Buys & Sells
No major purchases or sales of equities occurred during the month of September. The fund, however, did sell futures to reduce the exposure to equities.

Outlook
Fear conclusively overcame greed during September, with markets reflecting extreme risk aversion. The geographical, macroeconomic and earnings risks outweigh the potential rewards of a bounce and investors remain cautious on global equities. Oil and gold prices rose 6.0% and 2.3% respectively, while on the futures market non-commercial long positions increased in both commodities.

Money moved out of equities into bonds, with global bond yields hitting their lowest levels for decades and US treasury indexed bond yields moved below 2%. Both emerging market bond spreads (+133bp) and corporate bond spreads rose. Markets are clearly concerned about an invasion of Iraq, but it is unclear how much is priced in. Greenspan views the oil price as the biggest macro risk - the last seven US recessions have been preceded by an oil price shock. There appears to be more risk of Europe returning to recession than the US, but the global recovery is fragile, and we continue to see risks to growth expectations globally.

South Africa does not suffer the same macroeconomic or earnings risk, which is why the JSE outperformed strongly: in $ terms, the JSE All Share was down 2.0%, MSCI World was down 11.1%, with the Dow down 12.4%. The domestic indicators remain robust and the structural factors of a competitive currency, low household and business gearing, and a sound fiscus linked to an expansionary budget should ensure we weather the storm. However, we believe there is further downside risk to equities through earnings downgrades rather than multiple contractions.

Buys & Sells:

No major purchases or sales of equities occurred during the month of June. The fund, however, did sell selectively from the resource sector. Some exposure was also added to the bond asset class.

Performance & Reason

The fund had a disappointing June with respect to its peer group. The main reason for the fund's poor performance came from the overweight position in equities. Within equities the position to resources counted against the fund as this asset class (All Share Index) declined by 5,12% during the month. The position that the fund managers had built up in the domestic industrial sector helped stabilise the fund as this area declined far less than the All Share index.

The fund's exposure to bonds was built up to over 17% during the month. The All Bond Index showed a small positive return of 0,25%.

With the currency now having stabilized, performance from resources will be tied to the performance of the underlying commodity prices, which in turn are reliant on a recovery in the global economy. The fund managers continue to believe in the recovery, but the fund managers are becoming more concerned about the impact of accounting issues on investor sentiment, and the overflow effect this will have on consumer confidence.

Indices in the US remain at best fairly valued, as we move into the second half of the year. The house view remains that of a global economic recovery, which should gain momentum towards the end of the third quarter of the year. This should provide an improved earnings environment, but the concern remains as to how much has already been priced in. As things stand today, the markets are extremely volatile, and are likely to continue to be until investor confidence is restored.

Given the uncertainty of the current investment environment, the asset allocation decision (amount to be invested in bonds and cash) will have to be reviewed continuously as the prime focus is to preserve capital.

The impact of being exposed to the financial sector resulted in the negative quarterly performance of the fund. The fund continues however to invest in top quality financial companies such as the large banks, which offer extreme value on an absolute basis and on a risk adjusted basis for investors.

Other asset classes that are relevant to this fund are bonds and cash. Bonds had a poor quarter returning -4.6% and cash produced 2.3%.

Asset allocation has been positioned in a neutral way with equity exposure at 64%. A cautious view on bonds had the fund at 10% at the month end. The funds foreign exposure was at 8% with the balance of 16% in cash. The fund ended the month holding 49 counters, with the top 10 shares constituting 32% of the fund.

The fund will continue to invest in resource and financial sectors as our preferred sectors, and are watching the global environment closely.