The third quarter of 20 1 0 was a phenomenal period for the local fixed interest markets with South African Bonds rallying sharply to deliver an 8% return over the quarter and in excess of 15% over the past 12 months. The strong performance in the bond market has been driven by a combination of the continued aggressive buying of South African bonds by foreigners as well as declining inflation.

The strong demand for domestic bonds has also been the main contributor for the strengthening Rand, firming the local currency by 10% over the quarter from R7.66/US$ to R6.95/US$. Continued Rand strength has been very supportive of domestic inflation which fell to 3.5% in August from 3.7% in July. During September the South African Reserve Bank cut local interest rates by 50bps to 6%, citing the reason for the reduction in interest rates to lower inflation, continued Rand appreciation and a still relatively weak economic environment.

The Portfolio enjoyed a good quarter of performance outperforming both the peer group as well as the benchmark ALBI 1 - 3 year maturity bucket. Cadiz Asset Management outperformed the benchmark over the quarter while the Cadiz Liquidation portfolio performed marginally behind benchmark.

Post quarter end, the Portfolio has been enhanced with the appointment of Prescient Investment Management to the portfolio. Prescient was selected for its valuation and risk management focus as well as their ability to arbitrage trading opportunities. The manager tends to invest in securities with a high probability of performing well through all market conditions while simultaneously providing strong levels of capital protection. The inclusion of Prescient to the Portfolio will allow the Portfolio to be more flexible and less benchmark cognizant as before, enhancing the Portfolio's ability to preserve capital over time.

Capital is currently being invested in Prescient via cash flows and assets being switched out of the two Cadiz portfolios, which when complete will position the Portfolio with an equal exposure to Prescient and Cadiz with a 50% weighting respectively.

Although not cut during the quarter, the MPC cut the Repo rate by 4.5% during the course of 2009. As much of this had been anticipated and priced in by the financial markets in the 4th quarter of 2008, fixed interest returns in 2009 were below the historic averages. Bonds actually produced a -1 % total return whilst income assets were up 7.7%. In this regard cash (+8.4%) proved to be a relative safe place to be and much of the manager performance for 2009 can be explained by a lower modified duration relative to benchmark. Over the quarter, the Portfolio marginally lagged the benchmark and peers, however for the year the Portfolio produced a return of 7.9% return, beating the benchmark by 0.2%.

Cadiz African Harvest performed well as an income manager during the year. The removal of STANLIB AM during the course of the year resulted in the creation of a high yield bucket of illiquid income assets. This handful of assets (representing around 24% of total Portfolio assets) is currently being responsibly managed to maturity by African Harvest in a separate mandate. The majority of these assets are expected to mature during the course of 201 0, which should be beneficial to the Portfolio in terms of performance and liquidity.

South Africa is lagging the fragile global recovery and as such there may still be room for a further interest rate cut. This, together with the current nervousness in the equity market, may prompt a strong start to fixed income markets in 2010. Global and local yields have however risen in response to the increase in risk appetite and the expectation of higher inflation. On a relative basis yields are starting to look attractive and the total return from these markets in 2010 will be dependent on the progression of inflation during the year.