Although sticky at first, inflation has moved steadily down over the past 6 months, where for the year to August, CPI registered 6.4% p.a., someway off the 12% peaks seen in August last year. Lower inflation and the persistence of weak economic data convinced the SARB to again cut rates by 0.5% to 7% in August 2009, however they elected to keep rates on hold at the September meeting. It was however global markets and sentiment that drove local asset class returns during the quarter. The wall of money waiting to get in climbed the wall of worry associated with the uncertainty of earnings delivery required to sustain current multiples, forcing global equities higher.

South African markets benefited from this increase in risk appetite. Equities (+13.9%) continued their rally, whilst property (+12.2%) benefited from the rate cut during the quarter. Interest rate sensitive assets like bonds (+3.0%) and income (+1.9%) produced positive returns but lagged riskier growth assets. Returns from cash have been understandably disappointing (+1.8%) and it was pleasing to note that the Portfolio significantly outperformed cash during the quarter. Over the past 12 months the Fund has produced a return of 11.3%, again ahead of cash (+9.7%) and the real return peer group (+10.1%), where it was ranked 14/43. Over the last 4 years, the Portfolio was ranked 8/26 with a return of 11.1% per annum.

During the quarter, following a thorough review, we effected some manager changes that were designed to keep the construction of the Portfolio relevant. Whilst down weighting Old Mutual slightly in the process, the mandate with them was shifted from the dynamic floor offering to the capital builder offering. This builds in more downside protection to the portfolio and in order not to lose some of the Portfolios attractive upside participation characteristics, we increased exposure to Coronation in the mix. We also introduced ABSA Absolute managed by veteran investor Errol Shear. Beside the excellent bottom up stock picking abilities that Errol brings to the portfolio, he also favours exposure to inflation linked bonds and given current yields, this will go a long way to achieving the overall goal of the Portfolio. From a performance perspective, Coronation was the stand out manager for the quarter benefiting from strong stock selection and a relatively high weighting to equities.

We continue to believe that well constructed real return strategies will outperform cash over the coming years and that the safest way to play extended rallies in the current uncertain environment is via the protected equity exposure inherent in this Portfolio.

Inflation is falling at a slower rate than both investors and the Monetary Policy Committee (MPC) would desire. This has proved to be a concern for the MPC who, following two consecutive cuts of 1 %, decided not to cut rates further at their June meeting. With meetings now monthly, skipping one may not be indicative of the bottom of the cycle but rather buying time to assess future data flow, which we think is prudent. From a market perspective, equities continued their rally, producing a 8.6% return for the quarter, whilst bonds (+0.3%), cash (+2.2%), income (+1.4%) and property (-0.9%) produced more muted returns. In this environment the Portfolio produced a positive result and outperformed its peers. Over the past 12 months the Portfolio has protected investors, producing a 9.8% return during this tumultuous time, where it was ranked 11/43. The Portfolio now has a 4 year track record of outperformance during which time it has produced a return of 12.5% per annum - 2.3% per annum ahead of the peers - where it was ranked 5/24 amongst its real return peers.

In previous quarterlies we have highlighted that Prescient has been key to the protective qualities in the Portfolio over the past 12 months. With equity markets now recovering, the exposure to Coronation is starting to pay dividends again given their structurally higher exposure to equity. Prescient and OMIGSA produced positive returns for the period however it was Coronation who provided the biggest contribution to returns during the quarter. At a Portfolio level, the exposure to equities has moved higher from 24% in January 2009 to 26.6% at the end of June 2009, allowing the Portfolio to participate more in the recent upside. Interestingly exposure to bonds is now starting to increase as the compensation investors receive in yield is perceived to be attractive relative to cash and the duration risk implicit in the bond market.

