We are pleased to report that the fund reported an excellent performance in September and comfortably outperformed the Mid-and Small-Cap Indices.

We think that a major factor for success in the balance of the year will be to avoid the shock surprises of companies reporting disappointing trading performances as we pass the trough of the economic downturn. The trough in business performance is only experienced many months after the peak in interest rates, and we are arguably reaching the point now where investors think that the worst is over, but some real shocks are still out there. The trading updates of Taste and Argent in the last two days alone are examples. We expect more.
In addition, notwithstanding that the economy (SA and most others) may be through the worst, we would advise against opening any champagne as it is our view that the recovery will be slow and gradual at best. In that context, we believe that several sectors today discount substantially stronger and faster recoveries than we expect to evolve –most notably platinum in which we have no investment at present.

Despite this, we do note that there are several smaller businesses that have weathered the storm remarkably well, find themselves emerging stronger and better than ever, into a less competitive market space, and are on very attractive dividend yields. It is these that we seek to identify.

After a strong recovery in March, April and May 2009, the market took a breather in June with the All Share Index declining by 3.1%, with the Resources Index, which had been recovering strongly in the last months, giving back some of these gains (down -9.0%) while financials and industrials were relatively stronger at +4.7% and +0.7% respectively. Investors will recall from last month's comment that we were of the view that the resource space had run too hard and we were reducing our exposure to the sector. This has continued in June with further sales of Hiveld Steel and Vanadium, Merafe, Metorex and Palamin. Over the month, the mid-and small-cap sectors both rose by 1%.

Our view is little changed from last month's report and we remind investors of the fact that the dividend yield on the Financial & Industrial Index is now greater than the after tax (using a 40% tax rate) yield on cash. We consider this a very bullish signal for equity investment and this is why the fund remains fully invested with cash at less than 2%.

We are, however, extremely circumspect about the pace of any local or global (perhaps with the apparent exception of China) economic growth recovery which we believe will be subdued at best and very gradual. In these circumstances, the strong recovery we have seen in commodity prices in the first half of the year seems totally overdone to us and driven largely by Chinese inventory restocking and reserve building. This appears to be coming to an end and we consequently remain very wary of most resource stocks.

Our distinct preference remains for solid businesses that we believe will grow their dividends in difficult economic conditions we anticipate in the next two or three years. These include examples such as Shoprite, Spar, Clicks, Adcock Ingram, Pioneer Foods and Mediclinic.

In March 2009 the market bounced sharply reversing some of the decline suffered in January and February. The All Share Index jumped 11.0%, driven by Resources (+14.5%) and Financials (+14.1) with the Mid-Cap Index and Small- Cap Index rising a more muted 4.1% and 3.4% respectively, given the lower exposure to resources and financials which are typically large caps. For the quarter the All Share was down by 4.1% and the Mid- and Small-Cap Indices down by 4.4% and 6.4% over the same period. In these volatile market circumstances, the fund's defensive bias was reasonably effective in protecting investors' wealth in January and February and lagged - only slightly up in March and for the quarter.

Positions that have added particular value over the quarter include Oceana, Mediclinic, Omnia and Discovery, while positions that have detracted include Afrox, Palamin, Hudaco and Reunert.

Major recent decisions taken include disposing of, or reducing exposure to Grindrod, Datatec, Merafe and Palamin in favour of Illovo and Oceana. We also sold out of Foschini which has run very hard in favour of adding to underperformer Adcorp (now on a 12% dividend yield) and Bowler Metcalf.

With the run we have seen in the market in March - recall driven by the cyclical banks and resources up more than 14% - it is currently critically poised between two possible outcomes.

Outcome 1: "We are through the worst" - this is the position the market has swung towards in the last month, driven by a few data points that suggest the Chinese economy is doing a little better, for example, they have been heavy importers of iron ore and copper; their manufacturing index moved back into positive territory for the first time in six months; and construction activity stats have ticked up. In addition, the unprecedented stimulus applied to the global economy by monetary and fiscal authorities of all major economies through record low interest rates, public spending packages, tax relief and assistance to distressed banks and borrowers. The Bulls take these into account and conclude the market is already correctly discounting the inevitable recovery which will be stronger than currently expected as the inflationary impact of this degree of stimulus unravels in the next two years.

Outcome 2: "Three swallows don't make summer" - The Bear's position is premised on a view that regardless of the degree of stimulus applied, the global economy will still take many years to gradually digest and process the excesses that were incurred between the late 1980's and end-2007. They argue that we are in for a prolonged period of savings build up and subdued US and Western World consumer spending, with no support from the rest of the world. Under this circumstance, the recent strength in the market is overdone and has offered an opportunity to sell.

Although we would favour the latter argument and are using current market strength to build up some cash by taking profits on the shares that have enjoyed strong short term performance, we do nonetheless believe that we have seen the bottom in the equity market.

December 2008 saw the market recover a little from the depressed levels reached in November. The Nedgroup Investments Entrepreneur Fund ended 2008 appreciating by 6.8% in December. This was significantly ahead of the JSE Small-Cap Index, +1.8%; yet lagged the JSE Mid-Cap Index, +8.3%.

For the year, the fund returned a disappointing -31.7% in comparison to the JSE All Share, Mid-Cap and Small-Cap Indices, -23.2%, -18.7% and -31.2% respectively. We do, however, draw some comfort from the fund's performance versus the peer group, which on average, declined by 39.8%. The fund ended 2008 2nd over almost all measurement periods (1st over 10 years) and the three-year compound return is nearly 8%.

This brings a close to a turbulent fourth quarter and challenging 2009.

Although unprecedented support has been applied by Governments worldwide through bail-out packages, infrastructure investment and fiscal easing as well as by Monetary authorities through reductions in interest rates (these now average 1.25% across the G7), hard evidence of easing credit conditions has been slow to materialise, although there are some early signs.

We are, however, of the opinion that the stimulus will ultimately have the desired effect, but clarity on the earnings outlook for companies will remain uncertain for some time. Locally, tighter credit conditions, production cutbacks, mounting job losses, and declining inflation have encouraged the SARB to follow the precedent set by the worlds large Central Banks and we saw the first reduction in the Repo rate in December. We expect further cuts in the interest rate in the year ahead. However, the short-term prospects for commodity prices remain bleak.

We expect the first half of 2009 will likely continue to witness churning market conditions, thus our investment themes will focus on defensive plays: companies with high earnings visibility, stable cash flows and robust balance sheets. The fund continues to have large holdings in the defensive food retailers (Shoprite and Spar) and we are well positioned for any recovery in building contractors which have underperformed.