Global stock markets continued their march upwards driven by a combination of improving U.S. economic data, the release of better than expected earnings and a low interest rate environment that favoured risky assets. This was positive for capital flows into South Africa, which pushed the All Share Index up 13.9% for the quarter. Property (+12.2%) participated in the rally as the global hunt for yield resumed despite slowing income growth. Bonds (+3%) and income (+1.9%) also produced positive returns but lagged riskier assets. Pleasingly the real return component (+5.3%) outperformed cash (+1.9%) and we continue to believe that this will be a good substitute for cash over the coming years. In dollar terms, global equities (+17.9%) and global bonds (+6.2%) benefited from the increased risk appetite however this was more muted in Rand terms due to Rand strength. The Portfolio performed in line with its benchmark and was ahead of peers for the quarter. Over the past year the Fund produced a positive return of 5.2% but disappointingly lagged peers due to its more aggressive positioning.

Following the annual optimization of the long term strategic asset allocation of the Portfolio, we implemented a minor change to the fund's composite benchmark in September, reflected elsewhere in this factsheet. The property exposure in the benchmark was raised from 5% to 7.5% at the expense of bonds. We continue to manage actively around the benchmark, however given the benchmark changes during September our positions appear quite close to benchmark. Although the equity market has priced in a lot of good news and is vulnerable to disappointment, we would not be surprised to see current momentum continue over the remainder of the year. Accordingly we have increased our equity exposure post quarter end. On a see through basis the Portfolio inherits a large bond position from its holding in the real return portfolio however a large chunk of these are inflation linked bonds which are attractively priced relative to traditional government bonds, which we are underweight.

Global stock markets had an excellent second quarter, continuing their rally from the March 9th lows. Investors quickly latched onto the "green shoots" theme as data releases became less worse, and the rally gained momentum. The ALSI retumed 8.7% for the quarter. Property did not participate in the equity rally with the SAPY down 0.9% for the quarter, as investors began to worry about distribution growth normalizing and the threat of rising vacancy rates. The ALBI was basically flat at +0.3% for the quarter. The yield on the SAGB1 0 rose from 8.6% to 9.0% as investors began to worry about massive new issuance and sticky inflation. Income (1-3 year index) fared better than bonds, gaining 1.4%.

We remain sceptical at this point in time as to whether the global economy is on the path of a self-sustainable recovery and would like to see a continuity of data improvements for a sufficient length of time to convince us that what we are currently experiencing is something more than statistical noise. At quarter end, we were slightly overweight local equities relative to benchmark. In retrospect, the timing of our tactical equity purchases was extremely prescient. In line with our fundamental views, we took the opportunity to sell a large portion of our tactical purchases into market strength (in early June) so as to lock in profits. We reduced our underweight to bonds towards quarter end as yields picked up. We remain overweight cash. The Rand strengthened dramatically versus the dollar over the quarter, reducing our foreign exposure to an underweight position; we remain underweight global equities.

The Portfolio was ranked 7/10 amongst its peers for the quarter and 5/10 for the past 12 months. Pleasingly all of our domestic building blocks outperformed their respective benchmarks. We continue to look for opportunities to tactically tilt the portfolio to enhance performance.

Global stock markets began the year on a positive note with investors optimistic on the Obama stimulus plan. This optimism was short lived however, as US labour market and factory orders data disappointed. Markets sold off further when Tim Geithner's highly anticipated "Financial Stability Plan" was branded as vague. Concerns about US bank nationalization and a spate of deteriorating global data releases pushed markets into a nosedive from around mid February onwards, finally bottoming on March 9 (the ALSI exhibited relative strength, bottoming on March 3). Markets then rallied through March 27, on news of Citibank and Bank of America returning to profitability, the Fed's dramatic step-up in quantitative easing by announcing it would purchase US Treasury bonds, and the data releases suggesting that the US housing market may be nearing a bottom. Despite this rally, it was still a negative quarter, with S&P 500 down 11.7% and the ALSI down 4.2%. Bonds also lost ground (-5.1%), as did property (-1.4%); income bucked the trend gaining 2.3%.

We continue to adopt a cautious approach, as it is likely that the recovery will be U-shaped accompanied by heightened volatility. However, we are now more optimistic than before, as the actions taken by global central banks appear to have been successful in stabilizing the system. At quarter end, we were overweight local equities and we had reduced our underweight to global equities (assisted by timely tactical purchases), relative to benchmark. Early in January, we went underweight bonds and property relative to benchmark, as we believed most of the "good news" was priced in; we maintain this view. We ended the quarter marginally underweight in cash. The Rand was flat for the quarter versus the dollar, and our foreign exposure was marginally underweight its benchmark.

The Portfolio was ranked 5/11 amongst its peers for the quarter and is now ranked 5/11 for the past 12 months. The ranking for the past 6 months (9/11) is disappointing due to a higher weighting in equities (as it has a higher minimum allowed exposure to equities compared to peers). We continue to monitor conditions closely and will take advantage of irrational "distress selling' to selectively up weight equities should we feel that valuations are compelling based on a 5-year view.

Global stock markets accelerated their down move during the quarter as the financial crisis deteriorated and began to impact the real economy. In the U.S., employment stats, retail sales, industrial production, construction and housing data, and a host of other data weakened, with many new lows recorded. Most markets reached significant lows on November 20th, but managed to rally thereafter and recoup some of their losses. At its lowest close, the ALSI was down 25.0% during the quarter. It ended the quarter down 9.2% with Resources recouping a large portion of their losses. Interest rate sensitive assets rallied during the quarter (bonds +11.4%, property +8.5%, income +5.5%) as investors focused on lower inflation expectations and began to anticipate significant interest rate cuts, the first of which occurred in December 2008.

We continue to adopt a cautious approach as it is likely that the recovery will be U-shaped accompanied by heightened volatility. We went marginally overweight equities due to performance. We remain underweight global equities and overweight cash. Towards year end, we went slightly overweight bonds and reduced our underweight to property on a short term tactical basis, correctly forecasting that the bond rally would maintain its momentum. Early in January 2009 we booked some profits returning to our underweight position to bonds, believing that most of the "good news" was priced in. Our foreign exposure continued to benefit the fund on an absolute basis, as the Rand blew out during October (along with most emerging market currencies), ultimately weakening 13.5% to the dollar for the quarter.

The Fund was ranked 8/10 amongst its peers for the quarter. Over the medium term its rankings have been disappointing due to a higher weighting to equities (as it has a higher minimum allowed exposure to equities compared to peers), but its long term rankings remain solid. We continue to monitor conditions closely 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 significantly.