It has been extremely interesting to watch the events of the past few weeks unfold as it would appear that beside the market precedent from the 1930's, we are in uncharted territory. Equity markets sold off heavily in September as growing concerns about the stability of the global financial system emerged. The global credit markets have frozen up, some US banks have failed as a result and the current lack of confidence to lend to other banks and corporations is having a marked impact on economic activity. Whilst there is much uncertainty, what we do know is that the global monetary authorities will do everything in their power to avert a global financial crisis, pumping liquidity into the credit markets, rescuing banks and thereby restoring confidence in the system. Clearly global growth prospects are deteriorating and this will likely result in a recession over the coming quarters and investors, uncertain as to how deep and long the recession will last, have sold off equities aggressively in the process.

Together with other emerging markets, this has filtered through into the South African equity market where the All Share Index was down 20.6% for the quarter. In this context, resources sold off sharply, whilst interest rate sensitive assets generally held up well as the market started anticipating the peak in inflation and subsequent interest rate cuts. As to be expected, the Portfolio produced a negative return over this time, however on a relative basis it is pleasing to note the improved ranking of the Portfolio compared to its general equity peers.

In this environment the value managers in the mix did better than the momentum managers. In particular the Coronation Top20 Fund did exceptionally well in protecting on the downside outperforming the benchmark by around 5.2% for the quarter. We introduced and slowly up weighted the Investec Equity Fund during the quarter in an attempt to increase the size bias of the Portfolio and give it better balance by adding some growth and some resource exposure, albeit it still being underweight both these elements. The performance of the STANLIB Capital Growth Fund has been disappointing but fortunately we down weighted it from 20% to 10% in March and further to 7.5% more recently. Going forward we will be monitoring the market developments as they unfold and will be active in positioning the Portfolio accordingly.

Although the FTSE/JSE All Share Index rose by 3.4% during the quarter, performance was concentrated in a couple of sectors and a handful of stocks. The Energy sector continued to rally with Sasol up 19.8% during the quarter. General Miners (+18.1%) benefited from rumours of M&A with BHP Billiton in particular rising 24%. Select companies in the Media (+14.6%)and Telecommunications (+3.4%) sectors also did well particularly Telkom (+12.8%), which outperformed the popular MTN (+1.9%). The worst part of the market continued to be the interest rate sensitive areas with banks (-14.8%), real estate (-16.8%) and general retailers (-14.5%) all suffering.

The Portfolio demonstrated a significant improvement in its relative performance, out pacing the peers during the quarter as pockets of normalisation returned to the market in June. With large cap, momentum orientated companies driving performance, Rainmaker, Coronation and Prudential lead the recovery, all producing positive returns for the quarter. STANLIB's Capital Growth Fund was negatively impacted by weakness in small and mid cap growth shares vindicating our decision to halve their weighting in the first quarter. The visible improvement in Foord's performance during June was insufficient to result in out performance for the quarter.

The Portfolio's exposure to resources increased from 29% to around 32.5% during the quarter, partially because of relative performance, but also because of the underlying portfolios up weighting their holdings. Whilst the Portfolio still remains generally underweight resources relative to peers, we are comfortable with this position right now. Where we may need to close a gap in the next quarter is the underweight exposure in general to growth shares, in particular large cap growth shares. Having scrutinised a couple of suitable portfolios in this regard, we would look to finesse the timing a bit before appointing the most appropriate portfolio.

Although the 1st quarter produced positive equity returns, it was a tough environment for equities as pessimism reached new all time highs. Sentiment continues to be dominated by increased risks in the global environment as well as concerns around increasing local interest rates on the back of stubbornly high inflation. In the equity space, resources (+17.6%) completely dominated financials in spite of falling commodity prices during March. The Portfolio produced a -4.6% return for the quarter however this needs to be seen in context of financials producing a negative 12.7% return and industrials a negative 6.4% return. The general equity peer average was down 2.4%

The STANLIB Capital Growth Fund was the biggest detractor from value during the quarter. It had poor sector exposure (low in resources) and stock picking was below average. Exposure to small and mid caps hurt. This was partially offset by the Portfolio's exposure to the Coronation Top 20 Fund, which favours large cap value shares. Rainmaker and Foord were the best performers during the quarter as they had larger exposure to resources and were underweight financials. Early in the quarter the Fund up weighted its exposure to Foord at the expense of the STANLIB Capital Growth Fund, which was half weighted following prolonged underperformance over the last 6 months. The net effect of this has been to up weight the Portfolio's exposure to resources, where the Portfolio is structurally underweight.

It is interesting to note that there are very few quality equity managers in South Africa who are overweight resources relative to the SWIX, in itself a down weighted resource index relative to the FTSE/JSE All Share Index, which currently has 52% resource exposure.