Global capital markets experienced elevated levels of volatility during the third quarter as major risk aversion by investor's resulted in a large selloff in growth or risk assets as characterized by the -5.8% return produced by the FTES/JSE ALL Share Index. In September alone, the Rand depreciated by 15.7% and 7.8% relative to the US Dollar and the Euro respectively. We believe that this selloff in the Rand has little to do with domestic fundamentals, as the Rand has weakened against the US Dollar in line with other emerging market currencies. The primary cause of the dramatic change in global investor risk appetite has been deterioration in the growth prospects of advanced economies (especially the Euro zone and the US), from which emerging economies are unlikely to escape unscathed. The Euro zone is likely to go into recession unless the participating EU nations can efficiently and effectively come to agreement with regards to solving the Greece debt crisis. The divergent views amongst European politicians suggest that there is no easy short term 'quick fix' solution implying the uncertainty and volatility in markets is likely to persist for a while longer.

At quarter end, the fund's had 50% exposure to domestic equities, 17.6% exposure to cash, 9.1% to SA Bonds and 5.9% exposure to SA Listed Property. The remaining exposure (17.8%) was held in global assets of which 72% was held in global equities. Domestic equity exposure in the portfolio reduced during the quarter as the managers sought protection in the more defensive assets of cash and bonds. Investec were primarily responsible for this move, whilst Cadiz opted to remain fully invested to benefit from attractive equity valuations. Whilst this, together with their large exposure to resource shares, has paid off handsomely in October, it detracted from performance during the quarter.
Looking forward, we are confident that the current positioning of the overall portfolio will ultimately be rewarded as the current whirlwind of macro-economic noise blows over and the market sits up and takes note of the attractive global equity valuations relative to other assets classes. Within equity we like the exposure to resources given the massive cash flow generated by resource companies at the moment and the extreme low valuations of the sector (8x forward PE) relative the broader market (10x forward PE). If the returns in October are anything to go by, it would appear that our confidence is well founded.

The fund changed sectors from Domestic--Asset Allocation--Prudential High Equity to Domestic--Asset Allocation--Prudential Variable Equity on 02 Nov 2011

Local equities were essentially flat for the quarter and have not advanced for the year to date. This consolidation was perhaps to be expected given the huge rally in the 04 2010 and the onset of some rather disappointing macro-economic news in 2011. Following the Japanese Tsunami in 01, focus shifted to the sovereign debt problems within Europe and the "soft patch" emerging in the US economic growth path. In South Africa nonresource rand hedge shares (SAB, BTI and Richemont) performed well, as did interest rate sensitive consumer shares on the expectation that the first interest rate hike has been pushed into the 01 2012. Large cap resources were the key detractor from retums during the quarter as economic sensitive assets struggled in a soft economic environment. SA Bonds were up 3.9% with property (+5.0%) and income (+2.2%) also benefiting from this trend. Cash produced a 1.4% retum for the quarter, whilst inflation registered a 4.6% y-o-y gain.

Pleasingly, the Fund produced a positive retum for the quarter ahead of its new peer group in the Domestic Asset Allocation Variable Equity category (incidentally significantly ahead of its old peer group). Over the past 12 months the Fund has produced a return of 16.6%.

Having undergone major manager changes in 01 2011, the asset allocation of the Fund settled down, with equity exposure finishing 02 at 66.6% (54.2% local and 12.4% global). Following the up weighting of global equities during the March weakness, we again used the weakness in June to up weight the global equity component of the Fund. Not only was timing good, but global equity (in Rands) outperformed local equities for the quarter. The Fund benefited from a 4.6% and 7.6% exposure to local property and bonds respectively, which performed well during the quarter as expectations on interest rates changed. Both Investec and Cadiz produced positive retums for the quarter however Cadiz outperformed, primarily due to better downside protection in June thanks to lower equity content. At this early stage, it is pleasing to note the diversity in each of the managers' portfolios.

Looking forward, we remain concerned that macro-economic fundamental noise continues to dominate equity valuations in driving the market. Whilst this may remain the case for 03, we anticipate that when valuations reinsert themselves as the key driver of markets again (04), the Fund will enjoy a strong period of absolute and relative performance given its current positioning.

The STANLIB Multi-Manager High Equity Fund of Funds will change it's name to STANLIB Multi-Manager Balanced Fund, effective from 11 March 2011.

Global stock markets ended the year with a strong quarter, continuing their run from September. Investors reacted positively to both solid and weak economic data releases, with the latter increasing the likelihood of a second round of quantitative easing (money printing), which became known as QE2. The Fed delivered QE as expected on November 3rd. The All Share Index gained (+9.5%) for the quarter, with the rally led by small caps (and then large caps) and resource stocks. Property lagged (+3.1%) with the benefits of low inflation / interest rates already largely priced in. Income (+1.8%), cash (+1.4%) and bonds (+0.7%) produced positive returns with the middle of the curve outperforming. Global equities ($) gained (+8.7%), but global bonds lost ground ($) (-1.3%); due to rand strength, the rand returns were weaker at +3.7% and -5.9% respectively.

On a see-through basis, we were overweight local equities and neutral global equities, relative to benchmark at quarter end (we have been sellers of local equities into market strength, partially switching into global equities). We were underweight bonds (and had relatively low duration), having made some timely sales during the quarter, with favourable inflation data and the interest rate down cycle drawing to an end. We ended the quarter with our foreign exposure underweight relative to benchmark due to continued rand strength. Looking forward, we will continue to look for opportunities to tactically tilt the Portfolio to favourably positioned asset classes, with the objective of enhancing portfolio performance.

The Portfolio ranked 9/15 amongst its peers for the year, over which period our building blocks performed well versus their respective benchmarks - particularly our property and real return building blocks, ranking 3/21 and 10/46 respectively. Over the past 2 years the Portfolio has delivered a return of 16.1 % per annum, ranking 8/14, and in line with peers