Whilst the equity (+20.3%) and property (+14.5%) asset classes produced stellar results for the quarter, the income (+1.2%), bond (+1.1%) and cash (+1.8%) markets were relatively uninspiring. The fact that cash beat the return of bonds and income for the quarter, indicates much uncertainty regarding inflation and the future direction of interest rates. Inflation rose to 4.8% y-o-y in August pointing toward no further rate cuts. In fact, sentiment shifted toward a rate hike in December, which pressured the fixed interest market. The fund produced a 10.2% return for the quarter and was ranked 6/23 in the real return category of unit trusts. The fund returned a pleasing 12.6% for the past 6 months, comfortably out performing the peer group average.

The Fund produced excellent results for the quarter with strong contributions from all managers, who had largely ignored the bond market, choosing to hold equities, property and cash. OMAM, utilising their dynamic floor technology, was the best performing manager. Inflation linked bonds (ILB) outperformed nominal bonds and this benefited the fund as Prescient held exposure to ILB's during the quarter.

Globally, central bankers have become more concerned about the impact of higher oil prices on inflation. Locally, the situation is the same and although inflation remains within the target 3% - 6% band, the MPC says that higher inflation cannot be ignored. The risks to interest rates are therefore now on the upside with consensus for a 1% - 2% increase in 2006. This may prompt the underlying managers to be more defensive in their asset allocation positioning and potential holding more cash to protect capital. Given the run up in asset values, a short-term pull back should be regarded as a healthy platform for future gains as the long-term outlook for the South African economy remains sound.

The portfolio produced a positive return in its maiden quarter. Property was the best performing asset class, followed by equity and bonds. This was to be expected following the surprise 0.5% cut in interest rates in April. Whilst cash (+1.9%) still generate a positive "low risk" return, it was the laggard during the quarter. The Fund attracted R20m in flows in its first quarter. The selected underlying managers, Old Mutual Asset Management and Prescient performed well in this environment, however missed out on some of the superior returns in the equity market. In anticipation of this, in an effort to lift the potential upside participation, we added Coronation to the portfolio in May. Coronation is differentiated from the other two managers and is likely to hold more equities over time. This will result in the portfolio having more upside potential when the equity markets rally. Coronation has a value driven approach to share selection and a very strong absolute return mindset. The absolute return team, which we rate highly, was least affected by the Coronation walkouts. The inclusion of Coronation benefited the fund during the quarter. The managers continue to favour equities over other asset classes. Bonds are still largely ignored, except for inflation linked bonds where the managers believe these bonds offer better value than nominal bonds. The South African inflation rate has dropped significantly over the past 2 years and is comfortably within the target levels set by the reserve bank. A major threat to inflation is however higher oil prices and to the extent that these remain stubbornly high, inflation will rise, which could result in interest rates being increased early in 2006. We are confident that the selected managers will overcome these challenges in the year to come.

The STANLIB Multi-Manager Real Return Feeder Fund enjoyed a successful launch on the 31 March 2005. The South African Reserve Bank is targeting an inflation rate of between 3% and 6% per annum. This means that investment portfolios will need to generate returns higher than that to produce a real return for investor's, thereby ensuring that their future purchasing power is maintained. Whilst the benchmark of the Fund is to beat inflation (as measured by CPI), we have incentivised the selected managers in this multi-managed fund to beat inflation by 5% p.a. on a rolling 3-year basis, with a low probability of loss over any 12-month period. In order to achieve this, we have selected the most talented real return managers, following a thorough and continuous review of all real return managers in South Africa. The current managers, OMAM and Prescient, are expected to protect their respective portfolios from downside whilst allowing them to participate in the upside when equity markets are running. A flexible asset allocation mandate is essential for this and the managers are encouraged to be proactive in their portfolio positioning, remembering that exposure to equities is required to beat inflation over the long term. In this way, this Fund should produce consistent inflation beating returns for investors, resulting in a smoother return profile relative to a fully invested equity fund. We believe that a default portfolio of this nature, where the asset allocation of the fund is allowed to vary at the discretion of the highly ranked selected underlying managers, will be attractive to moderate risk investors. The economic outlook for South Africa remains rosy with inflation bordering on the low end of official targets and economic growth forecast at 4% for 2005. This picture may have been extended following the surprise 0.5% cut in interest rates in April, however it is unlikely that the equity market in 2005 will deliver the strong returns generated in 2004. Toward the end of the year, inflation is expected to pick up, which may place pressure on interest rates. Constructing a portfolio to match the economic environment is the key to successful investing and this is what we are hoping to achieve with the STANLIB Multi-Manager Real Return Feeder Fund.