The second quarter of 2005 proved, as in the first quarter, to be challenging from an absolute return perspective given that the trend that started in the 1 st quarter continued in the second, albeit with significantly more volatility.

As mentioned in our 1 st Quarter report, our philosophy of stock picking within the absolute return environment naturally steers us away from the more unpredictable and volatile resource sector. This is because the biggest price driver of resource shares is the future rand price of the underlying commodities which is, in general, always uncertain. From a relative perspective, our blue chip Financial and Industrials offers far more certainty and visibility in key variables such as future growth in earnings, dividends and cash flows. As a consequence, we had another tough quarter in terms of our stock picks.

We ended the quarter with roughly the same net exposure to equities as at the end of the previous quarter. Apart from a small amount of net purchases in equities our main tactic was the purchase of Sasol on a stop loss basis. This was instead of using call options. We sold the Sasol shares and banked a 18% profit which equated to 17 points for the entire portfolio. Another tactic employed on a similar basis was on the All Share Top 40 Index futures where again instead of using options we set a stop loss and bought and later sold the instruments to bank a 12 point profit for the portfolio as a whole. It must be stressed that this tactic was to manage our exposure risk and not to speculate.

Quoted property had another extremely positive quarter. Unfortunately our strategy of taking profit (mainly on the back of liquidity fears) proved to be incorrect. Our basic assumption of seeing the bottom of the interest rate cycle was too premature.

Bonds had once again an up and down quarter but in the end produced a decent positive return for the quarter. In hindsight we should have used the weakness in the 10 yr area to accumulate more bonds when they were around the 8.5% levels. We still see better value in nominal than inflation linked bonds.

Our future strategy will be based on our tried and tested philosophy of trying to balance the portfolio in terms of its dual objectives of not losing money in the short term while achieving the upside target. It is becoming more apparent that certain equities in the non-resource area are offering compelling value with respect to the cash alternative, particularly when viewed on an after tax basis. We see this as an opportunity to add selectively to our equity exposure. Within the fixed income area we are likely to accumulate bonds on any weakness.

The first quarter of 2005 proved to be challenging from an absolute return perspective. However, taking a cursory glance at the major asset class returns this does not appear obvious.

The All Share Index returned an impressive 5.9% return for the quarter but this was driven almost entirely by resources which produced 16.9% for the same period. Conversely, the Financial and Industrial Index, by contrast produced a modest 0.5% return.

Our philosophy of stock picking within the absolute return environment naturally steers us away from the more unpredictable and volatile resource sector. This is because the biggest share price driver of resources is the future rand price of commodities which is, generally, always uncertain. From a relative perspective, our blue chip Financial and Industrials offers far more certainty and visibility of future growth in key variables such as earnings, dividends and cash flows.

We ended the quarter at 29.9% in equities but intra quarter we peaked at just under 35%. Apart from a small amount of net selling in equities our main tactic was the purchase of out of the money call options in early January to manage the risk of an unexpected rise in the All Share Index. This strategy worked out well as we captured most of the rise in the market. We sold them out completely in late March. Although the logic of this tactic was to manage upside risk, the transaction itself yielded a handsome profit.

Quoted property ended the quarter on a strong note by returning 5.3%. Our strategy here was to start a program of reducing exposure. The main reasons being valuation relative to bonds and the fact that we believe most of the good news is now fully priced into the sector.

Bonds had an up and down quarter finally ending the quarter in negative territory returning -0.3%. Fortunately we resisted the early January and February euphoria and remained low in exposure and also kept the duration well short of the All Bond Index. We also introduced a small holding in a short dated Inflation Linked Bond of 1.8% bringing our total exposure in bonds to 10.5%.

Our cash holdings rose to 49.4% which in itself is returning a risk free decent real return as inflation continues to very benign at just over 3%.

The balance of the portfolio (5.1%) was made up of pref shares and a Bidvest Empowerment shares. This instrument will deliver an effective 11.5% annual return to the end of December 2006 should the Bidvest ords end above R60.

Our future strategy will be based on our tried and tested philosophy of trying to balance the portfolio in terms of its dual objectives of not losing money in the short term while achieving the upside target. We see this as a challenge as the markets, bonds and equities, are undoubtedly in some form of inflection point at they attempt to digest the end of the global deflation trade as the US raises interest rates. This is against the back drop of continuing positive domestic fundamentals.

The quarter was characterised by a continued upward momentum in the equity market, driven mainly by domestically orientated financials and industrials. This suited the fund as we kept the equity portion at the maximum levels in order to achieve the target return of CPIX + 4% and ensure, to the best of our abilities, that the fund does not experience any negative returns over any 12 month rolling period.

We began to trim our exposure to equities during December as we banked some of the excess returns.

A word should be made of why our allocation to equities is so low. We are driven by the objective of capital stability and believe that the volatility of equities has not subsided. Therefore we are constantly asking and testing for what is the maximum exposure required to equities to meet the dual objectives of meeting the upside target and capital protection over the short term. It is the second objective that causes us to run a low equity exposure.

Moving beyond equities, our exposure to bonds and particularly, quoted property added value over the fourth quarter. We are likely to hold our positions in the short term given our inflation forecasts and positive momentum in these markets

Our money market funds were predominantly invested in the short end of the money market curve as it offered the most value. This is likely to change as it appears that a cut of 50 points is on the cards during the first quarter of 2005. This has now being discounted by the forward curves.

Finally, we are likely not to change the asset allocation too much in the quarter ahead but will focus our efforts on stock picking with a possible rotation out of some the high flying financials and industrial into a some non- resource rand hedges in order to guard against an unexpected crack in the currency.