Market Review
Global equity markets continued their recovery during the quarter, with the MSCI World returning 16.8% in dollar terms. This quarter also saw the continued outperformance of risky assets, with the MSCI Emerging Markets index delivering 20% in dollars. Along with other emerging market currencies, the rand continued strengthening against the dollar, appreciating 3.1% during the quarter. The JSE All Share Index gained 13.9% in rand terms over the period. Global and local credit spreads continued to recover. The fear of an extensive recession or even depression that was being priced into risky assets has abated as economic data releases are turning more positive. Uncertainty remains regarding the effects of the quantitative easing policies followed by the central banks of the US, UK and Europe. US long bonds yielded 3.3% at quarter end, while the Barclays/Lehman's global bond index returned 6.23% in dollars for the quarter.

What we did during the quarter
As a house, we have had a relative overweight position in equities since the fourth quarter of 2008. Given the recent rally in the domestic and international equity markets, we continued to marginally reduce the magnitude of our overweight position in favour of bonds, cash and property (via the Active Income Fund). In July, we moved 1% of the portfolio from international to domestic.

In August we:
1. reduced the exposure to SA equities by 1% in favour of the Active Income Fund;
2. shifted 2.5% of our domestic cash investment into the Active Income Fund;
3. moved 2.5% from the International Defensive FoF into the International Bond FoF.
In September, we transferred a further 2% from the International Defensive FoF into the International Bond FoF.

Investment Strategy
In terms of our value-based investment philosophy, the number of attractive investment opportunities has diminished, given the rerating of assets during the past six months. SIM's analysis shows how a value-style investment approach has outperformed various other approaches, not only over the long term, but more specifically over the past six months. It has therefore become harder to find attractive investment opportunities.

Given the above, we still remain relatively cautious at this stage and believe the fund is appropriately structured according to its risk profile.

Market Review
Risky assets experienced a strong recovery during the quarter. The global equity markets rebounded sharply, with the MSCI World Index rising by 21% in dollar terms. The recovery in emerging equity markets in dollar terms was even more pronounced, with the MSCI Emerging Markets Index soaring 34.8%. Some of this return stemmed from the firmer emerging market currencies. The rand was one of the strongest-performing emerging-market currencies over the quarter. The JSE All Share Index delivered an 8.6% return in rand terms. Global credit spreads recovered from extreme levels and industrial commodity and oil prices increased dramatically. For example, oil gained 50% in US dollars. The fears of an extensive recession, or even depression, priced into these risky assets appear to have subsided. Global deflationary fears have also waned, with US government bond yields weakening to 3.5%. The Barclays/Lehman's Global Bond Index returned 4.9% dollars for the quarter. During the past quarter, two more reductions in the repo rate meant that other asset classes looked more attractive over the medium term.

What we did
As a house, we have had a relative overweight equities position since the fourth quarter 2008. Given the recent rally in our market we reduced our overweight position marginally. We also increased the international exposure given the rand's recent appreciation at the expense of domestic cash.

In April, we:
1) moved 3.5% of the portfolio from SA cash to international. This increased the international exposure of the Fund from 14.5% to 17.5%.

In June, we:
1) reduced the Fund's exposure to SA equities by 2%, moving 1% to international (taking the international exposure of the Fund up to 18.5%), and the other 1% to SA fixed income, and
2) moved 1% of the Fund from domestic cash to property.

SIM strategy
Developed-market governments and central banks have been engaged in unprecedented stimulus policies. The jury is still out on what effect these will have on economic growth and long-term inflation. Given this, we aim to be overweight in assets where the current valuation discounts a worst case scenario. Therefore we remain relatively cautious at this stage and believe the Fund is appropriately structured according to its risk profile.

