Introduction
The major theme for the 3rd quarter of this year was the sub-prime "crises" that broke in mid-August causing serious downward volatility. The recovery in the equity market at the headline All Share Index level was impressive but it was contained to just a handful of shares as the broad breadth of the market rebound was modest particularly in the local side of the Financial & Industrial sector.

Equities
We were fortunate to be well positioned from an exposure point of view during the volatile period during August. At the low point of the equity sell off our funds performed relatively well but they did not rebound as aggressively as the All Share Index. This is because the recovery was largely confined to Anglos and Billiton, which made successful stock picking difficult over this very short-term perm period. We continue to be shy of these two heavyweights on valuation concerns. For example, Billiton is currently trading at over 8X NAV with a ROE of 51%. These lofty valuation metrics are clearly unsustainable and we will revisit its case once more realistic valuations appear. Other areas in the equity stock picks that battled over the quarter were banks and technology. We believe that these areas are cheap and will continue to build exposure.

Fixed Income and Listed Property
We were not active in bonds over the quarter, which proved to be a sound decision as bonds, thanks to a recovery in late September, just outperformed cash over the quarter. However, within the cash area we were quite active extending the duration by investing heavily in 1 and 2 year NCD's. The logic of these investments is that we are now, in all likelihood, at the top of the interest rate cycle. Listed property had a solid quarter which we largely missed as our exposure to this sector is currently low. For a while now we have being arguing that despite there being solid fundamentals for property it is just a case of not meeting our value criteria.

Asset Allocation
As mentioned in the last quarterly our current allocation is essentially driven by a twin strategy of equities and cash. Equities should provide the required long term real return and cash is the balancing asset class to manage the risk of not losing any capital. In other words, cash is the only true diversifier to the unexpected volatility from equities.

We did not change our asset allocation by much over the quarter but intra quarter we did reduce equities as the uncertainty at one stage became unacceptable to us. However, when the Fed cut interest rates we did replace it with some All Share Index exposure to end the quarter little changed from an equity point of view.

Given the massive infrastructure and capital expenditure programs taking place both globally and locally we feel that this should provide a solid underpin to economic growth. Taking a three-year view, real earnings should therefore be delivered by the equity market albeit at a much-reduced rate than that experienced over the past few years. This outlook should be contrasted with the fact the market has currently lost obvious value as there is a high probability that real earnings will revert back to it long term trend making the short term outlook for equities murky. For this reason we are comfortable to stay around our long-term strategic equity exposure levels. We are confident that this approach will enable the fund to meet its dual objectives of providing inflation beating returns over a rolling 3-year period and to provide capital protection over a rolling 12-month period.

Introduction:
The major theme for the 2nd quarter of this year was the continued upward trend of equities in stark contrast to a negative return over the same period for bonds. Equities as measured by the All Share Index returned 4.3%, which, on its own, is about in line with long term expectations. However, the really impressive feature was that it was on top of a stellar first quarter of 10.4%, which has resulted in a return of 15.1% for the first 6 months of the year. Bonds, on the other hand, were the laggard producing a negative -1.7% return over the quarter as measured by the All Bond Index. For the year to date, Bonds have produced a marginal negative return of -0.1%. Listed Property eked out a small return of 0.3% over the three months but bearing in mind that the 1st quarter was particularly strong for this sector making the 6-month return 16.1%. In summary, the key feature for the local financial markets over the quarter was the sharp deterioration in the outlook for domestic inflation and the upgrade to global economic growth.

Equities:
We did not make any conscious asset allocation decisions over the quarter to reduce equities. Instead we focused on a disciplined approach of selling or trimming any share that looked fully valued. This approach resulted in our exposure being slightly below where we would consider being the long-term strategic exposure to be. In our opinion the equity market is now just about fully valued and with the recent rise in local and international bond yields the risk for equities has undoubtedly increased. However, against the backdrop of strong economic growth around the world including South Africa it is hard to argue the case for cash outperforming equities. It is this latter case that keeps us still invested in equities.

Fixed Income and Listed Property:
Our bond exposure was not changed during the quarter as we had already positioned ourselves defensively essentially in short dated credit bonds so we were dot unduly hurt by the poor quarter's performance. As mentioned above it was the unexpected bad inflation numbers and more importantly, the outlook for inflation, that caused the bond to sell off. The question now, is whether they have priced in all the bad news or is there an opportunity to buy at more attractive levels? We believe that we can wait a while, as the peak in inflation is uncertain in terms of extent and timing. Listed property also derated over the quarter in sympathy with the rise in bond yields. While the fundamentals remain attractive we are less convinced about the valuation storey. Our portfolios are now very light in this asset class as we reduced our holdings early in May so we were fortunate to avoid the sell off. As with bonds the next move is to increase exposure but it is all about being patient and waiting for better value to emerge.

Asset Allocation:
Our current allocation is essentially driven by a twin strategy of equities and cash. Equities should provide the required long term real return and cash is the balancing asset class to manage the risk of not losing any capital over a rolling 12-month period. In other words cash is the only true diversifier to the unexpected volatility from equities. Another feature of cash is that we have bought large quantities of 12 month fixed deposits which should also provide us with a decent real return should our inflation forecast materialize. In conclusion, our twin strategy is likely to prevail in the short term. We will, however be constantly alert to opportunities in the bond and listed property market should better value present itself.

