Domestic equities came under severe pressure in the third quarter as contagion from the credit crisis triggered a collapse in equities across the globe. Domestic equities fell some 20.6% led by large cap stocks. Financial institution failures in the US and Europe fuelled the sell-off in markets, forcing the US to adopt a USD700bn bail-out plan for these institutions. Casualties included Lehman Brothers, AIG, Fannie Mae and Freddie Mac, to name but a few. Investment banks were acquired by commercial banks, whereas others like Goldman Sachs changed their status from non-deposit-taking institutions to that of deposit-taking institutions. Heightened risk aversion following the credit crunch and disappointing employment and ISM data has now raised the likelihood that the US will formally enter a recession in the fourth quarter of this year. With leading economic indicators not pointing to any signs of a turnaround in economic activity in the first half of next year and poor visibility remaining about the outlook for the second half, equities are expected to remain under pressure over the near term. The downward adjustment to global growth sparked a further sell-off in SA resource stocks, with the RESI20 down a staggering 38.3% over the quarter. Dollar metal prices fell by a further 23.5%, bringing the decline in these prices to 30% from their highs earlier this year. The INDI25 declined by some 5.9%, while the FINI15 gained around 11.9%. Despite the rise in risk aversion from local and international sources, domestic bonds yielded 12.6% over the quarter aided by expectations that inflation will decline by around 2% in January next year following the re-weighting and rebasing of the inflation basket. Global equities declined by 17.0% in USD over the quarter with rand returns down a more muted 12.6% following the depreciation in the rand/USD exchange rate. Emerging-market equities fared even worse, declining by 28.7% in USD and some 24.9% in rands. Global bonds had a mixed quarter with inflation concerns dominating returns in July, whereas in September a flight to quality saw divergent returns from developed- and emerging-market bonds. Although global bonds yielded rand returns of 2.6% for the quarter, returns in September totalled 6.1%, reflecting partly a flight to quality as well as a sharp depreciation in the rand/USD exchange rate. Although the USD return was some -1% in September, the returns were skewed by a 6.7% USD decline in emerging-market bonds. The disparity in returns highlights investor appetite for US treasuries and non-US developed-market bonds.

There were no major changes to the fund structure over the quarter. The fund performed much better during the third quarter, ending above the median in its category. The foreign exposure of the fund detracted from value due to foreign equity performing worse than domestic equity, even taking into account the depreciation of the rand. The best-performing underlying specialist manager was SIM Unconstrained Equity.

Domestic equities were once again the best-performing asset class in the second quarter, yielding a rand return of 3.4%. There was again great dispersion of returns between the different sectors during the quarter. The composition of the SA returns in the second quarter was biased towards resource stocks, with the Res-20 yielding a return of 13.46%. Industrial and financial counters yielded negative returns, with the Ind-25 down 1.1% and the Fin-15 down a staggering 14.0%. Financial and industrial counters remained under pressure over the quarter as fears of additional interest rate hikes- fuelled by higher than expected inflation- weighed on the sectors.

Despite the relative outperformance by domestic equities over the quarter, downward revisions to economic growth and upward revisions to CPIX inflation point to an equity market derating over the next two years. SA bonds came under pressure over the past quarter due to higher than expected inflation and a widening in the country's currency risk premium. Upward revisions to CPIX inflation following Nersa's announcement of a total electricity tariff increase of 27.5% this year also pressured bonds. Against this backdrop, SA bonds yielded -4.9% over the quarter, in line with the returns from emerging-market bonds. SA cash yielded 2.7% over the past quarter, outperforming domestic bonds but underperforming domestic equities.

Offshore assets came under pressure over the past quarter on signs of a further deterioration in the global growth and inflation outlook. Although global equities outperformed global bonds, equities nonetheless yielded negative returns of 2.5% in USDs and 5.6% in rands. Emerging-market equities fared marginally better, declining by 4.7% in rands. Global bonds yielded negative returns of 4.4% in USDs and 7.4% in rands, whereas their emerging-market counterparts yielded slightly better returns of -4.3% in rands.

There were no major changes to the fund structure over the quarter. The fund struggled for the quarter due to the underlying equity managers battling against the equity index as well as their peers. The foreign exposure of the fund added value due to the depreciation of the rand. The best-performing underlying fund was the Foord Balanced Fund.

Sanlam Multi Managed Balanced Fund of Funds changed its name to SMMI Balanced Fund of Funds on August 1 2008.

Domestic equities were again the best-performing asset class in the first quarter, yielding a rand return of 2.9%. Once again there was great dispersion of returns between the different sectors during the quarter. The composition of the SA returns in the first quarter was biased towards resource stocks, with the Res20 yielding a return of 17.6%. Industrial and financial counters yielded negative returns, with the Ind25 down 5.2% and the Fin15 down 12.7%. Financials came under pressure following further poor news flow from foreign financial counters due to the ongoing sub-prime fallout, as well as a deteriorating interest rate environment in South Africa. In March, however, domestic equities (-3%) were the worst-performing asset class. Local bonds had negative returns for the quarter, yielding -1.9%. Bond yields came under pressure due to inflationary concerns as well as a weakening rand. The rand depreciated by 15.8% over the quarter. Local cash yielded 2.6% for the quarter. Global equities underperformed global bonds over the past quarter, yielding a rand return of 7.4%. Global bonds gained 30% in rand terms over the quarter, aided by a sharp depreciation in the rand. Inflationary fears have taken a back seat to the risk of recession in the short term.

There were no major changes to the fund structure over the quarter. The fund struggled during the quarter due to the underlying equity managers battling against the equity index as well as their peers. The foreign exposure of the fund added value due to the depreciation of the rand. The best-performing underlying fund was the Foord Balanced Fund, which was the top performer in its respective category for the quarter.

Domestic equities were the best-performing asset class in 2007, yielding a rand return of 19.2%. During the fourth quarter, however, domestic equities (-3%) were one of the worst-performing sectors, second only to the MSCI Global Equity Index (-3.5%). The relative underperformance from equities was due to ongoing concerns about the global credit crunch and fears of a recession in the US. On the domestic front, inflation fears and decreased foreign demand for domestic stocks weighed on performance. The composition of the SA returns during the fourth quarter was biased towards industrial stocks, with the INDI25 yielding a return of 2.1%. Resource and financial counters yielded negative returns, with the RESI20 down 7.5% and the FINI15 down 1.1%. Resources came under pressure following a 14.3% decline in the $ Metals Price Index amid fears of a US recession in 2008. Financials in turn suffered contagion from the sell-off in global financial stocks as bigger-than-expected write-downs knocked sentiment in these counters. Closer to home, two successive interest rate increases of 50 basis points each also weighed on the domestic sector. SA bonds yielded 0.9% during the fourth quarter, aided by a rally in global bonds. The ALBI yielded some 4.2% for the year, well short of the 9.4% returned by cash and the 8.2% yielded by global bonds.

Following an extensive review, the fund was restructured to enable SMMI to incorporate a tactical asset allocation view, an area in which our team has demonstrated success. The fourth quarter was the first full quarter under the new structure and we are pleased to report that the fund performed well against peers during this period.