October certainly lived up to its reputation. With the exception of Japan, all major developed markets posted declines on the month. Volatility was high and daily movements in excess of 1% were commonplace. On more than one occasion daily price changes of over 2% occurred - not that significant in emerging markets, but in developed markets the exception to the rule. Concerns over rising global inflation and low growth re-emerged to plague investor sentiment, and the effects on markets were dramatic. Emerging markets were very weak. In dollar terms, India was down 11.2% and South Africa 10.3%.

Global bond markets were also under pressure in October, registering their second consecutive monthly decline. The impact of hurricanes Katrina and Rita on global economies is still not clear, but it's hard not to attribute a large part of the current weakness seen in global markets to the negative effect of higher energy prices on economies.

The fund returned 2.74% for the month. Based on our poor return expectations for the US Equity market we have decided to sell out of the GAM North American Growth Fund. The exposure will be equally split between a commercial property and a global equity fund.

September continued to be dominated by the concerns over the impact of record high oil prices on the global economy. The uncertainty surrounding the ultimate impact of such high energy prices on economies helped the traditional safe haven and inflation hedge, Gold, to soar. With global liquidity still at high levels, this could be a trend to watch.
Despite the inevitable negative impact of high energy prices on growth, the Fed saw it fit to continue raising interest rates for the 11th time. This contributed to the dollar's gains against most of the major currencies. The rising inflationary concerns did impact global bond markets. More so the US as rates ended some 30bps higher. Largely ignoring the concerns over growth, inflation and rising interest rates, equity markets continued to trend stronger supported by the high global liquidity levels. Japan, again the star performer, returned 9.4%. The MSCI World index returned a solid 3% for the month.
The fund experienced large inflows of some R18m during the month. Economic fundamentals remain, on balance, supportive of equities and we continue to favour the European markets based on attractive earnings yields. We remain comfortable with our strategy to avoid high beta portfolios, and prefer the absolute return bias of our equity managers.

This fund's initial fee was reduced to 3% (3.42% incl. VAT) on 18 July 2005

With effect from 5 May 2005, the Metropolitan Select Manager Global Growth Fund of Funds has changed its name to Metropolitan Select Manager Global Growth Fund of Funds. The performance history was retained.

March saw growing evidence that rising interest rates are having a cooling effect on the global economy. US non-farm payrolls increased by only 110 000 jobs in March suggesting that US companies may be turning more cautious. Weakness was also present in various Eurozone economies, with business confidence declining. In the UK, there was an unexpected decline in industrial production, and house prices posted their largest monthly decline in almost a decade.
This economic weakness reduces pressure on central banks to raise interest rates at the previously expected pace, and has been supportive of bond yields, suppressing and then reversing the sell offs that began in February. We continue to remain underweight duration, yet are currently reassessing this position.
March saw the dollar first weaken and then strengthen, ending the month up against most major currencies. Brandywine have slightly increased the dollar exposure in their portfolio, yet continue to remain significantly underweight dollars.
Equity markets were broadly down in March. Sentiment and momentum turned early in the month, and we chose not to increase our equity exposure in such an environment. We were pleased to note that in addition to generating positive absolute retums, three of the four equity managers in the portfolio also outperformed their respective regional benchmarks in the first quarter.

During February US and European bond yields bounced sharply off their overbought lOws reached early in the month. Greenspan's reference to the bond market "conundrum" was the main catalyst in the sell-off, with him essentially talking longer yields up by arguing that it didn't make sense for them to have continued declining as the Fed Funds rate was hiked. We believe that there are further upward pressures on yields. The bond portion of our global fund maintains a low duration position in line with this judgement.
The MSCI AC World Index rose 3.3% in February (a rise of just below 1% in rand). Equity markets appear to be offering better value than bonds presently, with many stocks offering yields higher than those of their respective government bonds. We are currently looking at increasing the equity allocation of the portfolio, with a focus on income generating equities.
The USD showed strength at the t>eginning of the month, but weakened through most of February. Brandywine, one of our fixed income managers, has reduced their USD exposure in line with their bearish view on the USD. This has led to a decline in the overall USD JI exposure of the portfolio. With cyclical factors favouring the USD (eg improving interest rate differentials, faster growth) and structural G factors counting against It (eg the US' large current account deficit), we would generally prefer a more neutral USD exposure, and so are reconsidering our allocation to this manager.

