Equities delivered strong performance, lifting the 12-month returns to 47.8%. Bonds and cash returned a paltry 13.6% and 7.7%, respectively. Our portfolio asset allocation has been well positioned to benefit from the strong equity performance.

We maintain that the Reserve Bank's benchmark repo rate is likely to remain unchanged over the next few quarters. We now consider the risk biased towards rates rising - due to the continued uncertainty regarding the outlook for oil prices.

Bonds appear to be vulnerable to a correction. The official repo rate is down half a percent, while longer bond yields have moved up and down a little. It would still seem prudent for the bond market to more adequately discount the rising risk of higher inflation. The rand's strength has created imbalances, which ultimately is unsustainable and raises the likelihood of a self-correcting real depreciation of the currency. Longer dated yields offer virtually no break-even cushion compared to cash. We are retaining our reduced bond exposure in favour of cash, which offers better prospective risk adjusted returns.

On the equity side, the portfolio remains underweight resources, overweight financials and neutral industrials, consists of 39 shares and is currently 97% invested in equities with the balance in cash. The fund should enjoy a dividend stream of 25% more than that of the market. Owning rand hedge shares versus local shares seems to have been the differentiator over the last two quarters. Overall the equity market remains fairly priced and is the preferred asset class relative to bonds and cash.

We reduced holdings in Nedcor, MTN and Billiton and increased holdings in Bidvest, Nampak, Telkom and Firstrand. We successfully participated in the book build of Lewis Stores, which allowed us to increase our holding to 1%. We switched the entire Sanlam holding in favour of Liberty, and sold the entire Brait holding as we believe that Brait is trading close to fair value. The other outright disposal was Dorbyl, who had excellent performance. The following shares all had good relative returns; Delta (26%), Absa (12%), Alexander Forbes (13%), mCubed (50%), African Bank (15%) and Bytes Technology (13%). The fund's overweight position to Metals, Life Assurance and Support Services were the largest detractors.

Investor interest will remain focused on the rand for the coming quarter. Our view remains that we have seen the best of the local currency and that Oil prices will continue to attract attention.

From a return perspective, it was a fairly quiet month for equities and bonds. The All Share Index returned 2.1% and the All Bond Index 0.02%. Over the last 12 months, equities meaningfully outperformed bonds, with respective returns of 42.1% and 14.9%, supporting our overweight equity position.
On the equity front, Industrials and Financials returned close to 1%, while Resources returned close to 3%. The rand appreciated by 2% against the USD, 1% against the Euro and was flat against Sterling. The Alsi40 underperformed both the mid- and small-cap indices by 1% and 2% respectively. The best sector returns were Life Assurance, Platinum Mining, Oil & Gas and Media. The weakest sectors included Beverages, IT, Health and Metals.
The fund sold its entire stake in Absa, which has had a good relative and absolute performance since we added the share to the portfolio in November 2004 - largely as a defensive play during the Barclays bidding process. It has outperformed the All Share by 12% and the Banks Index by 7%. As the Barclays bid is now complete, and despite the synergy benefits that Barclays is promising the Absa shareholders, we believe that the share is now fairly valued. Furthermore, Absa has both the strongest focus and is the most concentrated bank with regards to the South African consumer, which in our view is now moving ex-growth.
Supergroup has underperformed the All Share by almost 30% since we sold the company at the end of 2004. We believe that a PE discount of more than 30% to the market more than compensated us for the concerns around the cash conversion metrics and therefore added Supergroup to the portfolio. Other changes were due to cash flows and/or rebalancing.
The overweight positions to Life Assurance, Support Services and Platinum Mining added to performance. The best performers were Amplats (9%), Implats (8%), Old Mutual (8%), Foschini (8%) and Business Connexion (15%).
The biggest detractors were our overweight position to Banks and our underweight position to Oil & Gas. Individual weak performers included Mustek, Mittal Steel, Unitrans and Massmart.
Overall, the equity market remains fairly priced and is our preferred asset class relative to bonds and cash. The historic price earnings ratio, adjusted for calendarised earnings, is just under 13 times. Earnings growth expectations for the next 12 months range from 15-20% and thus (all else being equal) a reasonable real return can be expected from the equity market going forward.

