If we have to be honest about our common interests, we can probably agree that South Africans love their sport and hate their banks. There are exceptions at the top end of the banking market for a fortunate few, but for the rest - we hate our banks. However, a consumer breakthrough is currently emerging in the form of a low fee bank which is accessible to absolutely everybody. We are referring to Capitec Bank. We recently attended Capitec's presentation of their results for the half year ended 31 August 2009. From the presentation we concluded that Capitec is gaining momentum and is going to be hard to stop. After quietly signing up 2 million clients over the last 8 years, Capitec has decided the time is right to announce their presence. The bank recently launched a new television commercial, the message of which is crystal clear: customers receive higher interest and pay lower fees on Capitec savings accounts. After launching their new commercial the bank signed up a record number of new customers during September - in fact 20,000 more than their previous record month. Key to Capitec's competitive offering is efficiency. Its 375 branches offer clients a real-time paperless service, all of which is supported by a single back office consisting of only 100 employees. Furthermore, a similar IT system to the one which Capitec uses successfully services 140 million customers for a single bank in India. Capitec is not only efficient; in our view it is the safest local bank for your savings. The bank has a capital adequacy ratio of 36% while the same ratio of our large banks is generally just over 10%. In addition, on 31 August 2009 Capitec would have been able to repay all retail customer deposits immediately.

Over the past 7 years Capitec's headline earnings per share has grown at a compound annual rate of 24%. We believe Capitec can continue to grow rapidly for many more years as it gains the trust of the general public and continues to chisel away at the market share of the large banks. As 7% of the fund is invested in Capitec, you will share in their success.

Porsche and Volkswagen, both held in the fund, have featured in recent news reports. Since 2005 Porsche has been fighting a relentless battle to gain control of the Volkswagen Group. Why is Porsche so desperately pursuing VW? VW has been a significant manufacturing partner of Porsche for many years. In 2005 VW was trading below net asset value and Porsche feared a third party could make a bid for VW. To prevent such a development and to harness the tremendous synergies obtainable from even closer co-operation, Porsche started acquiring VW's voting shares. (VW has a voting and non-voting share). Between September 2005 and October 2008 Porsche steadily acquired 42.6% of the voting shares together with sufficient share options to push its holding up to 74%. On this news the VW share price shot through the roof and VW was briefly the largest company in the world. (It emerged that there had been large short interest in the stock and speculators were forced to buy back the shares - a classic short squeeze.) By January 2009 Porsche had increased its position to the current level of 50.76% of the votes. At the moment Porsche does not have the cash resources to exercise its remaining options to further increase its stake. The likelihood of a complete acquisition has now slimmed drastically and the two car manufacturers have announced that they are investigating a merger. We believe this will be very beneficial for both companies. This David and Goliath battle has created tremendous mispricings, and therefore opportunities. How is the fund positioned? We hold Porsche as its share price does not nearly reflect the value of its stake in VW. However we also hold the VW non-voting share, which has the same economic value as the voting share but has little attraction to Porsche. The price of this share has not participated in all the hype and trades at 43% below net asset value and at 20% of the price of the voting share (remember the shares have the same economic value!). We expect these mispricings to narrow over time.

Mark Twain famously wrote, "there are three kinds of lies: lies, damned lies, and statistics". While we do not wish to comment on the accuracy of this statement (or statisticians in general!), we think it is appropriate to comment on one of the key indicators published by the national provider of socio-economic information, Statistics South Africa. The indicator concerned is the CPIX inflation measure which has recently been given a complete make-over.

Up to December 2008, the inflation rate targeted by the Reserve Bank was called CPIX. It was based on the change in the price of a basket of goods representing the average South African's spending in 2002 and it excluded homeowners' costs or interest paid on mortgages.

More recently, Stats SA has conducted new surveys into the spending habits of South Africans and has decided on both a new basket and a new calculation method for inflation. This new inflation measure, CPI, improves on CPIX as it is more in line with international standards and includes homeowners' costs in the form of owners' equivalent rent. The new CPI will be the inflation rate targeted by the Reserve Bank going forward. While most other differences are technical (and not terribly exciting unless you enjoy rebasing, reweighting and recalculating indices), there are some interesting changes: The cost of CD's and DVD's replace the cost of VHS and audio tapes in the previous basket. The cost of internet, laptops and lottery tickets are included for the first time and the cost of caravans are excluded completely.

As a result of this change, we have amended the benchmark of the Fund to the new inflation measure plus six per cent. In our historic calculations of the benchmark, we have retained the CPIX history up to December 2008 and have used the new CPI from January 2009 onward.

In the Fund, we have identified more undervalued businesses than ever before and as a result our equity exposure has reached 97%. The fund is strongly positioned to participate in the recovery that follows each and every down-turn.

When the news flow is thin during the first few weeks of the year, newspapers fill their financial pages with market predictions. These predictions tend to be very inconsistent and are probably more confusing than helpful. Instead of predictions, we rather discuss the positioning of the fund and why such positioning should reward investors over time.

At the end of 2007 the fund's allocation to rand hedge investments was 42%. During 2008 this was increased to 54%. In previous commentaries we mentioned that there are fundamental reasons why the rand should weaken, such as the bad state of South Africa's current account. A further motivation for this position is the very attractive valuations of many foreign shares. The shares in the MSCI World Index are for the first time in 50 years offering higher dividend yields than the yield on 10 year government bonds. Very simply put, this means that if you were to spend the exact same amount to purchase shares and bonds you would now receive larger cash dividends from the shares than from the bonds.

Bear in mind that the cash dividends on shares generally grow at rates exceeding inflation while bond distributions do not grow. Such a rare phenomenon creates opportunities which must not be missed, hence our large exposure to global equities. On 31 December 2008 the fund was in total 94% invested in equities, far exceeding the 68% allocation to equities at the end of 2007. Although the dividend yield to government bond relation in SA is not nearly as attractive as on the global stage, we have also found exceptional opportunities in the local market. Two measures of value which we follow closely are the price to earnings and price to book ratios.

For the fund as a whole, these two ratios have never been more attractive than at present. Therefore, the money you have entrusted to us is now almost completely allocated to equities. The best bargains are bought in times of panic, maybe now is the time to consider an additional investment in the fund?