We remain positive on the longer term prospects for the South African equity market, but in the short term we exercise caution. Increased market volatility, accompanied with unsustainably high commodity prices, resulted in demanding equity valuations. At 30 September 2006 the fund had 33.86% invested in cash. Inflationary pressure and a widening trade deficit continue to haunt the South African currency. We have invested in Rand hedge securities, Richemont, Remgro, SABMilier and entering the Itrix foreign exchange traded funds.
In our quest to identify attractively priced equities, with exceptional prospects, we have recently invested in the retail sector, purchasing Ellerines (sold JD Group), Truworths, Mr Price and Foschini. In our opinion, the impact of current and future interest rate increases on the profitability of retail companies have been overestimated by the market. The down rated retail sector has potential to yield above average future dividend flows for the patient investor.
On the precious metals and minerals front, we believe that the current high commodity prices, although they have eased lately, are unsustainable. The fund has not invested in commodities relating to precious metals and minerals. At an oil price of USD60 per barrel Sasol should be a solid performer considering the future benefits from the gas to liquid and coal to liquid technology to be rolled out internationally, Sasol should provide protection against a slippery Rand. The GDFI shares (Altron and Ceramics) remains attractive when adding the expected and required investment in infrastructure by the state (and the like of Eskom and Transnet) to the growing private sector investment.
Although the quality of Afrox's business is undisputed, we exited due to demanding valuations. A slowdown in vehicle sales resulting in reduced profitability forecasts for Imperial Holdings prompted us to sell Imperial. Omnia was a great performer in the portfolio and achieved our medium term target in a very short space of time, we took profits.

The volatility in financial markets since mid-May has unnerved many investors and re-awakened the principles of fear and greed applied to risk measures. We remain cautiously optimistic on the prospects of the South African equity market, but recognize that the prospect of a further 100 basis point interest rate increase is material. In the wake of inflation fears and tightened monetary policies we believe capital preservation should be exercised. The monetary cycle in the USA seem to be approaching an end.

When the uncertainty surrounding the USA interest rate outlook is reduced global markets could react positively. In the quarter under review we increased exposure to the industrial sector and rand hedge (SABMiller and Remgro) securities while reducing exposure to financials (Discovery and Standard Bank). Interest rate sensitive stocks felt the most pressure, prompting us to sell out of JD Group, Pick and Pay and Tiger Brands.

The extreme volatility of the market presented opportunities where certain securities declined to levels where the fundamental value could not be ignored. We took advantage of these prices and entered Imperial Holdings, Mr. Price and back again into JD Group at a more a favourable price. South African maize producers planted very low volumes of maize in the current season, an anomaly that should revert to normal in the coming season, and presented us with the opportunity to enter Omnia.