We don't pretend to have any macro-economic 'views' on the current global credit crisis per se, and if we did, we would discard our own dwellings on the subject. For most of the past two years we consistently communicated to all our clients that our bottom-up research could not identify many sensible investment ideas - with two key results in the composition of the fund: Capital allocation to equity reduced significantly, until recently; and within the equity component, we took significant steps to de-risk the portfolio by selling out of virtually all of the small cap, financially-leveraged and overvalued stocks.

These actions took place over a two-year timeframe, beginning in Q4 2006. In essence, we recognised that the world was paying a very high price for risky assets - through a process of taking low return assets, leveraging them up with lots of debt, packaging them as "alternative assets', and selling them as high return "portfolio diversifiers". This would ultimately lead to low returns, as the pyramid scheme became unsustainable. This is the process we are going through now, a process of de-leveraging and de-risking. We have no idea when it will end, but - and this is very important - we are not having any sleepless nights about any of the current assets in the fund, due to the fact that they are by and large good quality assets at low prices. As you might know, the fund did not participate to any great effect in the latter stages of the debt-driven bull market, but this is why it is so well positioned now.

Over the course of the past year, we experienced several shots across the bow with small capital allocations to businesses like Tiger Wheels in South Africa, and globally in Compucredit, Lloyds, AIG, MBIA - all of which we sold out of as we begun to realise the full extent of the risks involved in owning them. Tiger Wheels being the exception. We paid our school fees early on, and it certainly helped us to avoid accepting further risks in the fund.

In the past three months, both our domestic and global stocks have held up particularly well. In a time when the market has declined precipitously, the Nedgroup Investments Managed Fund has shown positive returns. We are very pleased with this outcome during this time of public distress. It appears the de-risking stance we implemented in the fund is being vindicated by recent market action.

We would like to remind you that over the past 60 years the average plain old 'boring' balanced fund in South Africa delivered real returns of around 6% to investors. This is a very good return, with no need for "high return alternative assets". Importantly, this return was not achieved in a smooth way; there have been many bumps along the way. However, these good returns were only achieved by investors who stayed the course, accepting the rough with the smooth. Most investors, who attempt to time the market buy-in at high prices and sell-out at low prices, effectively reduce their ability to earn a satisfactory real return. Right now, there is no need to panic as we are applying a sensible proven investment philosophy and process in a consistent manner through the markets' swings and roundabouts.

Throughout the course of this market cycle, we have remained true to the investment principles that define Regarding Capital Management and we have absolute conviction that these principles will continue to provide our clients with satisfactory real returns.

We would not go so far as to suggest times of global distress are fun to us, but we are excited about the potential opportunities for genuine asset mispricing that could emerge from this de-leveraging process, and we look forward to being able to deploy the cash resources into such ideas - as and when they meet our hurdles.

The dominant market drivers over the past quarter was very definitely the strong desire for investors to move closer to the benchmark, which is dominated by resource stocks. This desire is primarily motivated by a choice between anxiety and comfort - with most investors (understandably) choosing comfort. Up until a few days ago, comfort was provided by the large index stocks, which although overvalued, were going up. Good quality cheap companies, whose share price continues going down, provided anxiety.

As our philosophy compels us to buy assets that are priced well below intrinsic value, and our process determines that we own more of them as the cycle turns down and as they become cheaper and less popular, our strategy has been to accumulate more of what has been going down in price, such as Sun International, Imperial and JD Group, which are the three largest purchases in the fund for the month of June. The market has not treated this strategy kindly over the past quarter, six months and one year.

We have two alternatives in terms of the way forward. We can either reduce our business risk (as so many institutional investors seem to be doing) and move our funds closer to the index, or we can continue implementing our established philosophy and process. The former will lead to us to exchange cheap assets for expensive ones, to the detriment of our clients. The latter is thus the strategy we are comfortable with and will continue to implement. Longer term, we have a high level of confidence that this is the correct strategy, although it is leading to very high levels of anxiety at this time. We share this anxiety, but we feel that the only way to truly out perform is to buy anxiety and sell comfort. In short, this is our preferred strategy.

