Global equity markets proved to be remarkably resilient throughout the quarter, shrugging off some of the world's worst terrorist attacks and natural disasters. Investors continued to direct funds towards areas perceived to offer better growth prospects, such as the Asian economies. As a result, emerging markets continued to outperform developed markets. The Morgan Stanley Emerging Markets Free Index outperformed the general global index by some 10% over the quarter. Among developed markets Japan performed well, with investors gaining courage from a favourable election earlier in September.

As we enter the new quarter, reality seems to be setting in. Global equity markets have corrected somewhat in the early weeks of the quarter as investors tempered their rather enthusiastic growth forecasts in the face of further rate hikes, particularly in the US. Again, the Asian markets outperformed during this correction.

While valuations in global equity markets are generally reasonable, a potential sell-off in global bonds remains a risk, and a further pull-back in equity prices may represent the opportunity to buy in at lower prices.

Global equity markets remained flat for the quarter, but rand weakness against the dollar resulted in improved fund performance in rand terms. Oil prices hit all-time highs, which fuelled fears of inflationary pressure. There are concerns that oil producers may strain to meet demand, which will send the price up even further. The Fed again hiked rates by 25bps, and rates above 4% to curb possible inflationary pressure do not seem inconceivable. Corporate US is in good shape and the US trade deficit widened less than expected in April as record imports signalled healthy consumer demand and unprecedented exports provided good news on manufacturing. Strength in exports from manufacturers led some economists to raise growth estimates and the dollar climbed to a nine-month high against the euro. Positive sentiment still exists on US equities; however, the risks continue to rise. Three key factors continue to suppress exuberant optimism in the US, namely interest rates, the oil price and rising input costs.

At a recent meeting of G8 finance ministers US, Japanese and IMF officials again urged China to end its decade-old currency link to the dollar. Asian currencies revaluing would eventually be great news for the West. It should trim Asia's competitiveness and it should increase the buying power of the Asian consumer - all of which would bring joy to Western exporters and improvement to the US current account deficit. The potential revaluation of Asian currencies would result in reduced Asian competitiveness and would impact different sectors in different ways.

In recent months Europe again underperformed the US equity market largely due to growth differentials between the economies. Unlike the US, Europe has not been a beneficiary of strong domestic demand and recent trends indicate no immediate improvement.

The fund is invested in all the major regions of the world, according to the MSCI World (Developed markets) Index. Due to the size and market capitalisation of the US market, US stocks will command a high percentage in the fund. The recent dollar strength has impacted positively on this position.

A distinct move to increased risk aversion has emerged in US and global equity markets. This risk aversion has been driven by two key factors, an oil price that is resiliently high and an increase in hawkish sentiment emanating from the Fed, that inflation is rising and may jeopardize the "measured" rate increases. This would force the Fed to tighten at a more aggressive rate. While emerging markets have been the hardest hit, there has been a switch from equities to more defensive asset classes. The US earnings numbers for the quarter beat consensus forecasts for the 7th consecutive quarter.

However, earnings growth momentum in the US is showing clear signs of a slowdown from peak levels in July last year.

The Euro area remains unattractive from an equity perspective. It is likely that the Euro area will underperform other regions from a growth perspective in 2005, and will only be able to eke out around 2% growth for 2005. There are signs that improvements are under way in Europe, and the shift from exports to domestic consumption is encouraging, as it signals an improvement in domestic demand. We do not expect the ECB to be as aggressive as the Fed during the next 12 months. In recent months Europe has significantly underperformed the US equity market largely due to the growth differentials between the two economies. Unlike the US, Europe has not been a beneficiary of strong domestic demand, although there are signs of a slow improvement. Therefore European valuations are becoming increasingly compelling. Headwinds of restrictive monetary policy and high oil prices will continue to suppress any major turnaround in this market.

The Japanese stock market has withstood the pressures of the slide back into technical recession in the past quarter. While we remain concerned that the Japanese economy is still stalling, the equity market appears to be supported by strong corporate profits that have been sustained despite the poor economic backdrop. Japanese corporates continue to move from the restructuring phase into the growth phase, and corporate spending continues to respond to high profits. Recent improvement in these markets combined with improving employment has contributed to improved domestic demand. The derating of the Japanese equity market continues, although the pace of derating has slowed. The Nikkei remains a highly cyclical market focused predominantly on auto manufacturers, industrials and manufacturing industries.

Global equity markets, measured by the MSCI World Index, ended the year 2004 positively and delivered a return in excess of 12% in US dollar terms.

The South African rand appreciated by 14% from R6.60 to R5.66 against the US$ and for the third year in a row diluted rand returns of international investments.

Most major countries and regions delivered positive returns over the year, with Korea and Brazil being the star performers with returns in excess of 25%. Europe performed well, mostly on the back of euro strength, and the FTSE, Dax (Germany) and CAC (France) generated returns in excess of 15%. Although still positive, the Japanese and US markets were the relative losers with returns varying between 8% and 13%. Even with a strong fourth quarter, the technology-driven Nasdaq was a laggard in global terms. European sovereign bonds outperformed US and Japanese debt and this was driven by slow economic growth, limited inflation fears and a strong euro.

The UK economy has grown faster that that of the euro region for over 15 quarters. Economic growth topped 3% in 2004 and expectations for 2005 remain good albeit lower than the 2004 number. This will result in the 50 th consecutive growth quarter in the UK. The strong euro and the 30% rise in oil prices have left a mark on the economy and unemployment is running at a five-year high.

The Japanese economy continues to recover at a moderate pace, but a weak dollar resulted in slower than expected export growth.

The fund is managed on an index-tracking basis with the objective to deliver performance similar to that of the MSCI World (developed markets) Index. It is invested in all the major regions and countries of the world and has a diversified exposure to the largest companies and industries globally. A change of manager occurred during 2004 when the Sanlam World Equity Tracker Fund (managed by SIM) was appointed to manage in excess of 70% of the portfolio. Due to the size and market capitalisation of the US market, US stocks will command a high percentage in the fund. The recent dollar weakness impacted this position negatively.