Introduction: Market practitioners use, as one of their basic tools, the studying of long term averages and events in the context of what is average. History will no doubt judge quarter three of 2008 as an extraordinary one in the sense that it was far from average. This was in the context not only of the overall equity market volatility but also sector relative performance and also the action of the bond market must also be included in the extraordinary performance category.

Equities: There were two main features in the equity market over the quarter; viz. the sharp and rather dramatic reversal of the relative performance between the Resource sector (-38.9%) and the interest rate sensitive sector, particularly the Banks (+25.5%) and General Retailers (+26.8%). The other, of course, was the general direction of the market as a whole; the All Share Index which had a disastrous September (-13.2%) making the quarter (-20.6%) one of the worst in recent times. No further exposure was added in the Resource area during the quarter, however, we were unfortunately a bit light in the interest rate sensitive area. Our strategy has been consistently to look for relatively secure earnings over the next 36 months and the area that we still favour is the Construction sector (+10.6% for the quarter) which we have used as part of the strategy to offset the interest rate sensitive sector. The logic behind this thinking is that we are concerned about earning downgrades materialising in the near future in the broad domestic area of the market excluding public sector fixed investment spending. Our theme remained the same as before, viz, to focus on a three year time horizon and stay with our companies where we feel confident that decent real earnings will be delivered.

Fixed Income and Listed Property: We were not very active in any meaningful way in the nominal bond market over the period which proved to be not such a good decision in the short term as bonds had a strong quarter (+12.6%) outperforming cash (+3.1%) rather dramatically. Note that the comparison over the first 9 months of the year is that cash has out performed bonds by 4.0%. Within the cash area, as in the previous quarter, we were quite active extending the duration by investing again in 1 and 2 year NCD's. The logic of these investments is that we are now, in all likelihood, near or close to the top of the interest rate cycle. No further exposure was added to the inflation linked bonds over the quarter as we believe that, in general, this asset class is now fully valued. Listed Property had a very volatile quarter much in line with the other interest rate sensitive areas of the market. Our low exposure in this asset class paid did not pay off over the quarter as this sector returned an excellent +23.1% over the 3 months. Note that the year to date (9 month period) the return was -11.9% justifying our low exposure in this area.

Asset Allocation: We consistently built down the equity exposure during the quarter and ended the period substantially lower than what we deem the long term weighting in equities to be thus protecting the portfolios to the downside as much as possible. Some exposure, albeit small, was added to our bond exposure and our first tentative steps were taken to add some Listed Property to the portfolios. As mentioned in the last quarterly our current allocation is essentially driven by a twin strategy of equities and cash.

Investment Strategy going forward: The issue, from a big picture point of view, is that in order to achieve our upside target (inflation +) we must have a decent weighting in equities. The reason for this statement is that this asset class provides the best long term real return. However, by definition, given its superior return attributes, it comes at a price in the form of unexpected downside volatility. In order for us to meet the other objective of not losing any capital in the short term (rolling 12 months) we should have the entire portfolio in cash. This is the only asset class that will not lose money in the short term but will, at best, provide only a modest long term real return. Therefore our approach has been to consistently try and balance these objectives by getting the exposure to equities correct. Unfortunately even a low exposure to this volatile asset class will detract from portfolio's overall return when equities have a negative correction. The main judgment call now to be made is; for how long will this correction, or bear market in equities last? Regrettably, it is impossible to tell as there is some outstanding value emerging in various pockets within the equity market countered by some very negative top down factors, the main culprit being that we feel that the markets are too sanguine about top line economic growth. We believe that the ultimate fall out of the US led financial crisis will be a sustained period of below trend global economic growth and the key question now; is this correctly priced into the equity markets? In conclusion, the short term is going to be tough in terms of producing positive returns let alone beating the upside objective. Finally, we remain confident that this method of investing will produce over time, decent real returns coupled with low volatility during the inevitable phase that the equity market retreats.

Asset Allocation: The US housing "sub-prime" theme that started in August continued into this quarter resulting in one of the worst quarterly equity performances over the past 5 years. The sector that supported the equity market for the first three quarters of this year; viz. resources, finally capitulated over this period by declining by more than 7%. During the quarter Financials also dropped by slightly less than 1% while Industrials increased by just more than 1%. The All Share Index dropped by more than 3% over the quarter. However, for calendar year 2007 the JSE All Share Index still returned a respectable 19%. As mentioned in the last quarterly our current allocation is currently driven by a barbell strategy of equities and cash. Equities should provide the required long term real return, with cash balancing the risk of not losing any capital. In other words, cash is at present the best diversifier to the unexpected volatility from equities. On the positive side, and 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 lower rate than that of the past few years. Another positive point for equities, locally and globally, is that real bond yields are lower than the rate of economic growth which should provide a strong tail wind for growth assets. This outlook should be contrasted with the fact that the market has currently lost obvious value as there is a high probability that real earnings will revert back to its long term trend, making the short-term outlook for equities unclear. 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.

Equities: All in all we were well positioned from an exposure point of view during the volatile period during the quarter. Given the way we have structured the portfolio, we have fared reasonably well over the period under review. Our strategy, firstly, has not been to panic either out of the market when it falls or to panic back in when the market rebounds. Secondly, we have remained at what we would deem the long term neutral exposure level to equities, as it appears to us, from a top down perspective, that numerous bearish factors are balanced out by bullish factors. During the quarter some adding and trimming were carried out on a few shares but no major equity purchases or sales were undertaken.

Fixed Income and Listed Property: We were not active in bonds over the quarter which proved to be a sound decision as the All Bond Index (0.9%) underperformed cash (2.7%) over the quarter. Within cash, as in the previous quarter we were quite active in extending duration by investing heavily in 1 and 2 year NCD's. The logic of these investments is that we are now, in all likelihood, nearing the top of the interest rate cycle. As mentioned in our last quarterly we remain positive on the underlying distribution drivers for listed property but our value criteria was not met and more patience is still required in this area. SA listed property returned -0.4% over the quarter.