Fund Review
The Fund gained 4.8% for the 3rd quarter 2009, slightly underperforming the Benchmark return of 6.2%. The majority of the positive performance from the equity market occurred during July, where the market rose 10%, while the September performance was flat as the Resource Sector pushed the overall market lower. The Fund closed the quarter with the following asset allocation namely South African equities at 29% of total portfolio, South African properties at 5%, South African bonds at 9%, South African cash at 42.6% and foreign at 15%. The total equity exposure in the Fund is 36%. During the quarter we adjusted our equity asset allocation weightings to reflect our view of the global recovery and its impact on the South African economy. We reduced our Resource exposure to around 23% of equity. The strong recovery in Resource shares prices has more than discounted the global economic recovery. We believed that the Resource share prices would pull back as investors realized that commodity demand would be less than anticipated as global economic growth remains muted. Our big Resource holding is Anglo American. Anglo American is a recovery story based on cost cutting, internal restructuring and improving commodity prices. Our Industrial exposure is 53% of total equities. Our emphasis on Industrials is because we believe there is less chance of negative earnings surprises in these companies. We have large investments in shares of the caliber of SA Breweries, MTN and Bidvest. Around 24% of the equities are invested in Financials (This excludes Property). This is a mixture of Banks, Life companies and Financial Services companies. We favor FirstRand and Investec. FirstRand and Investec are recovery plays in an improving global environment. As consumers bad debts decline so earnings should improve. The Fund's positions in both Arcelor Mittal and MTN added to performance, while our holdings in Telkom and Amplats detracted from our performance. We also increased our holding in foreign assets towards the 15% level; as we believe currently that the Rand is overvalued and that foreign assets particularly equities are cheap.

Looking Ahead
Going into the 4th quarter of 2009, equities are still our preferred asset class relative to property, bonds and cash. We do acknowledge that the easy equity money has been made and that we may see the equity market pull back as investors realize that company earnings may not recovery as quickly as initially anticipated. We do not see material changes to our current asset allocation

Performance Review
In Q2 2009, the fund outperformed the benchmark primarily due to a massive underweight call in bonds and offshore assets as the rand was very firm during the quarter. Also, the fund's marginal overweight position in equities boded positively for the fund. The fund kept the exposure to risky assets (equities and property) around 35%, just below the 40% limit. Within the equities complex, our investment strategy is to buy attractively priced companies whose PEs trade well below the long-term average and whose eamings profile is less volatile. We maintained the Overweight bet in Financials in line with attractive valuations and think banks in particular are attractively priced, even though currently, banks suffer from declining advances growth, high credit loss ratios and declining net interest margins. We are structurally underweight Resources due to the cyclicality and volatile nature of the sector, in line with aiming to maintain low volatility for this fund.

Market Review
Global equity markets posted strong performance in Q2 on the back of optimism about global economic recovery as risk appetite is gradually returning. Also, our internal risk monitor indicates that most risk variables have improved in recent months. On the negative front, real global economic numbers continue to show signs of distress in most develop economies as we continue to witness a massive deterioration in US unemployment figures. At the same time, consumer spending: 70% of US GDP - remains very depressed. This is primarily due to rising unemployment and weak asset values.

Market Outlook
Equities and listed property securities are generally adversely affected by the contraction in economic activity. As a consequence, we have reduced our exposure to listed property from Overweight to Neutral. Our main anxiety is rising vacancy rates and declining rental growth rates. That said, investors who have a long-term investment horizon should still benefit from the stable income stream. On the equities front, valuations remain extremely attractive in most sectors. The ALSI is trading at PE levels well below the long -term average of 11 .8. Within the domestic fixed interest cluster, we prefer cash to bonds. We expect bonds to face major headwinds from rising government issuance and a higher budget deficit. On a risk-adjusted basis, we prefer one-year NCDs (8.30%).

Global and domestic markets continue to demonstrate high level of volatility in line with the uncertain global economic environment. Real economic numbers in developed economies are still dominated by bad news flow. US unemployment numbers have increased at a precipitous rate to 8.5% from 4.5% in 2006. At the same time, consumers are adversely affected by the sharp decline in net asset values against the backdrop of falling house prices and financial asset values. This, combined with rising unemployment, does not bode well for consumer confidence indicators.

On the positive side, global risk indicators such as Ted spreads, VIX index and corporate yield spreads are starting to show signs of financial stability. The recent strong equity market performance directly reflects dissipating risk aversion. Against this background, the gold price has declined sharply from US$980/ounce to US$877/ounce. Gold is a safe haven asset class. At the same time, China's imports of key commodities such as copper and iron ore were up significantly in Q1 2009. Copper has increased by 40% since the beginning of the year. This is partly due to Strategic Reserve Bureau's purchase of 300 000 tons of copper. Chinese authorities have pledged a US$585bn stimulus package to support the slowing economy. Fortunately, the Chinese economy is still growing around 6%. This is higher than the cost of borrowing. We expect China to remain the engine of incremental demand for commodities in the years ahead. There are immense infrastructural underpins that should provide natural support to commodity prices in the medium-to-long term.
Further, the US Federal Reserve and Obama's administration are injecting massive liquidity into the economic system. US Federal Reserve's assets have increased from US$800bn to US$2.3t over the past few months. As a consequence, money supply has increased. On the negative front, the velocity of money is not rising. This is due to the fact that commercial banks are lending mildly to market participants. Last quarter, the US Federal government and legislative offices passed a very robust stimulus package (around US$800bn). Our view is that these efforts will yield positive results over the next few years. We expect the US economy to register some recovery in Q4 2009. In fact, the US federal government is forecasting GDP growth of 3% in 2010.

During the quarter, we increased our exposure to equities from 18% to 25%. From a bottom-up perspective, most companies are trading at attractive valuations. It is a stock picker's market. Our valuation models indicate that share prices have already discounted the bad news. We continue to have a bias towards blue chip companies with a strong history of economic performance (Return on Capital higher than the Cost of Capital). We buy great companies at great valuations.

On the fixed interest front, we prefer cash to bonds. We expect bonds to face major headwinds from rising government issuance and higher budget deficit. On the listed property side, we remain overweight property on the back of attractive forward yields and low vacancy rates. It is noteworthy that vacancy rates have started to increase in the light of pedestrian domestic economic activity.

The fund is managed conservatively with the primary objective of beating the cash rate on three-year investment horizon basis.

Maximum equity exposure: 40% of the portfolio
Maximum direct and/or indirect foreign exposure: 15% of the portfolio