Volatility continued to increase in the third quarter and the investing environment remained difficult. This was partly a function of the continued fallout from the sub-prime crisis overseas, which worsen further. With economic conditions looking to slow globally - resource shares retreated significantly after a very strong six months at the beginning of the year. So, while the economic environment locally improved somewhat - with the oil price dropping by over $40 over the quarter and the 10-year government bond yields declining from 10.72% to 8.86%, almost 200 basis points, in anticipation of lower interest rates going into 2009 - the broad business outlook continued to deteriorate somewhat. Most of the weakness in the market was a function of a broad derating in the market in anticipation of generally weaker conditions to come, particularly globally but also locally, but also investors' increasing aversion to equities as capital is being more cautiously deployed Internationally. During the quarter the MSCI World Index was down 17% in dollar terms. Notwithstanding the weak global market and the resource cycle reversing materially, the rand was fairly stable and actually strengthened over the period, except against the USD, which staged a recovery against the euro. Earnings locally continue to be revised down slightly, although there remain areas of strong earnings growth. Internationally the risk is of a protracted downturn although this is not our core scenario.

For the quarter the INDI25 Index produced a return of -7.0% and for the year -11.9%, impacted by this weaker environment (both figures exclude the additional return from dividends). For the quarter, shares that performed well include Mr Price (+48%), Value Group (+32%), WBHO (+32%), Shoprite (+18%) and M&R Holdings (+10%). It was pleasing to see the fund's international investment in Berkshire Hathaway up 10% in dollar terms in what has been a turbulent time in the US. In terms of changes to the fund, new holdings were introduced through Imperial, SAB Miller, Netcare and JD Group. Additions were made to Rembrandt, Mr Price, Telkom and Supergroup. Shares disposed of outright were Barloworld and ArcelorMittal. The fund also trimmed holdings in Altron and M&R Holdings.

Although the broad environment for investing in industrial shares is weak, there is reasonable to good value in a broad range of industrial counters. Stock picking is key. Investors will need to be a little patient in the short term and the current global slowdown could last for some time. We will continue to focus on those opportunities were best value exists even in the most difficult of economic conditions. As always, investors should diversify.

The second quarter started off with a slight a recovery, which subsequently retreated as local and international economic conditions continued to deteriorate. This was compounded by an oil price that rose by over 40$ in the quarter, and generally rising interest rates locally and abroad. The local 10-year Government Bond Index rose by over 1.5%, which was a considerable move. Against this background local shares struggled, especially in the small and mid-cap area. We have generally been selling out small and mid-cap shares, unless the valuation remains too attractive.

International markets also performed poorly, with most in negative territory. Inflation concerns have become more pervasive and the earnings outlook has become more subdued. We expect this trend to continue. We continue to invest locally where there is relatively more earnings certainty, and internationally where it makes sense. The polarisation in the market continued, with resource-based shares continuing to perform. Should the weaker economic environment worsen overseas, there is a possibility of a weakening of the rand. We continue to favour companies with the potential to benefit from rand weakness, although this must not be the primary reason for owning them. With bond yields remaining weak during the period the currency performed relatively well after a very weak first quarter.

For the quarter the INDI25 Index produced a return of -1.6% and for the year -2%, impacted by this weaker environment (both figures exclude the additional return from dividends). For the quarter shares that performed well include: Value Group (+30%), Naspers (+21%), Telkom (+8%), Oceana (+5%) and Shoprite (+4%). There were a number of counters that performed poorly and which were added to where considerable value exists. Examples of these are Sovereign Foods, Supergroup and Barloworld. All three are trading close to or below NAV. While no near-term catalyst exists, patient investors will be well rewarded in time. New holdings were introduced in the form of ArcelorMittal and Wilson Bayly Holmes.

On the International side, the fund acquired some Berkshire Hathaway shares after long deliberation. A small portion of cash was also converted into dollars. On the sales side Advtech, MTN, Reunert and Blue Label Telecoms were sold outright and Naspers, Telkom, Murray & Roberts and Zeder were trimmed.

While the broad environment for investing in industrial shares is weak, there is reasonable to good value in a broad range of industrial counters. Stock picking is key. Investors will need to be a little patient in the short term as the current global slowdown could last for some time. We will continue to focus on those opportunities were best value exists even in the most difficult of economic conditions. As always, investors should diversify.

