The Active Income fund had a very satisfactory 3rd quarter of 2007. After a very volatile second quarter, the domestic fixed interest market stabilized in the 3rd quarter and showed signs of recovery during September. In the USA the Fed-fund rate was lowered by 50 bps in September; this action supported and stabilized international equity and fixed interest markets. On the domestic front the August Producer Price Inflation (PPI) surprised on the downside. This, together with a downward bias to international short-term rates, led to significant market strength in September. During September the R157 strengthened from 8.61% to 8.26%.

During the third quarter the yield curve inverted even more with longer dated bonds strengthening, while short-term interest rates edged higher. The All Bond Index returned 3.4% for the quarter with cash at 2.3% and inflation-linked bonds at 1.4%. The Property Index returned 9.4% for the third quarter of which 7.3% was in September; this performance was mainly driven by a stronger bond market. Income growth of approximately 10% over the next few years is still on the cards for listed property.

During the quarter the two significant changes were an increase in nominal bond exposure from 10% to 29% and an increase in property exposure by 7% to 7.7%. This was funded by a reduction in the cash exposure to 59%. This increase in bond exposure, together with the listed property exposure of 7.7%, contributed to the overall performance of 3.17% for the quarter. Currently we are increasing our bond exposure into weakness while also adding longer-dated money market exposure to the cash holdings of the fund.

The Sanlam Namibia Active Fund's objective is to provide a high level of income and to maximise returns over the medium to long term.

The fund is actively managed and invests across the income-yielding universe, including fixed-interest securities, corporate and government bonds, preference shares, money-market instruments and listed property.

Investors in this fund accept the aggressive performance objectives that go hand in hand with higher volatility and higher risk characteristics.

The Sanlam Namibia Active Income Fund had a very satisfactory month despite a general weak quarter for both domestic and international fixed interest markets. Investors became concerned about the outlook for higher global growth and as a consequence also higher global inflation expectations. The domestic market weakened towards the middle of May in sympathy with international markets. The higher than anticipated April CPIX number led to a significant weaker bond market. The R157 weakened from about 7.70% to about 8.50% towards the end of June. The All Bond Index returned - 1.65% for the quarter with cash at a decent 2.2% and inflation-linked bonds at 1.2%. The Property Index ended flat at 0.3% for the quarter.

After the weaker than expected CPIX number the exposure to nominal bonds was reduced significantly at quarter-end. As a hedge against further rising inflation we increased our inflation-linked bond exposure to earn a real yield close to 4%. Currently the fund has only a limited exposure to Listed Property with a weighting of 3.4%.

The general defensive stance of the portfolio during the second quarter led to very satisfactory performance in June relative to the peer portfolios. In the short term we will remain defensive while actively looking at opportunities to increase our nominal bond exposure as soon as the inflation outlook stabilizes.