Global equities declined by 17.0% in USD over the quarter, with rand returns down a more muted 12.6% following the depreciation in the rand/USD exchange rate. Emerging-market equities fared even worse, declining by 28.7% in USD and some 24.9% in rands. The sovereign risk premium surged to414 basis points from 295 the previous quarter, highlighting the increase in risk aversion towards emerging markets in general. With visibility in the global growth outlook having deteriorated further and earnings expected to remain under pressure for longer, the near-term outlook for global equities remains poor. Given the lead and lag relationship between US earnings and the rest of the world, disappointing earnings growth will become more broad based and will likely continue for a number of quarters. Despite all the recent doom and gloom, equity market valuations are attractive, and given the coordinated global bail-out that has occurred it could well present good buying opportunities on a 12-month view.

Global bonds had a mixed quarter, with inflation concerns dominating returns in July, whereas in September a flight to quality saw divergent returns from developed- and emerging-market bonds. Although global bonds yielded rand returns of 2.6% for the quarter, returns in September totalled 6.1%, reflecting partly a flight to quality as well as a sharp depreciation in the rand/USD exchange rate. With commodity prices having fallen sharply over the quarter, the outlook for inflation has improved significantly, supporting rate cuts in the US, Eurozone, the UK and selected emerging markets. Poor economic data releases coupled with a deterioration in the global growth outlook also underpinned bonds. Although global bonds are overbought in the near term, they are likely to remain so until leading economic indicators point firmly to a recovery going forward.

At quarter end a large cash inflow distorted the asset allocation position of the fund. This will be invested as opportunities arise. The strategy during the quarter was fairly defensive with an overweight cash and a neutral equity position. There where no major changes within the fund during the quarter. Overall, the manager selection and asset allocation blend is working well for present market conditions.

Offshore assets came under pressure over the past quarter on signs of a further deterioration in the global growth and inflation outlook. Although global equities outperformed global bonds, equities nonetheless yielded negative returns of 2.5% in USDs and 5.6% in rands. Emerging-market equities fared marginally better, declining by 4.7% in rands. Leading economic indicators, confidence indices, jobs data and purchasing manager indices for the US, Eurozone and Japan all weakened over the quarter, suggesting that earnings will remain under pressure for longer. Emerging markets have not been left unscathed either, with growth estimates also being revised lower on interest rate rises and increases in banks' reserve requirements to multi-year highs. Chinese banks now hold 17.5% of deposits with the central bank, while India's cash reserve requirement has been increased to 8.75% from a low of 5.5%early in 2007.

Of particular concern to the equity market is the surge in headline inflation fuelled by rampant oil and food prices. Apart from the obvious risks to consumption expenditure from rising inflation, petrol price subsidies in emerging economies like India and China have also been cut, further adding to the drag on global consumption. Over the near term, increasing supply disruptions linked to the hurricane season and demand-side pressures from the Northern Hemisphere winter are likely to propel prices higher. The drag that headline inflation has on equity market valuations suggests global equities are also no longer cheap - a fundamental shift in view from the previous quarter. Equity markets are therefore vulnerable not only to declining earnings growth but also to declining valuations. We therefore kept the fund's equity exposure fairly neutral during the quarter at around 65%.

Inflation concerns displaced fears of a slowing global economy as the single biggest risk to central bankers over the past quarter. The change in sentiment followed indications from the US Federal Reserve and the ECB that interest rates would need to increase in order to anchor inflation expectations and prevent these from feeding through into higher wage settlements. Although the Fed and the ECB held off on raising rates during the quarter, US money market forward rates were pricing in increases of some 75 basis points in the Fed funds rate by February next year. These expectations have subsequently moderated to around 50 basis points following the slew of data disappointments over the quarter.

Global bonds yielded negative returns of 4.4% in USDs and 7.4% in rands. US breakeven inflation rose to 274 basis points at the end of the second quarter from 217 basis points the previous quarter, highlighting the change in inflation expectations. The rise in inflation expectations is broad-based and applies across both developed and emerging markets. With real bond yields still low by historical standards, bond yields are expected to normalise going forward. Against this background we remained consistently underweight bonds and overweight cash during the quarter.

The fund remained defensively positioned during the quarter so no major asset allocation or manager selection changes were made. The liquidity funds and Foord's international funds were the most defensive performers during the quarter with small positive dollar returns, while the worst hit was the Sarasin Global Property Fund, down 8.3%.

The background for financial markets in the first quarter of 2008 was one of continued uncertainty. A spate of worrying economic news from the US and Europe fuelled fears of a recession in the US and lower growth for the rest of the OECD and key emerging markets, such as China. In response to this the Fed funds rate was cut by an unprecedented 75 basis points in January between scheduled meetings, with a further 50 basis points cut at the scheduled January meeting. This was followed by a cut of 75 basis points in March to bring the rate to 2.25%. The Fed has also now injected over $620 billion into the financial system and lent money directly to securities firms for the first time, e.g. the Fed pledged $29 billion to back JP Morgan's bailout of Bear Stearns towards the end of March. Following the rate cuts in the US, yields fell to their lowest point since 2003. Further investment bank losses and writedowns were announced for the quarter and the total loss is now over $230 billion.

Against this background equities remained volatile and where down 9.5% in dollar terms as measured by the MSCI, while bonds as measured by Lehman Brothers Global Aggregate Index were up 6.6%. With the 17.9% depreciation in the rand over the quarter this translated into a 7.7% return for equities and 30% for bonds. International property fell by 7% in dollar terms over the quarter but staged a strong recovery towards quarter end as attractive valuations lured investors back into the market.

During the quarter no significant changes where made to the fund as we believe the Fed will do anything to avoid a protracted recession and that the pullback in the equity market presents a great buying opportunity. As such the fund remains marginally overweight equities and underweight bonds on relative valuations.

Global equities disappointed over the quarter, yielding -2.7% in USDs and -3.5% in rands. For the year as a whole, the MSCI Global Equity Index yielded a rand return of 4.6%. Negative earnings growth for the S&P500 during the third quarter and expectations that earnings growth will remain flat during the first half of 2008 will limit gains in offshore equities, but equity markets are likely to avoid a sharp derating given that the US Fed is expected to cut interest rates in 2008, and due to reasonable valuations in major markets.

In the light of the poorer global growth outlook and the belief that the rand may be vulnerable to a surging current account deficit, we favour an overweight offshore asset allocation in 2008, biased towards equities rather than bonds based on earnings and dividend yield differentials. In the short term, however, bonds are likely to outperform equities as the US Fed continues to cut interest rates on recession fears and as uncertainties about the credit crisis continue. It is our view that global bonds are overbought and that long bond yields will trend higher over the course of the year. Global bonds were the best-performing asset class during the fourth quarter, yielding a rand return of 3.1%. For the year as a whole, global bonds returned 8.2% in rands. We foresee a rocky first half in global markets, with an improvement in the outlook towards the second half of 2008.

During the quarter the bond and equity holdings were reduced in favour of cash.