Global factors were the primary driver of local investment returns during the quarter, where SA equities were worst hit (-20.6%). The allowed failure of Lehman's, meant to set an example to other financial institutions, sparked a confidence and credit crisis that was perhaps worse than the Fed expected resulting in massive rescue packages and the unprecedented coordinated cut in interest rates. The amount of liquidity being pumped into the system to restore borrowing and lending would also appear unprecedented and whilst this may be negative for economies in the long term, the Feds' priority is clearly to do everything in its power to stabilize the financial system in the short term so as to restore confidence.

We have adopted a cautious approach to managing money in this difficult time purely because there are too many unknowns to take aggressive bets. We have been underweight equities, both locally and globally, relative to benchmark and significantly overweight cash. We are also underweight both bonds and property on a short term tactical basis as we feel that inflation and subsequently interest rates are likely to stay higher for longer than consensus is expecting. The inclusion of foreign assets in this portfolio in June 2008 has also provided good diversification and support as the Rand has weakened more recently. We are overweight foreign assets, particularly foreign cash.

Although the Portfolio was ranked 7/10 over the past 12 months, it was ranked 2/11 amongst its peers for the quarter demonstrating some defensive qualities in troubled times. The improved performance of our equity portfolio, where we have remained underweight resources all year, has also contributed to this strong showing. We will be monitoring market conditions closely going forward and will take advantage of irrational "distress selling" to selectively up weight equities should the economic picture become clearer as local valuations (on a 5-year view) appear attractive should consensus earnings not be downgraded too significantly.

It was a very similar quarter to the 1st given that there were few places for investors to hide. A handful of equities ensured that the equity market (+3.4%) finished in positive territory for the quarter but the vast majority of shares declined in line with the deterioration in global sentiment and an increase in risk aversion. Bonds (-4.9%), income (-1.3%) and property (-19.6%) all suffered under the pressure of higher interest rates and a surge in inflation, which reached 10.9% in April. Cash produced a safe 2.9% for the quarter. The rand strengthened around 3% relative to the major currencies, whilst global equities (-1.4%) out performed global bonds (-4.4%) in dollar terms as global inflation, and the threat of higher interest rates to counter it, took centre stage. In this context, the Portfolio performed well during the quarter.

The underlying portfolios delivered pleasing results relative to their respective benchmarks. Whilst there were no manager changes during the quarter, the Portfolio altered its long-term strategic asset mix to include a 15% allocation to international assets, whilst attempting to maintain the Portfolio's existing risk and expected return characteristics. The mix between these international assets is 60% global equities, 30% global bonds and 10% global cash. The global equity and global bond components are multi-managed by STANLIB Multi-Manager and our international partners based in London, using a proven and successful institutionally orientated manager selection and portfolio construction process. The added benefit of geographical diversification and the rand hedge qualities now ensures that this Portfolio creates the complete packaged solution for investors in the moderately aggressive space.

The composite benchmark of the Portfolio changes to the new asset allocation with effect from 1 July 2008 and we will continue with our successful policy of taking small tactical positions around the new benchmark. We have largely closed out our underweight equity and property positions and stand ready to invest our overweight cash position in interest rate sensitive assets on the first signs that we have reached the top of the interest rate cycle.

The equity market started the year on a positive note, with the All Share index up 2.9% for the quarter. This is a bit misleading as performance was driven by resources (+17.6%) and most general equity managers are underweight resource shares relative to financials (-12.7%) and industrials (-6.4%). Resources were buoyed by higher commodity prices and a depreciating Rand, whilst financials and industrials were hurt by higher inflation data and the subsequent increase in interest rates. We marginally reduced our underweight exposure to equities during the quarter. Bonds (-1.9%) provided limited diversification in this climate and we continue to underweight bonds relative to equities. Overweight exposure to cash (+2.6%) was beneficial however not enough to overcome the relative underperformance of our equity managers (driven by a lower exposure to resources), resulting in overall fund underperformance relative to benchmark for the quarter.

Although some of our equity managers did better than others, the equity component of the portfolio was underweight resources and underperformed its benchmark. The bond, income, cash and property components outperformed their respective benchmarks. Within the bond portfolio, STANLIBAM was removed and replaced by Coronation following the distancing of Henk Viljoen from the STANLIBAM decision-making process. STANLIBAM was also down weighted in the property portfolio following the resignation of Mariette Warner. We continue to rate these franchises within STANLIBAM but feel that improvement within the other management houses warrants the changes. Although having recently up weighted equity exposure the portfolio remains defensively positioned given the low PE value nature of these equities. As inflation is surprising on the upside and will remain higher for longer we are comfortable with our underweight bond exposure. In this environment cash provides good low risk, high return qualities and we are therefore comfortable with our 5.9% overweight position relative to benchmark.