June and July were not good months in terms of the price changes experienced in the South African equity segment of your portfolio. The main sources of price erosion in this instance were our non-core (ie lower quality) investments in Harmony, Simmer & Jack, Brait and Tiger Wheels. In addition the share prices of three of our core holdings, Metropolitan,Tiger Brands and Standard Bank, declined by more than 10%.

We reviewed the investment case for each of these holdings and our conclusions were largely that there has been no erosion in the value of these companies -we thought they were cheap three months ago and they are cheaper today. We are currently adding to several of the underperforming holdings in situations where they reach attractive price to value ratios.

With hindsight our investment in Tiger Wheels appears to have been a mistake in that we did not require a large enough margin of safety for the risk that the business could lose the funding support of its bankers. We purchased Tiger Wheels during the year and the company was in the process of renegotiating its debt when the banks announced that they would not provide more finance. We subsequently wrote the investment down to 1c per share but are of the opinion that we will realise a reasonable portion of the net asset value of 1250cps when the assets are sold (the overseas plants are operating as far as we know). Limiting your rexposure to these lower quality investment ideas is part of our investment process and at cost this investment represented about 0.6% of the value of your fund.

The recent market sell-off has provided us with a few interesting new ideas but nothing is genuinely exciting yet in South Africa. The equity market is up over 44% annually in compound terms over the past three years and the 10% pullback was not a big change in this context. The breadth of the sell-off in the markets and how it affected your portfolio did not particularly surprise us. Most of the business cycles and popularity rankings are at medium to fairly high levels which creates a situation where there is almost nowhere to 'hide' in the short-term except of course in cash, to which you have a substantial exposure in both the local and offshore portfolio segments. This cash comes at a cost in terms of not participating in the short-term excesses of bull markets -and we are not prepared to simply give it away if the long-term investment returns we expect from a new investment are not attractive.

Most of the equities in your fund reached their peak prices in May. In June and July the market was led higher by a handful of large-cap resource counters, while a very broad-based decline in prices was already evident.

RE:CM

The Nedgroup Investments Managed Fund changed sectors from Domestic - Asset Allocation - Prudential Medium Equity to Domestic - Asset Allocation - Prudential Variable Equity on the 01/08/2007.

Over the next two months, we will provide you with an extract from RE:CM's 2nd Quarter 2007 Investment Insights. The article is entitled:"Capacity Constraints - Second Order Growth Effects".

To anyone living in (or even visiting) South Africa, the effect of years of underinvestment in infrastructure is painfully obvious. Long queues atthe airport counters, gridlock (on the highways!), and regular power failures - all point to a lack of capacity to deal withour recent period of strong real economic growth.

In the past, these conditions would normally have led to an over heated economy, rising inflation and rising interest rates. The reason for this was that SA was constrained by its balance of payments - no one wanted to invest in a pariah country with an illegitimate government. As soon as demand increased due to a normal cyclical upswing, the current account deficit ballooned, as imports increased. The other side of the ledger, necessary to finance this deficit was missing -foreign investment.The only alternative left was to choke off the demand by means of higher interest rates to bring the current account deficit back into balance.

Post 1994, with our first legitimate government, these conditions changed -although, as it goes with structural changes, it didn't happen overnight. We first had to live through the emerging markets crisis of 97/98 (although we took little part in the boom that preceded it!) with resultant astronomically high interest rates, leading to a negative environment that further discouraged investment. This was followed by our currency crisis in 2001/2002, which gave us our own inimitable form of Dutch disease - no one needed to make long-term capital commitments to make money, all you needed to do was export widgets at an exchange rate which guaranteed massive profits.

Only after the rand had appreciated to somewhere around its realistic value in 2005, did the situation start to normalise. Consistently sensible fiscal policy had laid a platform for growth, and that is exactly what started to happen once all the right pieces fell into place.

So, despite a political situation that had already normalised in 1994, it took over 10 years for the economic situation to normalise. Very few market participants realised this as their economic realities had been moulded in the abnormal conditions of the apartheid years, as well as the turbulent 10-year adjustment period post-apartheid.

Importantly, what we experience as being abnormally high growth since 1994, is actually just a normal cycle when seen through the lens of a"normal" country!

This "surprisingly" high growth experience post 2004, thus took place in an environment where responses by market participants had been shaped in abnormal times -as well as in an economy that had seen very little investment for over 20 years.

Market participants have pushed the valuations of several of your investee companies to levels that we consider to be well in excess of what they're worth. We don't like paying commission to brokers, but occasionally when the opportunities arise, we will act on these convictions in order to realign the portfolio with the risk/value relationship that the market is offering you at the time. Our preference remains to pick good companies to allocate your capital to and to give them ample time to invest in their best business ideas.

We continued buying more of the higher quality, domestically oriented businesses such as JSE, Pick 'n Pay, Metropolitan, Afrox, Tiger Brands and Omnia. We completely sold out of the more cyclical, lower quality, businesses ofFoschini, Aveng, Apex Properties, AVI and stockbroker, Barnard Jacobs Mellet, we took some profits on Simmer & Jack as we feel it remains a highly risky operating business model, subject to forces of nature such as earthquakes and underground fires.

Your fund continues to own an extremely low proportion of resource shares -and we see no compelling valuation argument for changing this. Portfolio turnover for the year was 24.9%, within our long-term target range of15% to 25%. It is at the high end of the range due to a progressive reduction inequity allocation from 58% at the beginning of the year to the present 49.6%.

We were net sellers of SA equities for three of the four quarters of 2006.There are three main reasons for this. The first is driven by business cycles maturing and in some cases peaking, which caused us to reduce our tolerance for accepting risk. The second occurs when a good business is valued by the market at a significant premium to what we believe it to be worth. After allowing for arounding error in valuation of around 10% we believe it is prudent to sell the shares of a good business when it is trading at a premium of 20% to our estimated fair value. After all you wouldn't sell your crown jewels for just theirfair value, you would demand a premium. So do we.

The third is perhaps more of a basic principle, but we fundamentally believe in helping out the market when it is desperate. At times the market is a desperate buyer of shares and, like good Samaritans, we lend a hand by selling some of your shares. We don't know when, but the time will come again when the market is desperate to sell shares. We will be there with your cash to help out when the risk/reward ratio is favourably skewed.

For the full year of 2006, an investment in bonds returned less than cash, vindicating our decision to hold negligible amounts of bonds, less than2%, in your fund. We continue to prefer cash over bonds.

We instituted a major change to your portfolio during the last quarter of2006 by moving 14% of the fund offshore. Two reasons are that the rand is marginally overvalued, but more importantly, we are finding better and more bottom-up investment opportunities offshore.