The fund changed sectors from South African--Multi Asset--Flexible to South African--Multi Asset--High Equity effective 9 October 2014.

Market Review

Global financial markets took their lead from talk about the possible timing of the US Fed tapering but were caught off guard when the central bank failed to move in September. Syria was also a focus for a while until US military intervention was taken off the table.

Against this backdrop markets were volatile but buoyant, with developed world stock markets breaking through five year highs and bond yields moving in lock step with any Fed-related news.

By the end of the third quarter, the MSCI World Index had gained 8.2% on a total return basis in dollar terms, and the MSCI Emerging Markets Index 5.9%. At home, the FTSE/JSE All Share (ALSI) gained an impressive 12.5%, propelled higher largely by a rebound in resource stocks, with the Resource Index delivering almost 20% during the quarter. The Financial Index added 6.9% during the period and the Industrial Index gained another impressive 11.3%.

The rand depreciated 1.6% against the dollar during the period, which mean't the All Share offered foreigners a return of milder dollar-denominated return of 10.8%. The All Bond Index eked out a 1.9% gain for the quarter and the Inflation-Linked Bond Index 1.2%. Cash returned 1.3%.

What we did during the quarter

Early in the quarter we added to local equities via purchases of the Sanlam General Equity Fund, a well-diversified equity fund that leverages off the SIM houseview. Later in the quarter we started to lighten our equity exposure, as equities rallied to levels where they were above what we deem to be fair value on a fundamental intrinsic value basis. We increased exposure to local bonds as yields on SA bonds kicked up and offered good prospective returns.

We bought some local property via the SIM Property Fund. The high degree of volatility experienced during the quarter within the listed property sector presented a good buying opportunity in our view. The SIM Property Fund, which is fairly defensively positioned, has added close to 70bps during the quarter relative to the sector average's total return. Within cash, we increased the Fund's exposure to the SIM Active Income Fund and the SIM Enhanced Yield Fund.

On the international front, the weaker level of the local currency to the US dollar afforded us the opportunity to neutralise our offshore position and repatriate some rands. We continue to favour equities and listed property in the international space, based on relative valuations. Holdings in the Sanlam World Equity Tracker were increased. We reduced our underweight exposure to global bonds when US treasuries and most of the other developed market government long bonds rose to a point where they offered a positive real return. Towards the end of the quarter, we reduced holdings in the Sanlam Global Best Ideas Fund in favour of the Sanlam Global Financial Fund.

SIM Strategy

Local equities | The SA market currently trades at a 16 price-tocurrent earnings ratio (PE). We believe equities are fairly priced if they offer a prospective real return of 7% a year, which equates they offer a prospective real return of 7% a year, which equates to a current PE ratio of about 12 to 13, assuming a long-run real dividend growth rate of 3%. The SA market is on an 18.5 Graham & Dodd PE ratio versus a long-run average of 13.5. (The Graham & Dodd PE ratio is calculated by dividing price by the average inflation-adjusted earnings over the past 10 years.)

Local bonds | With the SA 10-year conventional bond yield trading above 7.75% for most of the quarter, using our long-run inflation target of 5.25%, this implies a real yield of 2.5%. SA cash currently offers a negative real return - three month cash rates are at 5.1% - and there is now almost a 2.6% spread between cash rates and long bond yields. We believe a 1% spread is sufficient compensation for the term and inflation risk associated with long bonds.

Local listed property | We retained our neutral holding in listed property.

Global equities | We retained our overweight position in global equities . According to our analysis, global equities on most valuation metrics are cheaper than SA equities.

Global bonds | We retained the underweight position in global bonds, but reduced the size of our underweight position. US and UK 10-year treasury yields have risen by more than 1% since the middle of 2012, with US treasuries increasing to 2.7%. European government bonds have risen by about 0.5%. Inflation-linked bond yields weakened as well, so long run inflation-expectations, as implied by the markets, remain at about 2%, which is in line with our long-run inflation assumption for developed markets. The developed market government long bonds now offer a positive real return (excluding Japan), which compares favourably to the negative real rates available from cash.

Long bond yields can be viewed as a forecast of future cash rates. Given the pronouncements of the various central banks, it does not appear as if zero nominal cash rates are going to change soon. Future cash rates would therefore have to increase well above the current long bond yields for cash to be a better long-run investment than bonds.

Global property | We have a significant position in international property via the Sanlam Global Property Fund. Currently our holdings have an average dividend yield of about 4%, which is attractive compared to global cash.

