Equity (+13.3%) enjoyed a strong rally during the quarter thanks to better than expected global earnings a receding fears of a "double-dip" recession. Bonds (+8.0%) also rallied as global yields dropped on expectation of a further round of quantitative easing in the US. Given the risk of debasement, the dollar declined in value relative to most currencies, including the Rand. Emerging market flows have played a major role in the currency strength, the result of which has been to contain local inflation below expectations at 3.5% y-o-y in August. Interest rates were cut by 0.5% during the quarter, with the SARB citing weak consumer demand and slowing global growth. In this environment, the Portfolio produced a positive return for the quarter, strongly ahead of its monthly inflation increment, our internal benchmark and the peers. Over the past 12 months the Portfolio returned 11.6% and was ranked 12th 143 in it comparable sector. Over the past 5 years the Portfolio has produced a return of 11 .3% p.a. and more recently has enjoyed strong inflows.

Coronation was the stand out manager for the month thanks to a relatively high allocation to equities, albeit that these equities were defensively positioned. Exposure to Naspers and MTN were particularly beneficial. ABSA Absolute also performed well thanks to good stock and sector allocation and selection within bonds. Although Prescient and OMIGSA lagged the other two managers for the quarter, they performed in line with our expectations. Both provide protection on the downside and will perform well should markets role over from these higher levels.

The overall asset allocation of the Portfolio increased marginally from around 28% to around 29.5% during the quarter. This resulted primarily from market movement than active changes in either manager weightings or manager positioning. Exposure to bonds was actively increased to 18.4% of Portfolio in anticipation of lower interest rates. Looking forward, inflation is expected to stay lower for as long as the Rand remains strong and as such the first hike in rates is only likely during the course of 2011. This, together with a mildly improving economic outlook should conspire to be positive for risk assets, however it should be noted that valuation risks have increased with the market rally and some consolidation should be expected.

The equity rally, which started in March 2009, extended into the 4th quarter where the All Share Index was up 11.4%. In spite of a stronger Rand, resource shares (+17%) were the primary beneficiary although industrials (+9.5%) and financials (+6.5%) also produced positive returns. Key interest rates were not changed during the quarter and as such other interest rate sensitive assets like property (+4%), bonds (+1.1 %) and cash (+1.8%) did not fare as well as equity. Year-on-year inflation to November registered 5.8%, falling inside of the Reserve Bank's target range for only the second time in over 2 years. Although the stronger Rand and weak economy have had a positive impact on inflation, inflationary expectations are now starting to increase thanks to a higher oil price, recent wage settlements and higher administrative prices, like electricity costs, which is concerning. In spite of this the Portfolio produced a return well in excess of cash for the quarter and for the full year was up 13.8%. Whilst the Portfolio underperformed its "target" over the last 3 years (CPI +5%) it managed to produce a healthy 8.6% return per annum and still protected very well during the financial collapse during 2008/2009. Over the past 4 years, the Portfolio was ranked 8 out of 25 in its peer group with a return that was 1 % per annum higher than the average.

Key to this success over time has been great portfolio construction and manager selection. The Portfolio moved from a 3 -manager to a 4-manager structure during the year, providing additional diversification benefits to clients. No manager changes were made during the quarter however. It was pleasing to note that recently up-weighted Coronation was the strongest contributor to returns, whilst recently included ABSA Absolute also produced strong returns for the quarter. Coronation was also one of the best performing absolute / real return funds in the country for 2009.

We expect that 2010 will be a very interesting investing year as much of the relief rally has taken place. The easy money has been made and now the equity markets are waiting for the delivery of strong earnings and economic growth. Should this fail to materialise or the quality of the growth is low (stimulus led and not natural demand) then we suspect that the market will be in for a rough time. The focus will be on stock picking as well as extracting value from the other asset classes which offer lower risk outcomes. Regardless of the uncertain outcome for equity, we believe that the Portfolio is capable of producing cash / inflation beating returns in 2010.