The All Share Index rose by 23.6% for the nine months ended September 2006. The Index (excluding dividends) is up 203% since it bottomed in April 2003. The price-to-earnings multiple has almost doubled from 8.5 times to 16.5 times over this period. Notwithstanding a sound economic outlook for South Africa investors should expect a more moderate return outlook in future.

An important feature of the quarter was the depreciation of the ZAR. Notwithstanding the ZAR weakness, the Resources Index underperformed the All Share Index by 5% over the quarter. This has been driven mainly by the emergence of macro-data suggesting a global slowdown may be commencing. The interest rate cycle in the US is already impacting the world's largest economy and the slowdown in the US housing market is likely to lead to a slowdown in the overall growth outlook. The effect of slowing demand coupled with rising supply should drive commodity prices lower. It is our view that the commodity cycle has peaked, with the next major move being down.

In general the more defensive rand-hedge counters outperformed as the currency weakened 8.4% against the USD to 7.75 from 7.15. Sentiment towards the ZAR took a beating with the surprisingly large current account deficit and the exoneration of Zuma on corruption charges. Construction counters came through with surprisingly strong earnings growth and with the added underpin of the infrastructure story have put in a solid performance. While we are of the view that these counters are now overvalued, there might be some momentum here yet. Other counters with a fairly reasonable growth outlook, like MTN and Netcare, also featured strongly.

Following the surprise interest rate increase in June a further 50bp was added in August, which was expected. We're expecting at least a 50 bps increase in October and probably another in December. However, both inflation and credit extension have remained stubbornly high. PPI is accelerating and might be signalling some of the second-round effects of higher fuel prices and a weakening currency. The Reserve Bank governor has expressed concern over consumer buoyancy, which has weighed on interest rate sensitive stocks, retail in particular. Consequently these counters look very attractive from a relative rating and dividend yield perspective and this did result in some price recovery towards the end of the quarter. However, on a fundamental basis we consider most of the consumer-credit retailers to be fully valued. Furthermore, the intended imposition of import quotas on apparel from China has created significant uncertainty for clothing retailers - the delaying of the imposition thereof to January 07 seems to have relaxed the market somewhat but the challenges remain.

Our view is unchanged from the last quarter. We believe that the market is now trading closer to its fair intrinsic value. It is fair to say that we have a more moderate view on the expected return outlook for the market.

With the market getting off to such a fantastic start in the first quarter, the second quarter has by no means been a dull one. The volatility has been extreme, with the market declining by 17% from its peak on 11 May to 13 June only to recover most of the losses by the end of the quarter. The All Share Index ended the second quarter higher than where it started (up 4.4%). It is certainly fascinating how conditions can change within a six-week period. With both the Federal Reserve Board (US) and the European Central Bank retaining a hawkish interest rate stance on the back of inflationary fears, and the South African Reserve Bank reacting to a very weak trade deficit, strong growth in money supply and fears that inflation may creep back into the system, it is no wonder they reacted with a 50 basis point interest rate hike. We don't believe it is over yet. It is likely that we will see another 50 bps interest rate hike in August and possibly another one in February. The sell-off in the rand was mainly on the back of the weak trade deficit. However, it is our view that the rand will stabilise at between R7/USD and R7,50/USD. It is also our view that inflation is likely to peak at approximately 6% over the next few months, but then to recover well within the inflation target of between 3% and 6%. With this in mind, we're likely to see some moderation in consumer spending; however, we remain positive on the general outlook for growth in South Africa.

The volatility in the market was evident in the divergent performance of many of the stocks represented in the fund. Anglo, Billiton and Goldfields surged by 24%, 23% and 21% respectively in the quarter, while Tigerbrands, Telkom and Imperial declined by 17.5%, 18% and 21% respectively. Consumer-related stocks in particular (especially the clothing and furniture retailers) performed poorly on the back of the interest rate hike and fears that the Reserve Bank is likely to continue raising interest rates in the short term (this fund has no exposure to the clothing retailers). The more cyclical rand-sensitive resource stocks, on the other hand, benefited from the blow-off in the rand over the quarter. However, with the expected moderation in the global growth outlook, commodity prices have started to show signs of moderating. This is evidenced by the 15% drop in the Economist Metals Index from its peak reached in mid-May.

With the ALSI historical PE ratio at 16.8 times (one year forward at 13 times), it is by no means the good value that it was when the market bottomed in April 2003 (when we were able to buy assets on 8 times PE ratios). We believe that the market is now trading closer to its fair intrinsic value. It is fair to saythat we have a more moderate view on the expected return outlook for the market. Suffice it to say that equities remain our preferred asset class.

Who would’ve thought that the year would get off to such a strong start? The All Share Index rose by 12.5% in the first quarter. As we indicated in our previous quarterly review, we’re positive on equities for 2006 and believe that equities have greater upside potential than all the other asset classes (inabsolute terms and on a risk-adjusted basis), but we certainly did not think that the first quarter would be so robust. Some of the stocks that performed well over the quarter, and which are represented in the fund, include: Nedbank (up 29%), Implats (up 25%), Bidvest (up 23% - note: the performance of the Bidvest options has been phenomenal), Imperial (up 22%) and Netcare (up 20%). With the general surge in commodity prices, we’re of the view that they’re generally trading above their sustainable and normalised levels. The current oil price of $66 is well above its long-term average (adjusted for inflation) and the political and supply-side risks are more than adequately priced in. The Economist Metals Index reached another all-time high. The commodity price strength has by no means been unfounded given the general strength in global economies and in particular China and India.

