The third quarter saw increasing volatility on the back on sub-prime fears in International markets, although some stability in the local market was seen towards the end of the quarter. With concerns growing on growth in international markets, particularly the US, bond yields declined - a trend seen locally as well. This was evident notwithstanding the expectation of rising short-term inflation and a further ½% rise in the prime lending rate during the quarter taking the cumulative impact of rising interest rates to 3% since the SARB started tightening. Expectations going forward are mixed, with a definite slowdown on the durable and credit side offset by stubborn inflation. One further interest rate hike is likely, after which interest rates will probably be on hold for some time. Rising interest rates are generally not great for equities and a more cautious tone has become evident in the stock market. Earnings growth in certain segments nevertheless remains strong and should provide an underpin to the market. For the quarter the INDI25 Index produced a return of 3.5%, excluding dividend returns. The overall return for investors in the INDI25 Index for the year to date is 13.3% (again excluding dividends), which is a reasonable return considering the returns achieved over the past couple of years. For the quarter shares that performed well include Stefanuti (+82%), Basil Read (+35%), Oceana (+19%), EOH (+14%), Shoprite (+10%) and Zeder (+10%).

The slowdown on the consumer side continued in the third quarter and shares exposed to this theme experienced poor returns. On the other hand, the construction and infrastructure shares remained well supported and continue to benefit from very high activity levels in the markets in which they trade. With a long period of under-investment and fairly good short-term visibility the outlook is likely to remain positive. Your fund continues to be well positioned to benefit from this theme, although we are mindful of the high valuations of some shares. The strong commodity cycle supported the local currency and resulted in modest gains from rand hedges. We do not expect this to continue indefinitely. During the quarter the fund added to MTN and Value Group. New counters introduced to the portfolio were PPC (through the unbundling of Barloworld), M&R, Stefanuti and Supergroup. Shares trimmed back included Barloworld, Telkom, Basil Read and Sun International, while the fund's entire holding in AVI, Enaleni, Verimark and Datatec was disposed of.

The return from industrial shares is expected to be more muted going forward given the deterioration on the macro-economic side. Earnings growth will underpin the market, but a more cautious approach is warranted. We still see value in selected industrial companies, but stock picking is probably more important than ever. Investors should look to diversify their investments.

The second quarter was a good one for the fund although the return from the market was a bit lower than that experienced recently. The market was characterised by rising bond yields, both locally and internationally, on the back of higher growth rates and a slight surprise on the inflation side. Notwithstanding the bond yields moving up and prime rising yet again by ½%, with potentially further interest rate increases to come, the rand remained relatively firm against most developed currencies - supported by strength in the mining area. Rising bond yields typically lower equity returns and a more cautious stance is now warranted. Notwithstanding this, earnings growth remains robust, providing an underpin to equity returns. For the quarter the INDI 25 was up 4.1% supported by strong overseas markets notwithstanding the rising bond yields. (Note: This return excludes the additional return from dividends.) Overall returns for investors in the INDI 25 for the year are now a very respectable 9.5% for the six months (again excludes dividends). For the quarter shares that performed well-included Simeka BSG (+33%), Basil Read (+26%), Shoprite (+18%), Sappi (+17%), Advtech (+14%) and Oceana (+13%)

The key theme of the quarter was the deterioration on the consumer side, with some discretionary retailers down significantly during the quarter. The market is likely to adopt a more cautious outlook and with the prospects of further interest rate increases likely the background is likely to remain muted. The fund was correctly positioned for this and we continue to remain cautious. The other broad macro-trends were again the construction and infrastructure companies performing well on the back of a robust outlook medium term. IT shares also continued to benefit from increased activity and reinvestment by many corporates to build capacity for future growth. The fund remains well exposed to these themes, although we are aware of the high expectations being built in to some companies. During the quarter the fund was relatively inactive, with additions to Datatec and Value Group. New counters introduced to the portfolio were Country Bird and Sovereign Group - both chicken producers. Shares trimmed back included Richemont, Steinhoff, Mr Price, MTN and Basil Read, while the fund's entire holding in Ellerines was sold.

The return from Industrial shares is expected to be more muted going forward given the deterioration on the macro-economic side. Earnings growth will underpin the market but a more cautious approach is warranted. We still see value in selected Industrial companies but stock picking is probably more important than ever. Investors should look to diversify their investments.