Sanlam Industrial Fund changed its name to SIM Industrial Fund on 1 August 2008.

The first quarter of the new financial year saw a continuation of the fallout from the International sub-prime crisis, a continuation of the high commodity prices and a somewhat softer currency as the rand weakened, with the domestic non-mining and non-construction economic outlook deteriorating. Consumer confidence fell sharply following Eskom's supply disruptions and an indication that future supply would need to be carefully managed for some time. Higher oil and food prices and a weaker currency, as well as the risk of further interest rate hikes, led to an overall derating of industrial shares.

Financial shares were more severely impacted as the international sub-prime issue continued to weigh on the rating of local financial shares as well. Although interest rates remained flat during the period, the risk remains to the upside following some negative inflation numbers recently reported and oil and food prices remain high. There is evidence of the second-round impact of higher inflation starting to come through, compounded by the rand which has weakened by over 20% against the euro since the beginning of the year. In this more somber environment almost all industrial shares retreated during the quarter.

Short-term earnings were generally supportive but concern remains regarding the medium-term outlook. We were not alone and generally all International markets retreated during the period. For the quarter the INDI25 Index produced a return of -5.5% and +9.4% for the year - impacted by this weaker environment (both figures exclude the additional return from dividends). For the quarter, shares that performed well include Barloworld (Flat), Rembrandt (-1.3%), Richemont (-2.3%), MTN (-4%), Aveng ( 4.7%) and Oceana (-4.8%).

As expected, those counters with a higher exposure to a weakening currency did relatively better than the local shares, with the larger dual-listed companies performing reasonably well. Some rotation was apparent, particularly in industries that performed well in 2007. The fund was not that active in the period. New holdings in the form of Mr Price and Telkom were introduced while existing holdings in Naspers, Steinhoff, Supergroup, Richemont and Altron were added to. On the selling side Freeworld, Stefanutti and Sappi were sold outright. Holdings in Advtech, Murray and Roberts, Rembrandt, Shoprite and Aveng - all of which had done relatively well in the previous year - were trimmed.

After the poor performance in the first quarter a reasonable performance is expected for the balance of the year, albeit not to the same extent as previous years. Earnings growth underpins the market but a more cautious approach is nevertheless warranted. We see selected value in certain industrial shares but are of the view that stock picking is more important than ever. Investors should diversify their investments.

The fourth quarter exhibited relatively less volatility than the previous three quarters and no major theme was evident, with the exception of the continued fallout internationally from the sub-prime crisis. Our financials did not completely escape this trend, but on the industrial side there was relatively less impact. The industrial shares were more impacted by the continuing rising short-term inflation indicators that resulted in the SARB raising interest rates twice by 50 basis points during the quarter, resulting in interest rates now having risen by 4% during this tightening cycle. Inflation pressures continue to persist and are likely to put further pressure on consumer-based companies - particularly in the short-term. Fortunately the fund has relatively little exposure here. Expectations of higher long-term interest rates were again evident with key bond yields moving slightly higher.

Rising interest rates are not great for equities although earnings growth looks reasonable. The INDI25 Index produced a return of 1.8% for the quarter and 15.4% for the year - both reasonable returns. (Note: Both exclude the additional return from dividends.) For the quarter, shares that performed well included Blue Label Teleco (+30%), CBH (+24%), MTN (+23%), Sovereign (+20%), M&R (+14%), Rembrandt (+14%) and Stefanuti (+13%). Rising interest rates continued to weigh heavily on the local shares in particular and during the quarter several shares moved sideways to down slightly. On the other hand there were strong performances in some key sectors, notably the construction and building sector, which continues to outperform albeit at more modest levels. Other key sectors that we had identified earlier in the year were the chicken producers and the food retailers - both sectors performing strongly in the period. In the telecoms sector MTN was a star performer although Telkom disappointed following the collapse of talks with MTN/Vodaphone.

During the quarter the fund was fairly active. Holdings in M&R and Basil Read were added to and new holdings in the form of Aveng, Reunert and Blue Label telecoms were introduced. On the selling side MTN and Richemont were trimmed while the fund's holdings in PPC, Nampak, Sun International, Mr Price, Johnnic Communication and Telkom were sold outright.

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.