Equities had another strong month with a return of 7.2% and bonds performed reasonably with a return of 1%. Over 12 months, equities have meaningfully outperformed bonds with respective returns of 51.4% and 18.9%, supporting our overweight equity position.
The rand appreciated by 4% against sterling and 1% against the US dollar and euro over the past month. This did not hold the equity market back at all and resulted in interest rates declining slightly and the yield curve flattening. As a result, the longer dated bonds performed slightly better than the rest of the yield curve.
With regard to the equity market, Industrials returned 9%, Financials 8% and Resources 5%. The Alsi40 underperformed both the Mid-Cap and Small-Cap Indices by 2% and 1% respectively. The best sector returns were Entertainment, Media, Pharmaceuticals and Steel. The weakest sectors include Real Estate, Gold Mining, Mining Finance and Forestry & Paper.
We sold the entire stake in Johnnic, which has had an excellent run - returning 180% over the last two years - 100% more than the market return. The upside in Johnnic, after the unbundling, was only 7% to our fair value and we therefore decided to sell the entire stake. We continue to hold Johncom, whose discount to fair value remains at more than 20%. Most other changes during the month were due to cash flows and/or rebalancing.
The overweight position to Steel, General Retailers, Support Services and Banks added to performance. The best performers were Bytes Technology (19%), Mittal Steel (16%), JD Group (15%), Lewis Group (16%), Consol (18%), Telkom (15%) and Firstrand (14%).
The biggest detractor for the month was our overweight to Platinum Mining. However, our large underweight to Gold Mining (underperformed by a further 5%) should also be taken into account, as this is a pair-wise bet. The other large detractor was the fund's overweight position to Life Assurance. Individual weak performers include mCubed, Nampak, Old Mutual, Implats and Angloplats.
Overall, the equity market remains fairly priced and is our preferred asset class relative to bonds and cash. The historic price earnings ratio, adjusted for calendarised earnings, is just over 13 times. This is in line with the 5 year mean of 13.3 times and below the 10 year mean of 14.3 times. With expected market earnings growth of approximately 15%, a reasonable real return is expected out of equities in the coming 12 months.

Equities again outperformed bonds with returns of 7.2% and 4.7% respectively. Our portfolio asset allocation continued to benefit from the relatively strong equity performance. It is interesting to note that over the past five years equities and bonds have performed almost identically with annual average returns of 17.1% and 17.2%, respectively. These returns can be compared to the CPIX, which averaged 6.3%.
The portfolio remains underweight resources, overweight financials, neutral industrials and consists of 39 shares. The equity portion of the fund should enjoy a dividend stream of 25% more than that of the market (currently estimated at around 3% pa). The rand weakened by 6% to the US dollar, 2% to sterling and was flat against the euro. The weaker rand helped the Resource Index to a 9% return versus the Findi, which returned 6%. Owning rand hedge shares versus local shares seems to have been the differentiator over the last two quarters. Resource-based rand hedges did particularly well during the first quarter and Industrial-based rand hedges did well in the last quarter and both were dwarfed by oil related shares.
We reduced the holdings in Nedcor, MTN and Billiton, and increased holdings in Bidvest, Nampak, Telkom and Firstrand. We successfully participated in the book-build of Lewis Stores when Gus Plc sold its majority stake. This allowed us to increase our holding in Lewis Stores to 1% of the fund. We also switched the entire Sanlam holding in favour of Liberty. Liberty has underperformed Sanlam for the past two years and is now trading at a similar valuation to Sanlam. Considering Liberty's operational performance, its market positioning and the Capital Alliance acquisition, we believe that Liberty offers more upside than Sanlam going forward. Furthermore, Liberty has clearly defined strategies. We sold the entire holding in Brait as it has outperformed the market by over 50% over the last 12 months, with a return of close to 100%. We believe that Brait is now trading close to fair value. The other outright disposal was Dorbyl, which also had excellent performance over the past 12 months - returning close to 90%. After they had announced the price to be fetched for the Alpine business in the USA, we believed that there was no longer much upside in the remaining businesses.
The following shares all had good relative returns; Delta (26%), Absa (12%), Alexander Forbes (13%), mCubed (50%), African Bank (15%) and Bytes Technology (13%). The fund's overweight position to Metals, Life Assurance and Support Services were the largest detractors during the quarter.