Introduction:
Looking only at the headline returns from equities for the 1st quarter of this year it looks impressive enough with the All Share Index producing a return of 10.4%. But this masked huge volatility at the end of February where equities fell just under 10% in total and then recovered strongly during the latter part of March. The All Bond Index underperformed cash over the quarter with the former producing 1.6% and 2.3% respectively. The star performer was the Listed Property sector which returned 15.7% over the quarter. Another feature during the quarter was that the SARB decided to leave interest rates on hold. The challenge now for the portfolios is to carefully pick through the data and noise in an attempt to understand if there is still genuine value within equities which has been the main engine of returns over the past 4 years.

Equities:
The momentum in the equity run early in the quarter pushed our exposure above our longer term strategic level. During February, before the volatility started, we started a disciplined program to reduce exposure. The logic in this move had more to do with risk management rather than any prescient notion that the markets would have a bumpy ride. The challenge as far as equity exposure is concerned is that if one examines the outlook for growth (earnings and dividends) and comparing these yields to real long bonds, then equities, as an asset class, remains attractive. In other words, real interest rates when compared to growth rates still favor equities over all the fixed income asset classes. The greatest risk to both these asset classes is that global liquidity unexpectedly dries up. This fact together with the uncertainty in the domestic interest rate outlook (recent spike in the oil price) has caused us to move closer to our longer term exposure level.

Fixed Income and Listed Property:
While bonds had a positive quarter the returns were less than cash. The slope of the yield curve remained negative throughout the period indicating that the long end is still comfortable about the future inflation expectations. So all in all it was a dull quarter for the bond market in terms of returns but what the yield is signaling is more important; i.e. a positive inflation outlook. We did not add further to listed properties during the quarter. Solid value, in general, has now been lost as the sector is now trading around fair value. We will have to patient in this area before we can start adding further exposure.

Asset Allocation:
We concluded the previous quarterly by saying that " we believe that 2007 should be a challenging year as the solid value underpin has largely disappeared making volatility a likely scenario." This is indeed what has transpired so far this year. However, the returns generated by equities have exceeded expectations. This further heightens the risk for more volatility from equities for the year ahead. We are therefore comfortable with a more neutral stance towards equities. An area that we are likely to focus more on is Listed Property. Given any opportunity; i.e. weakness we will, all else being equal add to this asset class.To add much more to bonds we would prefer to see further weakness so as to increase the probability that bonds will, over the next 12 months outperform cash.

Undoubtedly the main feature of the 4th quarter was the exceptionally strong performance virtually across the board. The All Share Index gained 11.8% over the quarter with the All Bond Index rising a very creditable 5.6% over the same period. With respect to the currencies, the rand appreciated by 11.0% against the US$ and 6.2% and 6.4% against the UK and the € respectively. The performance outcome was made to be even more interesting as it was achieved against a backdrop of rising short term interest rates which featured additional rate hikes in October and December of 50 points each. The total since the first rate hike in June stands now at 200 points. At first glance, it appears that the set back that the markets experienced in May and June was nothing more than a financially induced correction rather than a fundamentally driven one as the underlying macro economic variables remain sound.

Equities: Exposure to equities was increased during the quarter mainly due a defensive structure expiring although some defensive and diversifying stock picks were also added. We are now around our long term strategic exposure to equities. From a sector point of view we have remained steadfast and continued to believe that the Financial & Industrial sector should, in the foreseeable future remain the core of the portfolio. With respect to commodities in general, we are not overly bearish on the demand side of the equation but we do see more supply in many metals coming on stream this year which should depress prices. This input taken in conjunction with very rich valuation levels of the resource shares gives us the conviction to stick to our view.

Fixed Income and Listed Property: The domestic bond market was characterized by two important developments during the final quarter of 2006. First, the market rallied strongly with the yield-to-maturity on the benchmark 10 year bond falling by some 81 basis points to close the year at 7.80%. Secondly, the longer end of the yield curve rallied meaningfully more than the shorter end. Curve inversion was a major theme which investors had to identify early on. The inverted yield curve generally serves as a powerful signal that the rally in the domestic bond market could continue. Whether this will happen will depend mostly on the outlook for domestic inflation, the rand and the outlook for domestic monetary and fiscal policy.We did not add further to listed properties during the quarter. In hindsight we should have been more aggressive in the 3rd quarter when we added some exposure as this sector had a very strong quarter returning 19%. Solid value, in general, has now been lost as the sector is now trading around fair value. We will have to patient in this area before we can start adding further exposure.

Asset Allocation: Given the strong rise in the equity markets over the fourth quarter, and with the increase in additional exposure we feel comfortable with the weighting to equities at present. There is a fine line, in our opinion, between what the markets are discounting and what the macroeconomy should deliver. While we are optimistic about the local economy on a three year view, we believe that the equity market, in the short term, has moved ahead of itself. We therefore are likely to use any weakness as an opportunity to increase our exposure. Our nominal bonds exposure is modest at the moment and we would prefer to see a sell off in bonds before we make a meaningful investment in this area. The logic behind this thinking is that given the slope of the yield curve, cash on a risk adjusted basis is relatively more attractive. All in all we believe that 2007 should be a challenging year as the solid value underpin has largely disappeared making volatility a likely scenario.