Given that we are starting to recover from the primary risk aversion trade and global cash yields are likely to stay lower for longer, we believe that many well constructed real return strategies will outperform cash over the coming years. As such our fund of fund portfolios have up weighted this Portfolio in their mix at the expense of cash. We also believe that a safer way to play extended rallies in the current uncertain environment is via the protected equity exposure inherent in this Portfolio more so than via direct equity exposure. Both scenarios demonstrate our conviction in this Portfolio for current market conditions.

Inflation has eventually started to fall, which bodes well for the general performance of the various asset classes, as well as the Portfolio over the coming years. Inflation peaked toward the end of last year and now registers 8.7% y-o-y to February 2009. This was perhaps
higher than many had thought would have transpired given the reweighting of the CPI basket, together with significantly lower global inflation, suggesting that South Africa specific inflation has been sticky on the downside. This outcome was negative for bonds (-5.1%) and property (-1.4%) during the quarter - surprising in the context of the two 1% interest rate cuts announced by the Monetary Policy Committee over the quarter, both asset classes had however already run hard in the 2nd half of 2008.

Equity (-4.2%) had an interesting quarter, initially down on general uncertainty and lack of clarity associated with the US Treasury's approach to solving the financial crisis, but moved sharply up in March as the green shoots of their earlier actions started to emerge. This was supported by positive comments from the US banking sector about improved operational trading activity thus far in 2009. Cash (+2.6%) and income (+2.3%) performed positively and provided stability to many multi-asset class portfolios. Pleasingly the Portfolio produced a positive return during a difficult quarter. Over the past 12 months the Fund produced a 4.2% return, ouptperforming its peers by 4% and ranking 17/42. We remain happy with the Portfolio's long term track record at this point.

From a manager selection perspective, Prescient has continued to do well over both the quarter and the past 12 months. Their portfolio was well insulated from the initial shock, demonstrating superior downside protection relative to its peers. During the course of the quarter they started to deploy some of their cash holdings into equity which benefited from this rally, as they generally have a much higher weighting to equity. As mentioned in our previous quarterly, we increased our exposure to the Coronation mandate which was very positive for the Portfolio during the quarter. Interest rates are likely to drop further duing 2009 with consensus suggesting another 2% to 2.5% in interest rates still to come. This should prove to be beneficial for local asset classes, specifically if the efforts made to stabilise the global financial and property markets start to take hold. Markets generally rally in advance of the announcement of improved economic data and in this regard it is pleasing to note that the equity content of the Portfolio is rising steadily. We are confident that the Portfolio will continue to deliver positive returns in the year ahead.

The 4th quarter was another weak quarter for equities, which dropped 9.2% for the quarter. This was accompanied by much volatility which is logical given the massive uncertainty in the global economic environment. Interest rate sensitive assets continued to perform well as central banks around the world moved rapidly to reduce rates to protect against the global economic slowdown. Accordingly, SA bonds (+11.4%), property (+8.5%) and income (+5.5%) all helped to cushion the blow from equities. Pleasingly the Fund also produced a positive return for the quarter, marginally outperforming the peer average. Both Prescient and Coronation contributed positively to this outcome.

One of the primary objectives of this portfolio is that we aim not to produce a negative return over any rolling 12 month period, which we are pleased to report was achieved in 2008, a year that will go down in history as one of the worst ever for equities. Prescient was largely responsible for this outcome producing near cash returns for the year. The Fund was ranked comfortably in the top half of its peers for the year (24/59) and ranks 12/38 over the past 3 years.

Around mid-year, independent of the underlying managers, we actively put 15% of the Fund into a money market investment to improve downside protection. During the final quarter, as equities looked to bottom out, we move 7.5% back into the mandate run by Coronation. These active moves also helped to contribute positively to the year's return. As a result of this move the underlying equity content of the Fund moved up from 18% to 25.7% during the quarter. Although inflation and interest rates are on the decline it is likely that 2009 will again be a difficult investment year and hence caution is required. We suspect that a more bullish tone may emerge as the year progresses and clarity on the economic impact of the crisis unfolds.