The South African economic climate remained positive during the quarter, as evidenced by strong company profits and above average economic growth. Higher oil prices have however started to impact on inflation, which came in at 4.8% y-o-y in August. Although all asset classes produced positive returns for the quarter, bonds (+1.1%) and income (+1.2%) assets laboured under the threat of a potential reversal in interest rate policy. The equity (20.3%) and property (+14.5%) markets shrugged this off and continued to perform well. Resources (+25.5%) drove local equity returns, thanks to higher commodity prices, whilst interest rate sensitive financial shares (+13.1%) lagged. Under these circumstances, the fund produced a pleasing return of 10.1% for the quarter and was up 29.5% over the past 12- months.

Underlying fund performance was good for the quarter with only the equity portfolio under performing its benchmark due to an underweight exposure to resources. We included Coronation as the third manager in the property portfolio. They have an absolute return mindset and we rate their ability to add value through active trading. Whilst their weighting in the portfolio is currently low it will grow to around 15% in time. Within the equity portfolio, we have switched 5% of the assets from Frater to Foord. Portfolio momentum has moved strongly in Foord's favour and the switch will align the fund with this upward trend.

The benchmark of this fund has been constructed using long term strategic principles designed to achieve the needs of moderate risk investors. To give effect to the short term outlook for the market, tolerance bands exist around which the weight to each asset class can vary from the benchmark. These bands are tightly controlled - the equity content can be 5% above or below benchmark. This may appear modest, but it insures that the nature of the risk profile is preserved while offering upside participation and some downside protection. This policy benefited the fund by an additional 0.37% during the quarter as we were overweight equity and property and underweight bonds and cash. Given the current structure of the fund and long term outlook for each asset class, we believe that the fund can deliver returns around inflation plus 5.9% per annum over the next 5 years.

All asset classes performed strongly in the 2nd quarter following another surprise 0.5% cut in interest rates by the Monetary Policy Committee. On a relative basis, property (+11.7%) and equity (+6.9%) benefited the most, whilst the lower risk asset classes of bonds (+4.7%), income (+3.4%) and cash (+1.6%) lagged. These returns underscore an economy where business and consumer confidence is high, inflation low, coupled with record low interest rates and strong economic growth. A weaker currency can partially be attributable to renewed dollar strength as the US continues its "measured" path to normalized interest rates. The portfolio produced a return of 5.0% (net of fees) for the quarter, slightly behind its composite benchmark.The portfolio benefited from an overweight exposure to the property portfolio, which outperformed its benchmark. Continued strength in resources relative to financials and industrials resulted in the underlying equity portfolio underperforming its benchmark. Collectively the managers were underweight resources, which hurt as the rand weakened. This has been the key contributor the portfolio's underperformance year to date. As with the surprise interest rate cut in the 3rd quarter of 2004, all income managers under performed the benchmark because they were short duration in a downward rate revision. The underlying bond portfolio performed in line with its benchmark and the peers.During the quarter, the portfolio construction of our bond fund was changed to reflect our expectation of a narrow trading range in bond yields. In this environment, more active, trading orientated managers tend to outperform. ABVEST was included, whilst Investec and Sanlam were removed from the portfolio. The short-term signs are positive, as the bond portfolio's ranking has improved. Mariette Warner and her property team moved from Standard Bank Properties to STANLIB Asset Management during the quarter, which we view as positive for the property portfolio.

Although positive returns were generated in the 1st quarter of 2005, the markets were characterized by high volatility. Various factors impacted the local markets. A further 0.25% increase in US interest rates in March caused emerging market bond yields to spike, negatively impacting local income producing asset classes, and resulting in wide sectoral divergence between the returns of local resource shares (+16.9%) and financial (+1.1%) and industrial shares (+0.3%), which was a reversal from previous quarters. This was supported by Rand depreciation relative to the dollar (-9.5%). Property (+5.4%) and equity (+4.3%) were the best performing local asset classes for the quarter, whilst cash (+1.6%), income (+0.2%) and bonds (-0.3%) produced lackluster returns. In this volatile environment, most managers struggled to reposition portfolios, however well diversified portfolios produced acceptable returns with relatively low volatility (risk), re-emphasising the case for diversification. The Fund (+0.4%) produced a positive return for the quarter but underperformed its benchmark composite marginally as a result of an underweight resources position, relative to financials and industrials, in the Fund's equity portfolio. Over the past 12-months, the Fund (+22.4%) continued to produce attractive returns for moderate risk investors and comfortably outperformed its performance objective of CPIX + 6.2% per annum (+9.3%). The Fund only had 3 negative months in the last 12 months. There were no changes to the Fund's asset allocation or manager line up during the quarter. We completed a thorough review of all managers during the period and updated our predictive systems accordingly. As such investors should anticipate some manager changes in the 2nd quarter. We are also in the process of completing the annual re-optimisation exercise on the asset mix of the Fund and any changes will be implemented and communicated to the market in the quarter.

The South African economy excelled in 2004 driven by a strong rand, which helped reduce inflation and lower interest rates, thereby encouraging economic growth and expanding business opportunities. This virtuous circle will have positive spin-offs for the SA economy in 2005. All asset classes performed well in 2004 and the 4th quarter was no exception. Although less risky asset classes like cash (+1.7%) and income (+2.5%) produced positive returns, the higher risk asset classes delivered superior results. Bonds (+7.7%), equity (+11.9%) and property (+23.2%) benefited from the positive sentiment generated in the economy, particularly the strong rand, which finished the year at R/$ 5.64. The Fund produced an 11.6% return for the quarter comfortably outperforming its composite benchmark. The total return for the past 12 months was +24.3%, which was pleasing given the low risk profile of the Fund. During the quarter, the mandate with Allan Gray was removed from the equity component of the portfolio. This was partially offset by increasing the exposure to Fraters (deep value). The weightings to Rainmaker and RMBAM were also increased. The mandate with TAQUANTA was split into a Quants Core component (40%) and a Select Alpha component (60%), which attempts to replicate the returns of the top quintile of peers in the universe. Sanlam was inherited as an additional manager in the bond component of the portfolio following the conversion of the STANLIB MM Bond Fund into a feeder fund. The STANLIB Multi-Manager Equity Fund and STANLIB Multi-Manager Income Fund were also converted into feeder funds. Regulations dictate that a fund of funds cannot invest into a feeder fund and accordingly the Fund invests directly into the underlying Investment Solutions asset class funds. There were no other manager changes. Over the past 36 months the Fund has produced a positive return on 26 of those months and comfortably out performed its performance objective of CPIX + 6.2% per annum.