In a reversal of last month, on the back of a weakening rand, equities performed well during May with a return of 7.9%, while bonds performed poorly with a return of -0.12%. This would have benefited our overweight equity position.
The bond market continued its roller coaster ride of the past few months. On the back of the rand weakness during the month interest rates rose, and we had a further steepening of the yield curve. The best performing area of the yield curve was the 1-3 year area with a return of 0.41%. The 3-7 year area had a positive return of 0.18%, whereas the 7-12 and 12+ areas had negative returns of -0.16% and -1.20%, respectively. These relative performances would have benefited our short duration position.
For equities, May proved to be the most volatile month over the last 24 months. Financials returned +5%, Industrials +8% and Resources +17%. The spread of returns in most cases can be linked to the extreme rand weakness during May. The rand depreciated by 6% against the Euro and the British pound and over 10% against the US dollar. We believe that in some cases the share price reaction to the rand weakness has been overdone and that these shares are already pricing in the continued decline i n the rand and much more. The Alsi40 outperformed both the mid- and small-cap indices by 6% and 2% respectively. The best sector returns were Gold Mining, Platinum Mining, Oil & Gas, Household Goods, Beverages and Software & Computer Services. The weakest indices include the Construction, General Retailers, Telecoms, Banks and Life Assurance sectors.
The large position in Mining Houses and Platinum mining added to performance. The best performers were Anglo American (20%), mCubed (30%), Dorbyl (27%), Angloplats (23%), Johnnic Communications (+9%), Business Connexion (13%) and Brait (12%).
The main detractors were the fund's underweight position to some of the large Industrial 'rand hedges'. We continue to believe that the 'rand hedge' shares trade at too large a premium to the local consumer shares. The large underweight to Beverages (SAB), Household Goods (Richemont) and Investment Companies (Remgro) all had a large impact on the fund. Furthermore, the rand hedges that the fund has exposure to, such as Mittal Steel, Alexander Forbes, Nampak and Bidvest did not materialise. The fund's underweight to Resources (best performing sector) and overweight Financials (worst performing sector) also added to the underperformance. Within Financials, all the Insurers had a very weak month - largely we believe, on the back of the recent rulings by the Pension Fund Adjudicator (PFA). The overweight position to Banks, one of the worst performing sectors, also detracted.
We believe that sense will prevail and that the large premiums paid for most 'rand hedge' shares will unwind over time.

