We had a quarter from hell, to put it bluntly. In May 1998 market valuation topped out around 20 time earnings, March 2000 valuation was at 17 times. May 2008 market valuation was at 14.7 times, not a screaming buy but not close to the excessive valuations we had seen before previous crashes. And yes, this was a crash like no one had seen before. Inflation also had an interesting path; in June 1998 CPI was at a low of 5.1% while it was at a low of 3.4% in March 2000, only in June 2002 did it show strain at around 8%. In the current cycle inflation is expected to top out around just above 13%. Mainly driven by aggressive accelerating commodity prices, managing inflation via interest rates impacted severely on the consumer dragging the majority of interest rate sensitive stocks with it over the year. Banks and some consumer related stocks recovered somewhat from the June 2008 low after retracing 39% from the top in October 2007. However slowing world growth and dysfunctional credit markets impacted severely on materials and related sectors. Active risk in the equity component was subdued. However the benchmark is based on the JSE Alsi top40 index which has a sizable allocation in materials. Equity hedging cost has rocketed over the past quarter. Implied volatility increased from 24% in July 2008 to 37% at the end of September 2008, dragging on equity performance. However the derivative structures added a lot of value over the quarter to dampen the draw down. The equity market kept surprising to the down side as the credit debacle panned out, with excessive volatility. Given the level of valuation the funds maintained a moderate equity exposure whilst hedging down side risk. The hedged equity performance for the quarter was -17.28% whilst pure equities delivered -24.25% thus the hedging process reduced the draw down by 30%. Bonds had a massive 12.57% return for the quarter after adjusting for lower inflation expectation in July. Our models did not capture this as the risk adjusted total return for bonds did not proved to be superior to cash. The flight to quality weighed on bonds ignoring increased issuance, currency risk and political risk over the period. Cash remained attractive in this high risk environment, especially as the monetary authorities maintained an aggressive stance. The real cash yield is negative given a 12% repo rate and CPI of 13.7%, however the bond market is expecting inflation to taper down to around 6% over the net 7 years. Given the current steep target of CPI + 5% on a 3 year rolling basis the portfolio had to maintain moderate equity exposure given the medium to log term potential offered by the market. Currently equity valuation is very attractive and we will add exposure over the medium term. The cash roll down will reduce its attractiveness over the next 18 months. This will allow for higher interest rate sensitive assets like bonds and property. Property valuations are attractive, however post hedging cost it offer limited potential, bonds are moderate to expensive but does offer diversification characteristics, we expect to implement protected bond structures over the medium term.

Global market turbulence played havoc in our markets, impacting on our markets but more importantly the Rand. This has placed additional pressure on inflation. Adding to this electricity supply in South Africa became dodgy adding to the risk, but more importantly proving that the stellar growth we had resulted in capacity constrains.

Equity markets were very volatile but ended the quarter positive, adding just over 5% to the kitty. Bonds had a dismal quarter losing 1.5% (Govi index) after inflation disappointments. Cash maintained the upward trend given inflation expectations.

Equity return potential is still reasonable over a one year basis allowing for a moderate allocation. Bonds are unattractive relative to cash offering very attractive yields. The short term objective of the fund is to preserve capital and minimize drawdown's.

The quarter and the year ended on a low note, losing out to the much-anticipated year-end rally. Given the international and local jitter that should have been expected. Equity volatility remains high in a fairly trend less market. Risk in the equity marker remains fairly high making a cautious approach plausible. Medium and longer term return expectations, given current valuations are getting reasonably attractive.

Inflation caused havoc in the market resulting in money market rates last seen before the start of the equity bull run in 2003. The bond market also had a volatile quarter under performing cash.

The portfolio return lagged the target for the quarter but ended positive for the quarter. The fund is cautiously positioned to manage the current risk environment effectively, whilst capturing return potential that should result over the medium to long term from riskier asset classes.