The market volatility to which we are becoming accustomed continued in September 2011. Fortunately, the defensive constituents of the portfolio's barbell strategy (notably BAT, Mediclinic and Santam) did well to offset the damage caused by the resource components, which under-performed (notably Palamin) and also the dramatic pullback experienced in some of the high flying consumer discretionary counters (notably Mr Price and Foschini). Overall, the portfolio declined by 1.5%, which in the context of the All Share Index (-3.6%) and the -1.9% of the JSE Mid-Cap Index, and -0.3% of the JSE Small-Cap Index, is considered satisfactory.

The rationale regarding our portfolio construction and ongoing additions to the resource holdings, which have continued to underperform, has been tested by the fall in commodity prices in the last month (eg Copper down 22% in Sept), the weakening of the rand (-16% vs US$) and the possibility that further mismanagement of the European sovereign debt crisis may lead to a run on European banks and a repeat of the US banking driven credit crisis we experienced in 2008.

In addition, markets have become concerned that the white knight of the Chinese economy may not be able to ride to the rescue as in 2008/9 constrained by high inflation and hence an inability for the authorities to stimulate domestic demand through easier monetary policy and falling demand for their exports. While we worry about the possibility of the outcomes suggested above, we consider the likelihood of this worst case scenario as reasonably low for now and maintain our views. We also believe that the high levels of market volatility that the market has been under for the last four months is unlikely to be sustained, and will subside before the end of the year.

The rand weakness experienced in September, after a considerable period of stability, resulted in an undignified flight from emerging markets and the Retail sector - a darling of foreign investors was heavily affected by their selling pressure. For example Massmart -12% and Foschini -11% in September! While we concede that these shares have not looked cheap for some time, their growth prospects in South Africa, selling to consumers that have received high real salary increases in the last year, remain favourable. Consequently, we have used the recent weakness to add selectively to our positions.

June 2011 extended the volatile intra-month performance we have seen in the market every month so far in 2011. At one stage, the SWIX was down nearly 6%, but rallied in the last week to end down only 1.5%. Once again the portfolio did reasonably well, buoyed by its overweight position in industrials and the specific share picks, but was undermined to some extent by our select resource exposure. Resource stocks were once again the poorest broad sector performers (-3.1%) versus the -2.4 % of financials and even better -1.1% of industrials. The portfolio was flat for the month, which is acceptable in the context of a similar flat return by the JSE Mid-Cap Index, and the -0.15% of the JSE Small-Cap Index.

We expect the market volatility we have discussed in the last few months' commentaries to continue for at least another two months of northern hemisphere summer holiday period. But on the forecast of positive (or at least less negative) resolution of the various issues we've discussed before, and an improving economic outlook supported by the data, we are positioned for a rise in the market in the fourth quarter. During the month we continued to add to AVI and Advtech with the proceeds of profits taken in Metorex, Mediclinic, Lewis and Coronation. We have also acquired a small holding in Cashbuild that has lagged the retail sector, but is a very well run business with huge attraction to a variety of possible buyers.

On that subject we have benefitted enormously since the end of June from the appreciation of at least two shares of high quality, reasonably priced small-cap businesses which published cautionary statements saying they are engaged in some form of corporate discussions. Given the low levels of interest rates and limited organic growth opportunities facing many large South African companies, we believe this is a pattern that will probably recur. Consequently, we are very pleased to find the portfolio already holds several companies that fit this profile and may well be the target of this kind of corporate attention.

March 2011 started in a very nervous fashion. We watched the spread of political turmoil as it spread through Northern Africa and the Middle East with enormous concern that it could extend into Saudi Arabia.

Why is Saudi Arabia so important? Because it is the single country that is most able to influence the oil price. If the priceofoil had already risen from US$90 to US$115 through the events that took place in Tunisia, Egypt and Libya (cumulatively less than 3% of world oil supply), imagine the impact if the country that supplies 11% of world oil, but more importantly, is the country with the greatest flexibility to adjust oil output! Friday 11th March had in fact been planned as a "Day of Rage" in Saudi Arabia and as we nervously scanned the TV channels that morning for signs of what might be happening, a massive (5th largest in the world in the last century) earthquake occurred off the coast of Japan followed by a tsunami wave that caused extensive damage to parts of north eastern Japan. While the loss of life and property is tragic, our view is that the impact on global economic growth will be minimal, and in fact the re-building that will be required will be supportive. As the world's media attention swiveled to the natural disaster in Japan, events in the Middle East shifted downwards in priority, the oil price stopped rising and as markets adjusted to a view that the fragile recovery in global economic growth had not been compromised, equity markets recovered strongly.

We are very pleased that we managed to generate a positive return for the month of March in comparison to the portfolio's index benchmarks, and that we have managed to limit the year-to-date decline to only 1.2%, while the JSE Mid-and Small-Cap Indices are down by 4.5% and 5.3% respectively. We attribute this to our naturally cautious management approach and preference for stable businesses that are supported by strong cashflows and high dividend yields.

We view the events of the last month as a stark reminder of the fragile state of world economic conditions and the need to remain cautiously positioned and ever vigilant of events that could derail the recovery.

December 2010 brought the year to a strong end with the market (JSE All Share Index) rising by over 6% and concluding the year with an overall return of 19%. In comparison, the mid-and small-cap indices had a slightly more subdued end to the year, rising by 3% and 4.6% respectively and recording gains of 30.3% and 24.6% respectively for 2010 as a whole. In comparison, the Nedgroup Investments Entrepreneur Fund recorded a satisfactory +26.1% for the year. We would also urge investors to consider the return of the portfolio over the medium-and long-term period and we note with some satisfaction that the portfolio's five and seven year returns put it easily among the top performing equity portfolio across all categories in the unit trust industry. We believe it is especially noteworthy to consider the returns that have been generated in comparison to risk as investors consider investing in small caps as more risky. If one measures the returns generated by the Nedgroup Investments Entrepreneur Fund over time, they measure very favourably on a risk adjusted basis as well as the obviously important absolute basis. We will endeavor to maintain this pattern.

We attribute this result to the following:
1. Our more active management style where we are quick to rotate between our relative outperformers into our relative underperformers; and
2. A share selection policy that favours relatively cheaply priced, stable, highly cash generative businesses that do not haveliquidity constraints, have seasoned management and are able to grow even in tougher economic circumstances.

Our outlook for 2011 is summarised as follows:
-Although the US economy is mired in intractable problems, it will continue to recover and grow in a gradual fashion driven by further policy stimulus; the "whatever it takes approach". -The euro area is also expected to grow albeit gradually as a large economy like Germany benefits from the weakening currency, but there will be ongoing alarms bells ringing as shocks from the PIIGS continue to emerge.
-The developing nations' economies (obviously driven by an increasingly dominant China) that have become less reliant on the developed world to grow will expand strongly supported by rapid growth in their domestic consumer's per capita incomes and propensity to spend.
-There will be occasional shocks to this view during the year, eg further policy restraint in China to brake inflation, but these are unlikely to derail the overall picture.
-With this varied but overall picture of global economic growth, we expect demand for commodities to be strong and in this context we believe it is unlikely that the rand will weaken dramatically.

Consequently the portfolio retains its selected resources exposure which we think is an exciting area, overweight domestic consumer (again where the relative laggards have been picked) and keeps its large positions in the niche financial services businesses we have selected. Finally, we remain very concerned about the prospects for fixed investment spending and have recently cut our exposure to that sector even further.