The STANLIB Balanced Cautious Fund gained 1.7% for the past quarter ended 30th September 2014, relative to the 1.6% gain for the benchmark. Over the past quarter offshore equities strongly outperformed JSE-listed equities with resources especially suffering a significant sell-off over August and September in the face of a strengthening US dollar, while fixed income showed respectable positive returns domestically and offshore. Although we continued to reduce equity exposure of your Fund as markets across the globe reached new highs, overweights in industrial companies that have relatively defensive earnings and sizeable international exposure added to your Fund's performance in the quarter. These included JSE-listed Aspen, Netcare, Steinhoff and British American Tobacco, as well as offshore-listed biopharmaceutical specialists Gilead Sciences and Amgen. Similarly, overweights in more cyclical but high quality businesses including JSE-listed Sanlam and Alexander Forbes, as well as offshore-listed Apple, Facebook, Nike and Mazda, together with underweights in AngloGold and Standard Bank also added to your Fund's performance.

On the other hand, overweights in certain resource-related companies that we believe have longterm intrinsic value upside detracted from performance, including JSE-listed BHP Billiton, Impala Platinum and Sasol, as well as offshore-listed Suncor Energy. Commodity prices remain under pressure with the continued strengthening of the US dollar against a backdrop of anaemic growth and disinflationary pressures in much of the developed world. This has allowed the world's major central banks to maintain interest rates at very low levels and made US investments more attractive for global investors given the continued gradual improvement seen in the US economy. The other main detractor from performance was caused by the placing into curatorship of African Bank ("ABIL"), which effectively resulted in the write-off of its equity share capital.

As stated above, we continued to reduce your Fund's overall equity exposure closer to 30% during the third quarter on the basis of reduction in long-term intrinsic value margin of safety. Given our continued concerns about the weakness of the SA economy and potential for another bond rating downgrade later this year, the Fund remains underweight South African equities, property and bonds, while remaining overweight offshore equity, where we find far more value and conviction in an improving growth environment in the US over the next few years.

Looking Ahead

The Balanced Cautious Fund is well diversified in terms of both asset classes and multi-national exposure, with a bias towards income generating investments to target a relatively stable return over long periods of time. Investors need to continue to temper their expectations given the exceptional returns, significantly above inflation, which have been enjoyed over the past five years with relatively low volatility and risk apparent in generating these high returns.

To achieve a reasonable level of current income and long-term capital growth at average risk levels whilst complying with the prudential investments guidelines.

The portfolio will consist of a diversified spread of investments in securities and non-equity securities, in a manner which is similar to that usually employed by retirement schemes with maximum equity exposure of 40%. The portfolio may also invest in participatory interest and other forms of participation in portfolios of collective investment schemes or other similar schemes operated in territories with regulator environment which is to the satisfaction of the manager and trustee of a sufficient standard to provide investor protection at least equivalent to that in South Africa.

During the quarter we revised the fund's asset allocation, in order to position the fund for an improving global business cycle coupled to a rising interest rate environment. We increased our total global equity exposure in the portfolio from 12%% to 17%. Global equities are our preferred asset class. The global equities provide investors with exposure to North America, Japan, United Kingdom and Europe. Global companies we are invested include JP Morgan, Google, Facebook and Apple. In the South African portion of the fund we maintained our equity exposure at 13%. Thus the fund's total equity is in the region of 30% versus the maximum exposure of 40%. We sold down SA bonds in the fund. In our opinion SA bonds carry capital risk, as investors begin to realise that South Africa is in a tightening rate cycle which will be further exacerbated by a rise in global interest rates. We have maintained our exposure to commodities through the platinum and gold ETFs, but without the structural problems of the mining industry.

The business cycle is progressively favouring Resource shares and Billiton and Sasol remain our preferred overweight exposure. The fund was a buyer of Glencore over the quarter. The valuation of Glencore is very compelling. Furthermore Glencore management owns 24% of the company, which insures that management's interests are aligned with shareholders.

The investment environment for mobile telecommunication remains attractive and both MTN and Vodacom are benefiting from rapid data volume growth and smart phone penetration. Operating margins remain stable and are still showing a positive trend. During the quarter we sold some Naspers. We believe that the valuation is expensive and that the market is pricing in excessive growth rates for the ecommerce and mobile games businesses in Asia.

Our Financial exposure remained unchanged. The fund has marginal exposure to Sanlam and MMI. These are our preferred life companies given their growth prospects in Africa and Asia. FirstRand and Barclays Africa remain our preferred banking shares, given their diversified business mixes. Both these shares have surplus capital which can be paid back to shareholders through special dividends.

Looking Ahead

Our portfolio is well diversified with a bias towards income generating investments to insure a stable return. This is complimented by equity exposure in South Africa and offshore.