Equities had a poor month with a return of -5.17%, while bonds rebounded strongly with 2.06%. Over 12 months, equities comfortably outperformed bonds with respective returns of 24.51% and 18.57% - supporting our overweight equity position.
The strengthening rand had a negative impact on the equity market and this, together with the surprise cut in the repo rate by the South African Reserve Bank, supported the bond market. This cut resulted in a general decline in interest rates and a further steepening of the bond yield curve. This resulted in the longer dated bonds being the best performing area of the yield curve.
With regard to equities, Financials returned -1%, Industrials -5% and Resources -9%. The Resource underperformance seems to be as a result of the continued deterioration of leading indicators, slower world growth projections as well as an increasing build-up of inventory in China. The Alsi40 underperformed both the mid- and small-cap indices by close to 5%.
The best sector returns were Pharmaceuticals, Real Estate, Banks and Engineering. The fund was well positioned in the Banks sector with Absa, Standard Bank and Nedbank experiencing good returns in relation to the market. Other strong performers within the fund include Delta (+3%), Massmart (+4%), Johnnic (+8%) and mCubed (+9%).
The weakest indices include Gold Mining, Mining Houses, Beverages and Paper. Weak performers within the fund include Billiton, Mittal Steel and Anglo American.
During an active trading month, the fund reduced its overweight holding in Implats in favour of Amplats. Taking into account current commodity prices, exchange rates, etc. the Platinum Mining shares remain a much cheaper way to gain exposure to Precious Metals than Gold Mining. The fund also reduced the holding in Billiton and increased the holdings in Nampak and Bidvest. Furthermore, it switched out of Sanlam into Liberty Life. Liberty has underperformed Sanlam for the past two years and is now trading at a similar valuation to Sanlam. Considering Liberty's operational performance, its market positioning and the Capital Alliance acquisition, we believe that Liberty offers more upside than Sanlam going forward. Furthermore, it is not clear how Sanlam intends spending its excess capital, while Liberty has clearly defined strategies. Most other changes were due to cash flows and/or rebalancing.
The general market seems to be trading in a reasonably tight band around 13 times earnings (PE of 13x). This is certainly not expensive when you consider that the 10-year average PE for the market is over 14x, and that the economy is enjoying a much lower inflation rate than in the past.

Equities (28.2%) convincingly outperformed bonds (15.2%) in the first quarter of 2005, stretching their lead over 12 months. Our portfolio asset allocation has been well positioned to benefit from the relatively strong equity performance. Equities seem to have firmly refocused on the benefits of a strong rand for the domestic economy, while the inflation outlook continued to improve for bonds. However, our asset allocation models indicate that, while equity valuations still offer reasonable value, bond valuations do not. The residual risk compensation for holding bonds is currently negligible and hovering at levels that signaled a sharp reversal for bond yields in the past. We have accordingly reduced our bond exposure in favour of cash and equities, which both offer better prospective risk adjusted returns.
The portfolio remains underweight Resources, overweight Financials and neutral Industrials. The rand weakened by 7% to the US$ and 5% to Sterling and Euro. The weaker rand helped the Resource Index to a 17% return versus the Findi, which remained flat, and thus tier1 asset allocation was once again a strong driver of performance.
The quarter remained busy on the trading front - due largely to the massive relative re-rating of a large number of shares within the portfolio. The fund reduced its holdings in Altech, Sasol, Truworths, Foschini and Nedcor and sold its entire holding in Steinhoff. Steinhoff has outperformed the market by over 50% over the last 15 months. The company was acquired at a 45% discount to the market (PE relative) and is currently trading on less than a 20% discount to the market and thus the re-rating has been phenomenal. Furthermore, the running dividend yield is now less than 2% and the price:book ratio is well over two times. The fund also increased its holdings in Anglo American, Billiton, Richemont, Nampak and Telkom. The fund added one new share; Consol, which was unbundled out of AVI in late February. Their forward dividend yield is expected to be in excess of 4% despite the conservative cover of 2.5x. Trading on a prospective single digit PE with extremely strong cash generation, we believe that the concerns of the market around the budgeted capital expenditure are more than priced into the current share price. Most other changes were due to cash flows and/or rebalancing.
Resource and rand-hedge stocks dominated performance - largely due to the weaker rand, as well as concern and action by the market players that the local consumer shares appeared a bit pricey. The following shares all had good relative returns; Billiton (27%), Sasol (20%), Dorbyl (27%), Telkom (10%), Brait (22%) and Old Mutual (10%). The fund's overweight position to General Retailers, Support Services and Banks were the largest performance detractors. Other weak performers include Supergroup, JD Group, Lewis Stores, Bidvest and Sanlam.

