Global equity markets proved to be remarkably resilient throughout the quarter, shrugging off some of the world's worst terrorist attacks and natural disasters. Investors continued to direct funds towards areas perceived to offer better growth prospects, such as the Asian economies. As a result, emerging markets continued to outperform developed markets. The Morgan Stanley Emerging Markets Free Index outperformed the general global index by some 10% over the quarter. Regional allocation is likely to remain important, as equity markets have provided quarterly performances (in rand) ranging from 20% for some Asian markets to -2% for the US. Among developed markets Japan performed well, with investors gaining courage from a favourable election earlier in September. We have repositioned the fund to include a higher weighting in Asian equity markets.

As we enter the new quarter, reality seems to be setting in. Global equity markets have corrected somewhat in the early weeks of the quarter as investors tempered their rather enthusiastic growth forecasts in the face of further rate hikes, particularly in the US. Again, the Asian markets outperformed during this correction.

During the quarter global bond markets were characterised by a further increase in risk appetite and this was evident in the narrowing of the gap between yields available in developed markets and those offered in emerging bond markets.

The increased appetite for risk is of concern to us and we continue to manage this portion of the fund conservatively. We have increased the cash weighting in the fund to counter some of the risks in the bond market. Should global yields rise, we will be well positioned to take advantage of the buying opportunity that may present itself.

Global equity markets remained flat for the quarter, but rand weakness against the dollar resulted in improved fund performance in rand terms. Oil prices hit all-time highs, which fuelled fears of inflationary pressure. There are concerns that oil producers may strain to meet demand, which will send the price up even further. The Fed again hiked rates by 25bps, and rates above 4% to curb possible inflationary pressure do not seem inconceivable. Corporate US is in good shape and the US trade deficit widened less than expected in April as record imports signalled healthy consumer demand and unprecedented exports provided good news on manufacturing. Strength in exports from manufacturers led some economists to raise growth estimates and the dollar climbed to a nine-month high against the euro. Positive sentiment still exists on US equities; however, the risks continue to rise. Three key factors continue to suppress exuberant optimism in the US, namely interest rates, the oil price and rising input costs.

At a recent meeting of G8 finance ministers US, Japanese and IMF officials again urged China to end its decade-old currency link to the dollar. Asian currencies revaluing would eventually be great news for the West. It should trim Asia's competitiveness and it should increase the buying power of the Asian consumer - all of which would bring joy to Western exporters and improvement to the US current account deficit. The potential revaluation of Asian currencies would result in reduced Asian competitiveness and would impact different sectors in different ways.

In recent months Europe again underperformed the US equity market largely due to growth differentials between the economies. Unlike the US, Europe has not been a beneficiary of strong domestic demand and recent trends indicate no immediate improvement.

A distinct move to increased risk aversion has emerged in US and global equity markets. This risk aversion has been driven by two key factors, an oil price that is resiliently high and an increase in hawkish sentiment emanating from the Fed that inflation is rising and may jeopardize the "measured" rate increases. While emerging markets have been the hardest hit, there has been a switch from equities into more defensive asset classes. However, earnings growth momentum in the US is showing clear signs of a slowdown from peak levels in July last year.

The Euro area remains unattractive from an equity perspective. It is likely that the Euro area will underperform other regions from a growth perspective in 2005, and will only be able to eke out around 2% growth for 2005. There are signs that improvements are underway in Europe, and the shift from exports to domestic consumption is encouraging, as it signals an improvement in domestic demand. Headwinds of restrictive monetary policy and high oil prices will continue to suppress any major turnaround in this market.

The Japanese stock market has withstood the pressures of the slide back into technical recession in the past quarter. While we remain concerned that the Japanese economy is still stalling, the equity market appears to be supported by strong corporate profits that have been sustained despite the poor economic backdrop. The Nikkei remains a highly cyclical market focused predominantly on auto manufacturers, industrials and manufacturing industries.

The US bond market sold off dramatically over the quarter. The Fed increased rates by 25bp in March, however the markets have been consumed by the change in the Fed's inflation view. While the word "measured" was retained in the Fed's statement, a clear signal that inflationary pressures were entering the system does not guarantee that it will be included in the next statement. Most commentators now believe that interest rates may increase faster and sooner, resulting in a sharp flattening of the bond curve. We believe that US bonds will continue to struggle given the rising interest rate scenario in the US. The spread between European bonds (particularly German bonds) and US Treasuries closely mirrors movements in currency discrepancies. This suggests that economic fundamentals driving these bond markets are not as important as currency movements. Oil-producing nations have also highlighted the euro as the preferred currency for surpluses. The short end of the curve rose, resulting in a flattening of the yield curve. Due to the large surpluses on the Japanese current account, Japan is likely to continue contributing to the global imbalance and, in particular, funding the US consumer. Japanese authorities are likely to keep their currency weak to remain competitive from an exporting perspective. Low bond yields in Japan are not likely to attract any real investment and it is unlikely that the Japanese authorities will be in a position to increase rates, given the state of the economy.

Global equity markets, measured by the MSCI World Index, ended the year 2004 positively and delivered a return in excess of 12% in US dollar terms. The South African rand appreciated by 14% from R6.60 to R5.66 against the US$ and for the third year in a row diluted rand returns of international investments.

Most major countries and regions delivered positive returns over the year, with Korea and Brazil being the star performers with returns in excess of 25%. Europe performed well, mostly on the back of euro strength, and the FTSE, Dax (Germany) and CAC (France) generated returns in excess of 15%. Although still positive, the Japanese and US markets were the relative losers with returns of between 8% and 13%. European sovereign bonds outperformed US and Japanese debt and this was driven by slow economic growth, limited inflation fears and a strong euro.

The dollar again lost against the euro and the yen mainly due to deficit concerns but also due to speculation that foreign demand for US assets is waning. Large European exporters are also taking strain from a stronger euro, but recent oil price declines have offset some negative impact from the currency. Crude oil prices surged in 2004 to levels above $48 a barrel. In spite of these high prices, OPEC, which controls more than a third of world oil production, decided to cut output by more than 1 million barrels on 1 January 2005.

One of the major concerns regarding the US is the budget and trade deficit, which affect the demand for US assets. US imports continue to grow (demand for oil and consumer goods from Asia) and exports are falling, widening the trade deficit which ended November on a record high of $60bn. Retail sales are holding up, driven by low interest rates and a more stable economic outlook. Price incentives and lower gasoline prices boosted 4 th quarter 2005 sales of big ticket items such as autos, appliances and furniture. Major external factors such as dollar movement, oil prices, geo-political risks and global growth concerns add risk to the equation, and shareholders must be selective, careful and prudent in their investment choices.

Due to the slower economic growth in Euro land, it is expected that European government bonds will once again outperform US Treasuries in 2005; there are little growth and inflations fears around. US Treasuries are yielding about 50bpts more than German bonds with similar maturities and the spread is not expected to close.

The fund has a 56% exposure to global equity markets and an 18.6% exposure to global bond markets. The cash position is around 25% at this stage. The equity position in the fund is managed by the combined expertise of three leading international asset management houses, namely Fidelity Investments, Bernstein and Alliance Capital.

They have vast analytical, research and portfolio management resources and have offices in the major centres of the globe. Leading global bond managers manage the bond exposure. Pimco, Morgan Stanley and Templeton have substantial research and fund management resources globally that select securities for this fund. The cash exposure is mainly invested in US dollars and euros.