The year started off well, although with increasing volatility and without much assistance from international markets. Modest currency weakness and continued strength in the mining area broadly supported the market. Interest rates were relatively stable with government bond yields relatively flat over the period and CPI and PPI being relatively well contained. The market remains of the view that interest rates are likely to remain flat over the year although there may be a short-term rise in inflation before it recedes later on.

For the quarter the INDI25 Index was up 5.2% as strong results were generally reported supporting the market. (This return excludes the additional return from dividends). Shares that performed well were biased towards the infrastructure and IT themes amongst others, with particularly strong performance from Basil Read (+55%), Altron prefs (+36%), Advtech (+30%), Didata (+21%), Mr Price (+18%), Datatec (+18%), Telkom (+17%) and MTN (+16%). The necessity of investing long term was again demonstrated in the fund, with the IT shares performing relatively well. Activity levels in the IT space have again picked up both locally and internationally - which we see as a theme with some longevity and which differentiates the fund from most of its competitors. For quite some time these shares have moved sideways but have recently attracted more interest. Exposure to this sector was also increased with the introduction of Simeka - the broad-based IT services company.

Other themes playing out were the construction and electronic companies. Notable performance was achieved from newly introduced company Altron and we expect the company to continue benefiting from the broad power upgrades generally going on in the country. The telecoms companies also performed well, with MTN producing particularly strong results. The companies invested in continue to benefit from high activity levels generally in the market although in general we are cautious on valuations given the prolonged up-cycle we have enjoyed for some time. During the quarter the fund was reasonably active, with the following counters added to: Altron, Value Group, Barloworld, Naspers and Steinhoff. New counters introduced into the fund were Top Fix and Simeka. Holdings lightened included Basil Read, Richemont and Mr Price.

Shares sold outright included Imperial and Bidvest. With the market having performed well and with valuations looking fairly priced, performance will be driven more from earnings than any further re-rating in the market. Fortunately the economic outlook remains reasonable. We would expect a fair performance from the fund for the remainder of the year, but nothing dramatic. Investors should look to diversify their investments.

Taking the lead from offshore markets the fourth quarter was an exceptionally good one and for industrial shares in particular. This was notwithstanding rising local and international interest rates and some strength in the rand (particularly against the $). The SARB raised interest rates by 1% during the period with two rate adjustments of 50 bps respectively. The rand strengthened by about 11% against the $, closing the year at 6.97 R/$. Nevertheless the inflation environment looks well contained notwithstanding strongly rising food prices. Inflation expectations as embedded in the bond market saw the R153 close at 8.16% the end of December from 8.63% - a not insignificant movement over the period, supporting the local equity market. For the quarter the INDI 25 Index was up 18.2% for the quarter and 37.8% for the year - as the market continued to benefit from a robust earnings outlook and a further re-rating of our market. (These returns exclude the additional return from dividends.) Shares that performed well during the period were biased towards the local shares, with particularly strong performance from Naspers (+39%), MTN (+35%), Mr Price (+33%), Johncom (+29%), Basil Read (+29%), Imperial (27%) and Barloworld (+27%)

The fund continues to be balanced between value and growth with neither style excessively priced besides one or two sectors where we would focus on specific undervalued shares. We will continue to increase our offshore exposure indirectly as we see more broad-based value here, particularly if the resource cycle should weaken somewhat. Locally infrastructure remains a theme with some longevity although one needs to be circumspect on where to invest, with over-valuation in many shares. We remain cautious on discretionary retail and continue to reduce our exposure here. The market has made heroes of some companies and as always one needs to be circumspect on valuation given the strong market we have enjoyed over a number of years. During the quarter the fund was active, with Basil Read, Altron, Barloworld, Oceana, Steinhoff, Mr Price and Rembrandt added to and new counters introduced in the form of Value group and Zeder. Holdings lightened included Imperial, Ellerines, Italtile and Naspers. Shares sold outright included Aspen, Lewis, Massmart, Bytes Technology and Britvic.

The outlook remains positive fundamentally although valuations look full. The fund will continue to seek miss-priced opportunities. Given performance to date and the high rating of the market investors should be more circumspect on the returns they can expect from the fund. Diversification is key and a more cautious approach is likely to be adopted by the fund in future.