Although equities delivered mediocre performance in December 2004 was still the year for equities. The 12-month returns for the ALSI were 25.4%, compared to 15.2% and 8.2% for bonds and cash, respectively. Our portfolio asset allocation has been well positioned to benefit from the relatively strong equity performance. During the quarter, equities seemed to shrug off the stronger rand, while bonds benefited. The equity market is increasingly focused on reaping the rewards of rampant consumer demand. Within equities, our portfolio was well placed to take advantage of the strongly diverging performance between sectors, with the Financials, Industrials and Resources returning 52%, 47% and -5%, respectively. The portfolio remains underweight resources, overweight financials and neutral industrials.
The rand continues to strengthen, ending the year 18% stronger than the US dollar and 10% stronger than the euro. The rand strength overshadowed the underlying strong commodity cycle, resulting in a poor performance from the Resources sector.
The quarter was particularly busy on the trading front - due largely to the massive relative re-rating of a large number of shares within the portfolio. The fund reduced its holdings in AVI, and Standard Bank and sold its entire holding in Tiger Wheels, Super Group, Remgro and Capital Alliance. Capital Alliance shareholders were offered R18.50 per share by Liberty, resulting in an excellent 38% price performance by Capital Alliance for the quarter. The fund increased its holdings in Metropolitan, Sanlam and Alexander Forbes. Furthermore, six new shares were added; Telkom, Richemont, Dorbyl, Absa, African Bank and Nampak. We believe that the current Telkom share price more than compensates us for the looming competition from the changes in recent legislation that intends to open the telecommunications industry. Using a market parity rating for the Vodacom business within Telkom, one ends up buying the fixed line business at a 50% discount to market. More importantly the equity free cash flow yield is in excess of 30% for the fixed line business.
The fund had another very strong quarter as a result of its correct positioning vis a vis the improving prospects for the local economy. Local industrial and financial stocks dominated performance - largely due to strong consumer numbers, continued rand strength and the muted interest rate outlook. Furthermore, the fund was well positioned for the company-specific trading updates coming out of the consumer related sectors. The fund's underweight positions to Forestry & Paper and Gold Mining continued to contribute to out-performance, while the overweight position to Platinum Mining was the largest detractor during the quarter. Other specific weak performers include Supergroup, Delta, Old Mutual and AVI.

After our first year of managing the fund, we are pleased with the results to date. The portfolio is currently ranked in the top quartile over this period.
Equities delivered exceptionally strong performance in November, lifting the 12-month returns to 11.9%, and 32.2% for bonds and equities, respectively. Our portfolio asset allocation has been well positioned to benefit from the relatively strong equity performance. Equities seemed to shrug off the stronger rand, while bonds benefited. The equity market, like the economy, is increasingly focused on reaping the rewards of rampant consumer demand.
The fund had another very strong month as a result of its correct positioning vis. a vis. the improving prospects for the local economy. Both the local Industrial and Financial shares dominated performance. Strong consumer demand continues - as reflected by most of the current economic releases, which we believe is largely due to the muted interest rate outlook as a result of the strong rand.
Industrials and Financials both returned close to 11% while Resources returned 2%. The best sector returns were those that had exposure to the domestic consumer; Entertainment, Speciality Finance, General Retailers, Media and Telecoms. The fund was well positioned in most of these sectors with Altech returning 18%, Massmart 20%, Truworths 20%, Lewis group 18%, MTN 22% and Business Connexion 25%. The weakest indices include the following so-called 'rand-hedge' sectors; Gold Mining, Platinum Mining, Forestry & Paper and Oil & Gas. The extreme rand volatility experienced over the past few months continues - during the month the rand strengthened against the Euro by 2% and the US$ by nearly 6%.
The fund increased its stake in Hudaco, added Absa, Richemont and African Bank, and reduced its stake in Supergroup, Standard Bank and Remgro.