A decision to actively allocate to resource stocks, thus overriding the current views of our underlying managers, would require a strong view. Although financial and industrial stocks had a significant rally last year and in relative terms resource stocks have not really begun to move, the outlook for resources remains murky.

Over the past few years we have experienced some significant commodity price appreciation, especially when measured in dollars. Increased Chinese demand, increasing global growth, and dollar weakness have been major factors in this appreciation. One of the key pillars underlying the above has been record low US interest rates. As US interest rates rise, global growth is expected to soften in 2005. This being the case, some of the support for global commodity prices should ease over the coming year. Nonetheless, robust demand for commodities from China is likely to continue.

The Rand is the wildcard in the whole scenario. At current levels, most of our underlying managers believe that resource counters are showing little value and only begin to do so when using R/$ of 7 or more in their valuation models. The strong rand along with other cost pressures in particularly mining stocks have led to margin compression despite high commodity prices. Currency forecasting is inaccurate at best, but there are many factors supporting the Rand at levels below R/$7. Recent Rand weakness will support the current run in resources, but if material Rand weakness does not materialize, resource stocks are likely to underperform. Furthermore, rand weakness that is the product of dollar strength (rather than broad based rand weakness against a basket of currencies), is likely to be accompanied by lower dollar commodity prices, which is what we have seen so far this year in gold prices. Therefore careful stock picking within the resource sector remains the best way to gain exposure to resource stocks.

A number of our underlying equity managers have been increasing their exposure to resources selectively over the last few months, but they are all still underweight vs. the ALSI. Careful stock picking has led them to names like BHP Billiton (diversified commodity exposure), Sasol (for oil exposure) and platinum counters. Gold stocks are not a favourite. A look at the charts on the next page shows which of the resource sub-sectors have performed well year to date, and what is clear is that diversified metals have led the sector, with platinum and energy also performing well, yet gold and steel have lagged. Thus the stock picking of the underlying fund managers has contributed positively. At the end of this comment is the current resource allocation/stock picks within the Prudential Active equity portfolio. It shows that the fund's equities are approximately 20% in the materials sector compared to the ALSI weight of over 37%. Note that this weight is about 5% greater than that shown on the factsheets, since the Materials Sector in the database used below includes paper, packaging and chemicals, which are not part of the ALSI Resources Sector.
The managers remain more comfortable being overweight industrial and financial stocks where valuations and earnings growth are clearer. Our fund managers have also been increasing exposure to rand hedges over recent months, yet have been looking more in the industrial sector, where they see better valuations. For the time being we do not intend to overrule their positions by buying a separate resource fund.

The choice of which first world currency is beneficial for a South African resident is made simple by the Select Manager Global Growth FoF. Investing offshore should be a diversification strategy and not a performance chasing exercise. For this reason, our fund is diversified over all major currencies specifically giving larger exposure to the euro which we foresee as the dominant currency going forward. The risk for the investor of choosing one developed market currency is significantly lowered through this diversification.
December saw continuations of the strong equity markets and a weakening dollar seen in November. The S&P 500 rose a further 3.2% (up 0.6% in rand), leading to a total gain of 9% for the year. Given the strength of the rand against the dollar in 2004, this translates to an almost 8% loss in 2004 for the S&P 500 when measured in rands. MSCI AC World also had a strong month (up 3.8% in dollars and up 1.1% in rand) and year (up 13.3% in dollars but down 4.2% in rand). December saw a new dollar low against the rand of 5.62, as well as a new all time low against the euro of 1.36. The dollar ended the year oversold, suggesting a possible dollar rally, yet the long term prospects for the dollar remain unfavorable. The dollar weakness has been accompanied by a widening spread between US Treasury and German Bond yields, with European yields declining while US yields have been gradually moving up over the past few months.
NB With Orbis Optimal having recently lost its approved status, we are making some switches in the portfolio, essentially redistributing the Orbis Optimal allocation between the global bond funds.