The 2nd quarter of 2008 was yet another volatile period for the JSE ALSI. The soaring oil price dominated market headlines with crude oil closing the quarter at $140/barrel, up some 38% from the beginning of the quarter. High and rising oil, commodity, and food prices meant local and global inflation fears grew further during the quarter. These inflationary concerns and their impact on global growth were the principle reason for the sharp drop experienced by the JSE ALSI from the middle of May to the end of the quarter. The ALSI closed the quarter with a positive return of 2.8%, despite being 12% up during May.

The top performers during the quarter were once again resource stocks, with Anglos, BHPBilliton, Sasol and ArcelorMittal all amongst the top 10 performers. The Resources Index returned 13.4% during the quarter, whilst the Financial Index and Industrial Index declined by 19.6% and 2.7% respectively. The ValuGro General Equity fund's 55% sector weighting in resources enabled the fund to return 4.7% during the quarter, nearly 2% ahead of the JS ALSI.

Going forward we believe it is still too early to begin increasing exposure to local financials. We remain sceptical of analyst's forecasts of significant earnings growth for local banks and insurers 1 and 2 years forward. We would far prefer to be in resource stocks, many of which will report 50- 100% earnings growth over the next year, than be in financials which in our view are due to report flat to single digit earnings growth (and which face a very hostile and uncertain outlook over the next year).

The 2nd quarter of 2008 was yet another volatile period for the JSE ALSI. The soaring oil price dominated market headlines with crude oil closing the quarter at $140/barrel, up some 38% from the beginning of the quarter. High and rising oil, commodity, and food prices meant local and global inflation fears grew further during the quarter. These inflationary concerns and their impact on global growth were the principle reason for the sharp drop experienced by the JSE ALSI from the middle of May to the end of the quarter. The ALSI closed the quarter with a positive return of 2.8%, despite being 12% up during May.

The top performers during the quarter were once again resource stocks, with Anglos, BHPBilliton, Sasol and ArcelorMittal all amongst the top 10 performers. The Resources Index returned 13.4% during the quarter, whilst the Financial Index and Industrial Index declined by 19.6% and 2.7% respectively. The ValuGro General Equity fund's 55% sector weighting in resources enabled the fund to return 4.7% during the quarter, nearly 2% ahead of the JS ALSI.

Going forward we believe it is still too early to begin increasing exposure to local financials. We remain skeptical of analyst's forecasts of significant earnings growth for local banks and insurers 1 and 2 years forward. We would far prefer to be in resource stocks, many of which will report 50- 100% earnings growth over the next year, than be in financials which in our view are due to report flat to single digit earnings growth (and which face a very hostile and uncertain outlook over the next year).

A 2.2% return on the JSE ALSI over the 1st quarter of 2008 may suggest a quiet 3 months. The reality was far from that. The ALSI fell 5.7% in January, and then followed that in February with the biggest monthly gain in the ALSI in nearly 5 years. The ValuGro General Equity Fund returned 2.4% over the quarter.

The rand weakened by over 25% on a trade-weighted basis during the quarter (with the Rand/Yen and Rand/Euro cross- rates being among the biggest cross losses). It was therefore no surprise to see the dollar-denominated resource sector driving the JSE during the quarter. The Resource Index added 17.6%. The weak rand, in conjunction with SA equity selling by foreign investors due to increased risk aversion, meant that local financials and industrials remained weak during much of the quarter. The FINDI closed the quarter down 7.5%.

The ValuGro General Equity fund's strong sector weighting in resources and underweight position in financials continue to benefit the fund. We remain bullish on our outlook for commodity stocks, particularly those exposed to commodities such as iron ore, steel, coal and ferrochrome. The prices of these particular commodities are set periodically between producers and consumers and thus tend to avoid the 'froth' of speculative forces present on the commodity futures markets. Your fund closed the quarter with almost 50% of the portfolio exposed to resources.

A notable purchase during the quarter was Altron. Some 60% of Altron's revenue is derived from its electrical infrastructure divisions, a direct beneficial of electricity, ESKOM, and Telkom infrastructure spend. Strong growth prospects and a relatively cheap valuation made the Altron share extremely attractive to us at its price levels during the quarter.

In our September commentary we commented on our holdings in Anglo American and BHP Biliton (then at 9.7% and 10.6% respectively) and said we would continue to hold these stocks close to maximum weightings until we became concerned they were overvalued relative to their fundamentals.

During the final quarter of 2007 we did reduce our holdings in both stocks (to below 8% each) as we became increasingly concerned with exogenous and economic factors. Latest polls of economists suggest a 40% chance of a recession in the US in 2008 and while we certainly don't base our portfolio transactions on economists' forecasts, we think whether the US economy has negative growth or only negligible positive growth the impact on US demand for resources will nonetheless be much lower. US housing prices continue to slump and the Fed looks like it will be forced to continue cutting interest rates further to simulate growth. The global credit crisis in conjunction with the above factors will slow overall global growth in 2008.

We increased cash levels in the fund from 5.4% to 9.4% during the quarter, not only due to concerns over global growth but because we sold certain stocks reliant on equity market performance for profit growth (eg. (Sanlam and Old Mutual). Local factors which worry us are growing interest rate hike effects evident; SA inflation stubbornly high at 7.9%; the current account deficit at 8.1% of GDP; and slowing global investor FDI and JSE inflows.