The economic outlook is positive but in the face of a slowing world economy and in the absence of any further domestic stimulus, the South African economy's growth rate will probably slow down. The exceptional returns experienced over the last 2½ years for South African Equity investors is nearing an end and investors will have to be content with much lower prospective returns, however shares are still offering a fair risk premium to government bonds. Pockets of value remain with Woolworths being a case in point: it recently brought back 11% of its shares which will boost its return on equity to over 40% and result in a material boost to earnings in 2006. Woolworths should give a tax free 5.5% yield in 2006, which is attractive in relation to the best interest rates available in the bank. In addition to this yield you are getting an exceptional food retailing business that has captured the lifestyle shift into healthy convenience food. Woolworths has substantial barriers to entry and we see ongoing strong real growth and high real returns. This is a business we are happy to own for the long-term and we expect it to return in excess of 25% per annum over the next three years.

After the stock market's fantastic performance in 2003 and 2004 many institutional shareholders are overweight shares and are now selling shares to reduce risk. In addition offshore investors are being cautious in light of increased interest rates in the USA. This is creating a stagnant market where few shares are rising. Nevertheless strong earnings growth is resulting in a de-rating process resulting in better value and pockets of good value are beginning to appear. In the short term it is a difficult market to generate returns as there are so few shares rising. The fund is not fully invested in equities and we have maintained a fair cash weighting to give us the flexibility to take advantage of opportunities that may arise. We are also invested in special situation shares, which we classify as shares that can give a good return regardless of market conditions. The current environment favors Centaur as we believe we can cherry pick the best investment opportunities going forward. We believe the portfolio is well positioned in the best opportunities to benefit from the anticipated eventual market upturn. Even though the current environment is lacklustre I am positive on the medium term outlook for the SA economy and local stock market.

After an exceptional performance in 2004 the market looks fairly priced, with a fair degree of optimism already reflected in many domestic share prices. The key to performing in 2005 will be superior stock picking ability.

Shares where corporate or management action unlocks value for shareholders, or those with superior growth characteristics not reflected in the current share price, will continue to perform well in the year ahead. The current environment favours a niche fund such as the Centaur Flexible Fund, where the manager's edge is its stock picking
ability.