Market review Global and local equity markets declined steeply for the first two months of the quarter before rebounding in March and ending the quarter down 11.8% and 4.2% respectively, Emerging markets outperformed during the quarter ending up 0.5%, while negative sentiment prevailed in the developed world stock markets with the MSCI World Index falling 12.5%. Offshore bonds also had a disappointing quarter, with yields rising in the face of increased issuance and less foreign buying. At home, SA equities followed their offshore counterparts lower with the FTSE/JSE delivering -5.3%, and local bonds yields traced the upward movement in global government bonds. The property index was also negative producing -4.6% for the quarter. Domestic cash ended up as the best performing asset class for the quarter.

What we did during the quarter
We did not make any significant changes to the portfolio during the quarter. Fortunately during March the global and domestic equity markets had an expected short-term positive rally, and the fund benefited from this movement. By having a relative underweight exposure to bonds and property did add value, and being overweight domestic cash added value over the quarter. We maintained our 15% exposure to offshore assets which continued to add diversification benefits during the quarter.

Investment Strategy
There is a risk that global inflation could rise well above average in the medium to long term as the Central Banks print money to buy some of the government debt issues as well as selective distressed corporate debt and therefore remain neutral global bonds. Given the price-to-book valuations of between 1 and 1.5 for the developed equity markets, as well as a return to a better functioning capitalist system we expect global equities to outperform global bonds. Locally, equities are still offering value with the All Share Index trading at a forward price to earning multiple of around 10.8X, still below the historic mean of 12.5X. In light of this and the expectation that domestic interest rates will reduce further by mid-year, SIM recommends a domestic equity bias. Therefore, we still remain cautious at this stage and believe the fund is appropriately structured according to its risk profile.

Market review
The FTSE/JSE All Share Index lost -9.2% during a tumultuous fourth quarter, as economic news from developed economies confirmed that the world was entering a recession and emerging-market growth indicators continued to deteriorate. Resources (-12.9%) and Financials (-11.4%) led the ALSI down, while Industrials (-4.1%) were relatively unscathed. A clear defensive style-bias emerged looking at cross-sector performance, as non-cyclical sectors outperformed. Global equity markets also had a rough quarter, with the S&P500 losing 22.4% and the MSCI World Index falling 21.7% in US dollars.
The Federal Reserve lowered the target funds rate from 2% to between 0% and 0.25%. Indicators of a sharply slowing global economy came thick and fast, with the most notable probably being a steep drop in US employment. Official measures to protect the financial sector continued and US automakers also sought public sector support. Meanwhile, fiscal policy was stepped up in a number of countries. In South Africa, the SARB cut the repo rate by 50 basis points to 11.50% at its MPC meeting in December on easing inflation pressures.
Local bonds had a strong quarter, returning a healthy 11.3% for the period. Listed property was also a feature, producing 8.5% for the quarter. These returns were in response to a strong belief that the repo rate was likely to be cut meaningfully during 2009.

What we did over the quarter
In general we had a quiet quarter in terms of making any significant changes to the portfolio. We remained overweight cash given the short-term uncertain outlook, particularly with the volatile equity markets and sentiment remaining highly problematical. However, given the relatively low equity weighting, we began to add some exposure to equities at the expense of cash in early December. We also started to add cautiously to property in late October and early December.

Major performance value adders and detractors
The position that added the most value over the quarter was our cautious stance towards equities compared to cash and bonds. We added value by being relatively overweight fixed interest and the small switch to property also turned out to be correct in December.
We also maintained our 15% offshore exposure, which continued to add diversification benefits over the quarter.
Overall, it was a very solid quarter in terms of how the portfolio was structured relative to what returns the main asset components delivered.

Investment strategy going forward
We maintain that the ultimate fallout of the US-led financial crisis will be a sustained period of below-trend global economic growth for at least the next two to three years and the key question now is: is this correctly priced into the equity markets? There is no doubt that pockets of value are emerging within the equity markets, so the only challenge, given that we are sensitive to avoiding capital loss (making the time horizon much shorter), is when the value will begin to be unlocked. Regrettably, it is impossible to predict this, so we believe it would be prudent to take advantage of our low weighting to equities and to start adding some more exposure cautiously. We are likely to be buyers on any material weakness. We believe bonds have more than fully discounted all the positive inflation and short-term interest rate movements and are now expensive.