The third quarter of 2005 proved to be challenging for the fund on a relative basis. The main reason was the unexpected rapid rise in the resource sector on the back of strong demand for our resource shares.

The reason for the fund's modest second-quarter return relative to its peer group was again the underweight in resources.

The All Share Index returned an impressive 20.3% for the quarter, driven by a more broad market performance. Resources produced 25.3%, the Financial and Industrial Index 17.2% and the Mid-cap Index 18.6%.

Some cash was raised towards the end of this quarter. This is a short-term tactic as we believe that there is a high probability that equities are due for a correction off an overbought base.

Quoted property had another extremely positive quarter returning 14.5%. We unfortunately remained underweight this asset class relative to bonds.

Bonds were the laggard this quarter with the All Bond Index producing a return of only 1.1%. By comparison, cash delivered 1.8% over the same period. The major change on the fixed income side this quarter was the impact of the higher-than-expected fuel prices together with a rising base effect, which resulted in a change in short-term inflationary expectations. The bond yield curve continues to flatten, implying that the long end is optimistic that the rise in inflation is of a transitory nature. Our view is that the shape of the yield curve is positive for the bond market and we will use any weakness to add selectively to the longer end of the curve.

The balance of the portfolio was made up of our offshore exposure, with just under half invested in our Global Best Ideas Fund.

Our future strategy will be based on our tried and tested philosophy of transparent and visible growth in key variables such as earnings, dividends and cash flows. It is becoming more apparent that certain equities in the non-resource area are offering compelling value compared with the cash alternative, particularly when viewed on an after-tax basis. We see this as an opportunity to add selectively to our equity exposure. Within the fixed income area we are likely to accumulate bonds on any weakness.

Like the first quarter, the second quarter of 2005 proved to be challenging for the fund on a relative basis. The main reason was the continuation of the rapid rise in the resource sector on the back of high USD$ commodity prices combined with a weaker rand.

The areas that led to a modest second-quarter return relative to the peer group were being underweight resources and overweight mid-caps.

The All Share Index returned an impressive 7,2% for the quarter, which was driven by a more broad-based market performance. Resources produced 9,1%, the Financial and Industrial Index 6,2% and the Mid-cap Index 6,7%.

Our net exposure to equities is less than at the end of last quarter. This is a short-term tactic as we believe that there is a high probability that equities are due for a correction off a very overbought base.

Quoted property had another extremely positive quarter. Unfortunately our strategy of taking profit (mainly on the back of liquidity fears) proved to be incorrect. Our basic assumption of having seen the bottom of the interest rate cycle was too premature.

Bonds again had an up-and-down quarter but produced a decent positive return for the quarter. In hindsight we should have used the weakness in the 10-year area to accumulate more bonds when they were around the 8,5% levels. We still see better value in the nominal bond than inflation-linked bonds.

The balance of the portfolio was made up of our offshore exposure, with just under half invested in our Global Best Ideas Fund.

Our future strategy will be based on our tried and tested philosophy of transparent and visible growth in key variables such as earnings, dividends and cash flows. It is becoming more apparent that certain equities in the non-resource area are offering compelling value with regard to the cash alternative, particularly when viewed on an after-tax basis. We see this as an opportunity to add selectively to our equity exposure. Within the fixed-income area we are likely to accumulate bonds on any weakness.

Fund manager Steve Mills is one of the few SA portfolio managers with a proven track record in asset allocation. The past few months have not been so good for him as he did not anticipate the rotation back into resources so far this year. His decision to sell out of bonds in late February does not look so clever with bonds bouncing back but it is hard to fault his view that bonds are still looking expensive.

Financial Mail - 10 June 2005

The first quarter of 2005 proved to be challenging for the fund on a relative basis, mainly because we did not anticipate the aggressive sector rotation that took place during the quarter.

The main reason for the modest first-quarter return relative to the peer group was being underweight resources and overweight mid caps. The All Share Index returned an impressive 5.9% return for the quarter but this was driven almost entirely by resources, which produced 16.9% for the same period. By contrast, the Financial and Industrial Index produced a modest 0.5% return, with the mid-cap index only marginally ahead on 0.6%.

In the previous quarterly we mentioned that we were looking to bank some profit from high-flying financials and industrials into areas that could potentially benefit from a weaker rand such as the non-resource rand hedges. This strategy was implemented but clearly was not aggressive enough.

Quoted property ended the quarter on a strong note by returning 5.3%. Our strategy here was to reduce exposure, the main reasons being valuation relative to bonds and the fact that we believe most of the good news is now fully priced into the sector.

Bonds had an up-and-down quarter, finally ending the quarter in negative territory returning -0.3. Fortunately we resisted the early euphoria and sold out completely in late February. This added value to the returns of the fund over this period.

Our cash holding rose to 28% by the end of the quarter, which in itself is returning a risk-free decent real return as inflation continues to very benign at just over 3%.

The balance of the portfolio was made up of our offshore exposure, with just under half invested in our Global Best Ideas Fund.

Going forward, the intention is to focus on diversification and quality as we believe that the financial markets are particularly challenging at the moment. Equities and bonds are undoubtedly at some form of inflection point as they attempt to digest the end of the global reflation trade as the US raises interest rates. This is against the backdrop of continuing positive domestic fundamentals.

The quarter was characterised by the continued upward momentum in the equity market, driven mainly by domestically orientated financials and industrials. Bonds and quoted property also delivered good returns.

For equities the fourth quarter was a continuation of the third quarter, with the equity market delivering the goods, particularly those sectors that benefited from lower interest rates such as certain banks and the consumer area. Resources have underperformed severely in relative terms as analysts have begun to discount a stronger rand in the future. We remain well underweight this area of the market, mainly due to concern over the actual dollar commodity cycle as opposed to forecasting a stronger rand.

Moving beyond equities, our exposure to bonds and quoted property in particular added value over the fourth quarter. We are likely to hold our positions in the short term given our inflation forecasts and the positive momentum in these markets Our money market funds were predominantly invested in the short end of the money market curve as it offered the most value. This is likely to change, as it appears that a cut of 50 points is on the cards during the first quarter of 2005. This has now being discounted by the forward curves.

We are not likely to change the asset allocation too much in the quarter ahead but will focus our efforts on stock picking with a possible rotation out of some the high-flying financials and industrials into some non-resource rand hedges in order to guard against an unexpected crack in the currency.