However, the best-performing sector on the JSE (for the first quarter) was the construction sector. The sector rose by 35% in the first quarter. This was on the back of another theme that we believe will play itself out over the next few years. With the government diverting its attention to infrastructural spend, the objective is to increase the contribution of gross fixed capital formation from its current 16.8% level to approximately 25% over the next few years. The risk to this target is not the lack of funding, but rather the lack of capacity to potentially achieve the target. Nonetheless, we believe that the focus on infrastructural spend will ultimately assist in further job creation and the alleviation of some of our unemployment problems.

Although Government’s target of growing GDP at 6% may be on the high side, we still believe that the domestic economic fundamentals remain robust andsupportive of further sustainable growth (well above trend growth) in the medium term.

With the ALSI PE ratio currently at 16.5 times, it is difficult to argue that there is exceptional value (we could argue this in March 2003 when the market was trading on a forward PE ratio of 8 times). However, given our expectation of 28% earnings growth, the forward PE ratio of 13 times is reasonable given the exceptionally strong economic outlook. Hence, notwithstanding our concerns regarding the valuations of resource stocks generally, we are of the opinion that the rest of the market provides sufficient upside for us to believe that equities remain the preferred asset class.

Signs that Sanlam General Equity Fund (SGE) was finally putting years of shoddy returns behind it became evident in September last year. The improvement has continued and, for the first time in longer than most unit holders care to remember, SGE appears to be on the right track.

SGE's manager, Claude van Cuyck, is determined that it will stay on track. He says a key factor is the stability of Sanlam Investment Management's (SIM) senior staff, which has seen virtually no change in over three years. But SGE's real winning edge, says Van Cuyck, will come from applying the house view "with a moderately more aggressive overlay". This is the approach he applied with great success during his three years as Sanlam Industrial Fund's manager.

It is an approach that at times means taking a bold view - one that differs from general market thinking. One of the more notable features of SGE's portfolio is the absence of Sasol. "We feel Sasol is overvalued," says Van Cuyck. Rightly or wrongly, it is a view that has stood SGE in good stead since late 2005 and proved spot on since Sasol's share price began sliding in February.

SIM's stance on resource shares in general is cautious. Though Van Cuyck concedes that momentum could still drive resource share prices higher, he believes most have overrun their fundamentals. Anglo, SGE's top holding, could be trimmed in due course, he adds.

Van Cuyck's big hopes are pinned on domestic industrials and financials. "I am extremely positive on local dynamics," says Van Cuyck. SIM expects the financial and industrial index, driven particularly by industrials, to have average earnings growth of 19%-20% over the next 12 months. This would place it on a modest forward p:e of about 12,5.

Share selection is also vital, something Van Cuyck says SIM has well in hand, particularly in respect of pockets of above-average value still to be had.

SGE is in with a fighting chance to perform well this year. Van Cuyck's strategy should also appeal to investors wary of funds now taking an extreme, bullish view on resources.

Financial Mail - 03 March 2006

Strong price momentum continued into the last quarter. The All Share Index rose by 7.7% for the quarter, to end the year up 47.3%. The financial sector was the best-performing sector for the quarter, gaining 11.7%, while resources took the honours as the best-performing sector for 2005 with a return of 71.5%.

2005 was a good year for global emerging markets. With inflation and interest rates generally in check and emerging-market economies remaining buoyant, global investors have been less risk averse. This, together with the strong South African economy and strength in commodities in general, has led to a significant rerating of the JSE.

The resources sector has been supported by a general surge in commodity prices as global economies remain strong. In particular,growth in industrialising countries like China and India is fuelling additional demand for resources, and the Economist Metals Index is close to a peak last seen in 1988.

The exceptional performance from the resources sector, however, should not take the shine off the strong performance from the local industrial sector. A consumer-led boom over the past few years has been driven by the low inflation and interest rates, tax benefits and social grants, increased asset prices (mainly property) and access to credit (as debt service costs have been low). Apart from the local manufacturing sector, which suffers from the strong rand, South African industrial companies have shown a general trend of strong revenue growth, driven by volumes as opposed to pricing power, improving margins and cash flows, and improved ability to pay dividends.

We are optimistic about the outlook for 2006. The South African economy has been well managed and the government is turning its focus to infrastructural spending to remove bottlenecks and increase growth potential to 6%. While we feel that this is a "stretch target", we are optimistic that growth in the local economy will remain buoyant and support domestic shares.

Although the long-term outlook for commodities is likely to be supported by demand from the likes of China and India, we maintain that the resources sector is generally overvalued. We believe that "through-the-cycle" valuations for many of our resources counters are lower than their current levels. We still see more relative value in the local industrial and financial sectors, and have weighted portfolios accordingly.