Fund Review
The Dynamic Return Fund appeals to a moderately conservative investor who is aware equity exposure is important in achieving positive real returns, but is also anxious about market downturns. The process is driven by stringent quantitative risk management techniques which offer exposure to various asset classes while aiming to protect investors against capital loss. The Fund returned 5.7% for the quarter ending September 2009, compared to its benchmark performance of 1.7%. The fund's benchmark is Consumer Price Inflation (CPI), while its target is CPI plus 6%.

Looking ahead
The local and global economy showed some signs of recovery over the quarter. However, this recovery remains extremely fragile, facing a number of unique risks including rising unemployment and inflation. We will continue to look for opportunities while keeping an eye on risk to ensure that the Fund achieves its two principle objectives, namely to try and preserve capital over rolling 12 month periods and aim to produce real returns.

Market Review
Over the past nine months to mid-2009, most major economies have experienced their steepest consecutive declines in GDP since World War II. There are, however, tentative signs that the severity of the global recession is moderating. This moderation in the severity of the recession is driven by a combination of factors. These include the major emerging markets recovering, some return of business confidence, ongoing massive fiscal and monetary policy stimulus as well as inventory adjustments contributing positively to growth. However, financial conditions remain tight, while rising unemployment globally remains the major risk to a global recovery in 2010. The South African leading indicator has been pointing to a significant slowdown in domestic economic activity for some time and continues to suggest further declines in the quarters ahead.

Fund Review
The Dynamic Return Fund appeals to a moderately conservative investor who is aware equity exposure is important in beating real returns, but is also anxious about market downturns. The process is driven by stringent quantitative risk management techniques which offer exposure to various asset classes while aiming to protect investors against capital loss. The fund outperformed its benchmark (CPI+6%) for the quarter ending June 2009, but returned lower relative performance over one and three years, mainly as a result of the high inflationary environment recently experienced.

Looking ahead
The current local investment and economic situation remains challenging; the expectation however is that the economy will have reached its low point by the end of the first half of 2009. The rate of decline in activity should moderate in the second half of 2009 before starting to reflect a modest recovery in 2010. In light of the persisting market volatility though, we will continue to look for opportunities while keeping in mind the Fund's two principle objectives: to try and preserve capital over rolling 12 month periods and aim to produce real returns.

Investment Environment
The Fund withstood the market volatility over the past quarter and delivered a small positive return whilst preserving capital. The domestic equity market had a severe slump towards the end of February but recovered strongly during the past month. The market recovery was sparked by a recovery in the international financial sector, and by expanded fiscal stimulus packages. We have seen an improvement in the local inflation outlook but the inflation rate is dropping slower than expected. Further interest rate cuts are expected in the current weak economic environment.

After a strong start during the first week in January the market dropped nearly 20% from this high level towards the end of February. A strong recovery during March erased most of the losses for the quarter. Since the Fund's underlying equity portfolio largely represents the Top40 index - the Fund's performance trend will be broadly in line with the market.
We started the quarter with a low effective equity market exposure of only 15%, and this helped the fund to preserve capital during the market downtrend. The fund's protection capability was adjusted during the quarter with hedging instruments being repositioned based on large market movements. Due to high levels of volatility in the market, the risk model constrained the fund's effective exposure to the equity market in the range of 15% to 30% over the past quarter. The high effective cash position at the start of the quarter meant that the fund could increase exposure to the equity market when the market started to recover during March-09.

The fund is invested in equities, cash and money market instruments as the implied real rates of return for bonds and property are currently unattractive on a risk-return basis.
The fund's unit price initial decrease with a subsequent recovery during the past quarter meant that there was no opportunity to raise the protective "Floor" level.

Current Investment Position
The fund has protection against equity market downside risk, and the low effective equity market exposure means that we are actively looking for opportunities to increase market exposure, within the risk model constraints. If the market continues to move upwards, some of the hedging positions will be unwound incrementally to increase market participation.

The Fund managed to preserve capital over a challenging investment period, and delivered a small positive return for the past quarter. The domestic equity market continued to decline over the past quarter, with very volatile price movements. International developments negatively influenced equity markets, where the credit crises spilled over into a worldwide broad economic slowdown. Fiscal stimulus packages and lower interest rates are being deployed to stabilise the economic situation. Local inflationary pressures are abating, and much improved CPI numbers are expected during 2009. The market continued with the downtrend of the previous quarter, but also showed an increase in price volatility, which meant that there were large up-and-down movements in the equity market. Most of the market losses were recovered towards the end of the quarter but the short term outlook for the market remains uncertain. The equity portfolio of the Fund largely represents the Top40 index - meaning that the Fund's performance trend will be broadly in line with the market. The fund's risk model constrained the fund's effective exposure to the equity market in the range of 10% to 20% over the past quarter, reducing the effective market exposure as the market trended lower. The fund is invested in equities, cash and money market instruments as the implied real rates of return for bonds and property are currently unattractive on a risk-return basis. The Fund has protection against equity market downside risk, and the low effective equity market exposure means that we are actively looking for opportunities to increase market exposure, within the risk model constraints.

The fund changed sectors from Domestic Asset Allocation Targeted Absolute & Real Return to Domestic Asset Allocation Prudential Variable Equity.