We are the first to acknowledge that we do not know what the future holds. The only way we can deal with this uncertainty is to buy good quality assets that are not discounting in any good news or are discounting huge amounts of bad news. Looking at our top holdings in South African and global equities, all the stocks are priced as such. This does not mean that their prices cannot go lower, it only means that at some point in the future, the market should recognise the value and bid up their prices again. At that time, we think the fund will benefit handsomely. In the meantime, patience and more than the average modicum of determination are required.

Significant detractors to the fund for the month of March were banks, JD Group and Sun International. Contributions came from Harmony and Transhex.

We do not (and we do not think anyone should) place much analytic emphasis on short-term market swings and roundabouts in prices. We mostly concern ourselves with establishing a realistic fair value range for all of the businesses we choose to analyse. Once that is in place, we 'use' Mr. Market solely to judge the opportunity set placed in front of us on any given day - and then we allocate capital accordingly.

In March, market price changes afforded us the opportunity to continue to selectively commit fund capital to the cheapest core stocks in our universe of equity holdings in SA.

We committed reasonable amounts of fund capital to core holdings Pick 'n Pay, Absa and JD Group at what, we believe, to be very favourable price levels, thereby improving the upside to fair value that we measure for the total fund on an invested basis.

By value, the largest sale was Harmony, where we sold a portion of our holding to get closer to our targeted exposure after a somewhat over-exuberant increase in the share price over a very short period of time.

Our bottom-up investment process continues to favour a reasonably low domestic equity exposure at 51%, zero bond market and property exposure and a maximum allowable offshore allocation. If the core stocks in our investment universe continue to experience drawdowns in price, and the business cycles continue normalising and possibly overshooting, we should be in a position to significantly increase the exposure to domestic equity. We would really welcome such an opportunity.

The significant fund capital allocation to the RE·CM Global Fund is delivering acceptable results to date, compared to its global MSCI World benchmark. We believe the equity holdings in that fund offers better upside in fundamentally better global businesses, thereby increasing our conviction in the overall fund positioning.

The very significant narrowing of the SA equity market leadership is continuing in the short term. History and our research, suggests that this is unsustainable, and we look forward to a return to normality. We believe the fund is very well positioned for this.

Some of our clients may be expressing concern about the recent returns of the investments we manage on their behalf.

At the individual share level, we experienced poor relative performance in some of our non-core holdings like Harmony, Simmer&Jack and Tiger Wheels, while some of our core holdings like Metropolitan, Tiger Brands and Standard Bank also lagged. At the sectoral level (although we do not use sectors for benchmarking), our underweight exposure in Resources and overweight in Financials both held back performances.

We would like to point out that this relative 'underperformance' is not too surprising. Analysis of the JSE All Share index (ALSI) components in the June-August period shows considerable concentration in a narrow range of counters, particularly in the Resource, Construction and Telecom sectors. There was also significant market volatility during this time.

Although the ALSI rose very slightly over the period (+0.15%), the ratio of rising to falling stocks was 0.33, Le. three times as many stocks fell as rose. So, not only are overall equity valuations stretched, in our opinion, but the concentration of overvaluation has increased.
We intend to continue along our chose valuation-driven course which means we may continue to underperform should certain fashionable sectors become even more overvalued. Despite unprecedented strength of SA equities since 2003 our investment performance remains sound.

The recent turmoil in global markets appears mostly to have subsided for now. However, the actions of the US Federal Reserve to cut interest rates and some major central banks to pump liquidity into markets may do no more than pour fuel on what we believe are already overheated equity valuations.

We conclude once again that equity valuations remain by and large overstretched and there remain relatively few attractive investment ideas. However, in our opinion the 'risk' wheel is starting to turn.