Conditions in the financial markets continued to improve during the third quarter of 2010. On the back of lower inflation and a stronger rand, interest rates declined across the spectrum. The prime rate was reduced by half a percent to 9.5% in September, and is at a 30-year low. The FTSE/JSE Shareholder Weighted Top 40 total return index was up by 14.9%. Listed property (FTSE/JSE Africa SA listed property total return index) was up by 13.7% and bonds (BEASSA ALBI total return index) by 8.0%. The portfolio was correctly positioned to participate in these market movements. We enter the fourth quarter with an increased equity exposure of 61.3% - up from 42.7% at the beginning of the third quarter. While this reflects continued optimism, we are monitoring market conditions closely and will not hesitate to reduce equity exposure when we believe it is required.

Fear of a sovereign debt default in Europe was a major driving force of financial markets during the second quarter of 2010. The South African Volatility index started the quarter at 19.6% and increased to 30.5% by quarter end, reflecting a significant increase in risk aversion. Equity markets retreated sharply. The FTSE/JSE Shareholder Weighted Top 40 index was 8.6% lower over the quarter. With the market more realistically priced, we are comfortable to enter the third quarter with an increased equity exposure of 42.7% - up from 25.3% at the beginning of the second quarter.

The portfolio's effective equity exposure has been gradually increased in anticipation of a strong recovery in corporate earnings over the next 12 months. However, the effective exposure of around 25% at the March quarter end still reflects caution as the equity market is not cheap based on most commonly used valuation methods. We plan to add more equities if market conditions continue to improve.