The third quarter of this year proved to be a rebound from the tough second quarter and as a consequence the fund produced a solid result.

The main positive driver of the performance came from the equity side where the All Share Index gained 6.3% over the quarter. It is interesting to note that the Financial & Industrial Index had a bigger upward correction, gaining 11.0% over the three month period. At an asset allocation level we remained out of nominal bonds as we remain nervous about the immediate outlook for short term interest rates. This strategy proved to be neutral over the quarter as bonds did only marginally better than cash returning 2.1% versus 1.9%.

Since May 2003 to May 2006, South Africa has experienced a sweet spot in terms of the broad macro economic drivers. The most important being disinflation, an appreciating rand and of course lower real and nominal interest rates. Basically, all of the SA equity market shares benefited from this benign environment particularly those that were plugged into the local economy. However, with the change in the trend of the Rand this favorable environment is busy changing to a much tougher one with interest rates set to rise by at least another 100 points with a distinct risk of further increases. Note that another 100 points is well discounted in both the equity and bond markets but more than that will unfortunately introduce a further bout of downside volatility.

Given these short term risks we have the positioned the equity exposure to be about neutral. The reason for this stance is that, looking forward into 2007, there are definitely some positive fundamentals to be found which should result in equities remaining the asset class of choice. In conclusion we are happy with our stance at present from an asset allocation point of view. We have begun to shift the focus of the equity stock picks to reflect the change in the overall macro environment.

Finally, if the rand stabilizes, the markets should start to factor in a different but solid set of economic variables and we should end the year close to our respective upside targets.

This quarter proved to be an exceptionally tough one for our portfolios. May and June was an extraordinary period with respect to our portfolios as the equity component detracted value largely from a sector point of view. It was the worst two months since inception of these funds in 2001 and we believe it was due to a market aberration rather than any flaw in our approach to their management.

Equity exposure was trimmed in April and then again in mid May which in total came to a reduction of over 6%. Note that the total equity exposure reduction since the beginning of the year now amounts to just over 10%. We are now running well below what we think is the optimal strategic exposure to equities. As has being mentioned often before in our quarterly reports that the equity exposure has been generally confined to the Domestic Financial and Industrial sectors due to the relative consistency and reliability of future earnings and dividend growth. Over the quarter the Financial & Industrial sector declined by -5.6% while the Resource sector actually went up by 21.3%. Therefore over the three month period there was a 26.9% difference in the performance of these two sectors! Over the quarter, our negligible exposure to long bonds paid off as the All Bond Index produced one of it worst quarterly returns producing a negative - 3.6%. However, this is an area that we are increasingly focusing on to try and extract real returns, so it is likely that we may start adding to our nominal bond positions on any further weakness. Quoted property was the big loser over the quarter declining by -22.3% but fortunately the fund's exposure to this asset class remained very low.

In summary, we were pleased with the overall asset allocation of the fund over the quarter but, essentially, it was all to do with having only Financial & Industrial exposure in the equity portion of the fund that contributed to the quarter's return.

In conclusion, despite the disappointing absolute quarterly performance we remain confident that we can achieve our dual objectives of not losing capital over a rolling 12 month period and to achieve our upside objective over a rolling 36 month period. However, it is worth stressing, that on a short term, month to month basis, we can experience negative draw-downs when there are widespread sell offs.

The first quarter of this year continued where we left off at the end of last year by having another positive performance over the period. The fund finished the quarter in 2nd place in addition to producing a strong absolute return.

The main driver of the performance came from stock picking, as our exposure to the precious metals sector paid off handsomely, particularly in January. Other parts of the equity portfolio such as building and construction also played a positive role in the overall performance. Value was also added by switching our bonds into quoted property.

As mentioned in the previous quarterly we went into the new year with an overweight position in resources. January was an exceptional month for this sector as it returned 12%. That rate of return was clearly unsustainable and we took some profits from this sector in early February.

Our exposure to equities was reduced over the quarter mainly as a result of profit taking in areas that we believed have run ahead of the fundamentals. Overall our exposure to domestic equities declined from 68% to 63% over the quarter. The big change from an asset allocation point of view was our switch from bonds into quoted property.

Quoted property performed exceptionally well this quarter returning just under 22% against bonds and cash returns of 1.5% and 1.8% respectively.

In summary, the big picture is still conducive for equities and property to outperform cash and bonds over the medium term. However, we caution that there might well be a short term correction ahead in equities as price momentum is now running well ahead of forecast earnings momentum. Our current strategy is to being relatively defensive at an asset allocation level (modest exposure to equities) and also with respect to our stock picks.

We believe that the fund is well positioned for the foreseeable future to take advantage of the potential scenario outlined above, both from an asset allocation and stock pick point of view.

The third quarter, of 2005 proved to be challenging for the fund on a relative basis. The main reason was the unexpected rapid rise in the resource sector on the back of strong demand for our resource shares. The area that led to a modest second quarter return relative to the peer group was again being underweight resources.The All Share Index returned an impressive 20.3% return for the quarter which was driven by a more broad market performance. Resources produced 25.3%, the Financial and Industrial Index 17.2% and the Mid Cap Index 18.6%.

Some cash was raised towards the end of this quarter. This is a short term tactic as we believe that there is a high probability that equities are due for a correction off an overbought base.Quoted property had another extremely positive quarter returning 14.5%. We unfortu-nately remained underweight this asset class relative to bonds.

Bonds were the laggard this quarter with the All Bond Index producing a return of only 1.1%. Cash by comparison delivered 1.8% over the same period. The major change on the fixed income side this quarter was the impact of the higher than expected petrol prices together with a rising base effect has resulted in a change in short term inflationary expectations. The bond yield curve continues to flatten implying that the long end is optimistic that the rise in inflation is of a transitionary nature. Our view is that the shape of the yield curve is positive for the bond market and we will use any weakness to add selectively to the longer end of the curve.The balance of the portfolio was made up of our offshore exposure with just under half invested in our Global Best Ideas fund.

Our future strategy will be based on our tried and tested philosophy of transparent and visible growth in key variables such as earnings, dividends and cash flows. It is becoming more apparent that certain equities in the non-resource area are offering compelling value with respect to the cash alternative, particularly when viewed on an after tax basis. We see this as an opportunity to add selectively to our equity exposure. Within the fixed income area we are likely to accumulate bonds on any weakness.