategy is one of broad diversification to as many asset dasses and instruments as is logical. To this end we will look for selected opportunities to build the international portion of the portfolio.

The global financial system and world economy were again under extraordinary strain during the third quarter of 2011. In Europe fears that Greece and some of its neighbours may default on their sovereign debt obligations was reflected in the steep rise in Euro zone bond yields. Deterioration of public finances led rating agency S&P to suspend America's AAA rating early in August. The MSCI Global Equity Total Return Index declined sharply by 16.5% and the Economist's metals index was down 20.1%.

On the local front the Rand weakened from R6.76 to R8.09 per US dollar - a move of 19.7%. Risk aversion also caused the FTSE/JSE All Share Total Return Index to be down by 5.8%. However, the FTSE/JSE SA Listed Property Total Return Index increased by 2.2%, highlighting the benefits of diversification. A small decline in longer-term interest rates helped the BEASSA All Bond Total Return Index to increase by 2.8%. The Barclays BESA Government Inflation-Linked Bond Index was 3.0% higher; the Alexander Forbes Money Market Index returned 1.3% and the prime rate was left unchanged at 9.0%.

In positioning the portfolio we always aim to strike an optimum balance between upside potential and downside risk. Our quarter end portfolio reflects the reality that we are currently in a risky environment.

Equity exposure was close to the lower end of our normal range. While both listed property and bonds are also risky assets, they are likely to provide attractive yields in the foreseeable future, which justifies a cautious exposure. As we have a neutral view on inflation-linked bonds we have a moderate exposure to this asset class.

The global financial system and world economy were again under extraordinary strain during the third quarter of 2011. In Europe fears that Greece and some of its neighbours may default on their sovereign debt obligations was reflected in the steep rise in Euro zone bond yields. Deterioration of public finances led rating agency S&P to suspend America's AAA rating early in August. The MSCI Global Equity Total Return Index declined sharply by 16.5% and the Economist's metals index was down 20.1%.

On the local front the Rand weakened from R6.76 to R8.09 per US dollar a move of 19.7%. Risk aversion also caused the FTSE/JSE All Share Total Return Index to be down by 5.8%. However, the FTSE/JSE SA Listed Property Total Return Index increased by 2.2%, highlighting the benefits of diversification. A small decline in longer-term interest rates helped the BEASSA All Bond Total Return Index to increase by 2.8%. The Barclays BESA Government Inflation-Linked Bond Index was 3.0% higher; the Alexander Forbes Money Market Index returned 1.3% and the prime rate was left unchanged at 9.0%.

In positioning the portfolio we always aim to strike an optimum balance between upside potential and downside risk. Our quarter end portfolio reflects the reality that we are currently in a risky environment.

Equity exposure was close to the lower end of our normal range. While both listed property and bonds are also risky assets, they are likely to provide attractive yields in the foreseeable future, which justifies a cautious exposure. As we have a neutral view on inflation-linked bonds we have a moderate exposure to this asset class.

The Metropolitan Cautious Portfolio will change it's name to MET Cautious Portfolio, effective from 16 February 2012

During the past quarter, the Greek debt crisis was a sharp reminder that global risks prevailed and markets were volatile. Despite this, the FTSE/JSE All Share Total Return Index was down by only 0.6% and the Rand ended at R6.76 against the US Dollar - almost unchanged from R6.75 last quarter. After declining by 2.2% in the previous quarter, listed property did well and the FTSE/JSE Africa SA listed property total return index increased by 5.0%.

The inflation rate was 4.6% in May, well above its cyclical bottom of 3.2% in September last year. The Barclays BESA South African Government Inflation-Linked Bond Index was 3.8% higher. Despite rising inflation, long bond rates declined, causing the BEASSA All Bond total return index to increase by 3.9%.

The prime rate was left unchanged at 9.0% and the Alexander Forbes Money Market Index returned 1.3%.

While the fund perserved capital over the turbulent quarter, it was comfortably ahead of its inflation-linked benchmark over the 12 months to June.

In positioning the fund we always aim to strike an optimum balance between upside potential and downside risk. We enter the third quarter of 2011 with an effective equity exposure of 26.3%. This cautious positioning addresses the fact that there are still significant risks in the global financial system. Both listed property and bonds should provide attractive yields in the foreseeable future. However, we maintain only moderate exposure to these two asset classes as neither of them are risk free, especially in an environment where inflation and interest rates are likely to be on the increase. This risk is partially offset by the inclusion of inflation linked-bonds in the fund.