Market Review

It was an eventful quarter that will best be remembered for the profound impact Federal Reserve chief Ben Bernanke had on the financial markets when he indicated the US central bank could well start withdrawing monetary life support as early as September this year. Financial markets around the world went into a tail spin, unraveling the buoyant spirit that had predominated until then. By the end of the quarter, the MSCI World Index had just managed to stay in the black, up 0.8% in total dollar-based terms, notwithstanding June's 2.4% losses.

Emerging markets were much harder hit as investor sentiment turned for the worse on indications economic prospects may not be as positive as they expected. As a result the MSCI Emerging Markets Index slumped 8% (6.3% in June alone). SA was not as hard hit as the index, shedding 7.3% during the quarter, even though the rand depreciated further during the period.

In local currency terms, the JSE All Share Index ended the quarter just in the red (-0.2%) but again with highly divergent performance between the different sectors. Resources were again knocked by the commodity price meltdown and lost 11.8% during the quarter. The Financial Index also ended in negative territory, off 1.6% for the period. In contrast, the Industrial Index continued its winning streak, gaining another 6.9% during the quarter. Of the fixed interest assets, the All Bond Index declining 2.3% and inflation-linked bonds slumping 4.9%. The only asset class to gain ground during the second quarter was cash, which delivered positive returns of 1.3%.

What we did during the quarter

We increased the Fund's allocation to bonds via the SIM Bond Plus Fund. Bond yields kicked up significantly during the latter part of the quarter presenting good value opportunity. Purchases were funded from the SIM Money Market Fund and the SIM Active Income Fund. Local equities were added to, mainly through purchases of the SIM General Equity Fund, a well-diversified Fund that leverages off the SIM houseview.

Local property stocks, like bonds, came under pressure from foreign selling over the quarter. The defensive characteristics of the SIM Property Fund, with its overweight postion in higher yielding small- to mid-cap stocks and underweight exposure to the lower yielding more liquid, large-cap stocks proved beneficial over this past volatile quarter, with the Fund outperforming the property sector average total return.

On the international front, having held an overweight (relative to benchmark) position in offshore assets during a quarter that saw the rand weaken to more than one standard deviation below the fair exchange rate according to purchasing power parity calculations has worked in the fund's favour.It is important to note that the SIM Managed Moderate Aggressive Fund's offshore position and performance is determined on a see-through basis looking into all of the offshore investments of the underlying funds, both local and global.

Towards the end of the quarter, with the rand having weakened to the extent that it has, we took the view that it would be prudent to begin neutralising our overweight view that it would be prudent to begin neutralising our overweight offshore position. As such, we have marginally reduced our global property and equity holdings and repatriated offshore cash at levels close to R10 to the US dollar. Nothwithstanding the oversold level of the rand, we retain our bias to offshore risky assets (equities and property), which, according to our analysis, are cheaper than SA risky assets.

SIM Strategy

Local equities | We currently have a benchmark holding in SA equities as we believe SA equities are fairly valued. The market trades on a forward price-to-earnings ratio of about 13 times. Also, in summing up the individual company valuations, as calculated by our equity analysts, the market appears to be fairly priced.

Local bonds | During the quarter, the SA 10-year conventional bond yield rose by almost 200 basis points from a low of 6.1% to a high of 8%. Using our long-run inflation target of 5.25%, this implies that a real yield of 2.75% was on offer. The Reserve Bank targets an inflation range of 3% to 6%. Even if we are, on average, at the upper end of this target, the SA 10-year bond still offers a 2% real yield, which equates to the real return SA nominal bonds have offered since 1900.

Rapid price movements in assets often provide fertile ground for valuation driven asset managers but we need to ascertain whether the news and events have warranted this price change. If we frame this in terms of the 10-year bond, it implies there has been a significant change in the outlook for 10-year inflation, 10- year real yields and/or the required 10-year inflation-risk premium in SA. Given the weakening in the rand, shorter-term inflation expectations have risen as domestic currency weakness would cause a once off re-pricing in imported goods. However, it would only have a significant impact on 10-year inflation expectations if there is a belief that the rand will weaken more than the prevailing inflation differential - from already cheap levels - over the next 10 years.

Local listed property | We retained our neutral holding in listed property.

Global equities | We retained our overweight position in global equities. According to our analysis, global equities on most valuation metrics are cheaper than SA equities.

Global bonds | We retained our underweight position in global bonds. Benchmark 10-year sovereign bonds in the developed world have weakened considerably during the quarter but still offer too low a prospective real yield relative to the alternative asset classes in our opinion. We prefer to take our overweight position in SA bonds.

Global property | We have a significant overweight position in international property via the Sanlam Global Property Fund. Currently our holdings have an average dividend yield of about 4%, which is attractive compared to global bonds and cash.