Local equities were down 5.8% for the quarter as a lack of political and economic leadership hamstrung the recovery in the US and resolution of the debt crisis in Europe. It was perceived that this in-action would lead the world back into recession. The whirlwind of economic noise created around this topic during the quarter contributed to significant uncertainty and weakness in risk assets. The depreciation of the rand and other EM currencies, along with the collapse in commodity prices and the drop in the US 10 year Treasury yield to below 2% were also indicative of this lack of confidence. The Fund performed in line with its peer group for the quarter and remains well ranked for the past year (27th out of 86).

Allan Gray has driven returns in the Fund recently, benefiting from its large rand hedge exposure, gold exposure and underweight exposure to the General Mining sector. Their return was around 4% better than the sector average. Exposure to Polaris via the Nedgroup Entrepreneur Fund was also a key driver, given that Small and Mid caps were largely ignored during the turmoil (mid cap shares outperformed large caps by 4.6% for the quarter). Exposure to British American Tobacco (BTI) also protected this Fund. Rainmaker underperformed the peers by around 1% for the quarter as a result of a recently increased exposure to resource shares, which have subsequently done well in October. ABSA Rand Protector suffered the same fate, but the pain was offset by large exposure to Rand Hedge non resource shares like Richemont, SAB, MTN and BTI.

During the quarter we marginally reduced our exposure to Entrepreneur in favour of Rainmaker, to benefit from more attractive valuations in the large cap resources area of the market and in anticipation of an improved economic picture emerging in the 4th quarter. The market has already de-rated somewhat and, we feel, over-digested the bad news regarding global growth. Given this, we maintain a positive and constructive stance on equities going into year end.

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 Q4 2010 and the onset of some rather disappointing macro-economic news. Following the Japanese Tsunami in Q1, focus shifted to the sovereign debt problems within Europe and the "soft patch" emerging in the US economic growth path. With solid earnings growth coming through from companies, shares were de-rated during the quarter and on pure valuation grounds now look attractive assuming forecast earnings growth is delivered. In South Africa non-resource 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 Q1 2012. Large cap resources were the key detractor from returns during the quarter as economic sensitive assets struggled in a soft economic environment.

Pleasingly the Fund produced a positive return for the quarter and outperformed the peer group by a wide margin. Over the past 12 months the Fund has produced a return of 23.7% and was ranked 19th out of 84 funds in its peer group. Many of the share and sector level attributes mentioned above played a positive role in this out performance; however the key driver of returns for the quarter was ultimately manager selection. All of the managers, except for Allan Gray, produced flat or positive returns for the quarter with those most exposed to small 1 mid caps doing the best. In this regard, Entrepreneur did exceptionally well, producing a 2.4% return for the period. Exposure to this Fund has systematically been increased from 9.9% to 14% of Fund as at quarter end, which also added value. Prudential Equity was the 2nd best performer with a return of 1.2%. Allan Gray struggled primarily due to its gold exposure which was the worst performing sector for the quarter and underweight retail exposure which was one of the best. Over the past year, Coronation Top 20 and Prudential Equity have made the strongest contribution to outperformance within the Fund.

Looking forward, based on valuation grounds, we maintain our positive 1 constructive stance on equities but fear that further derating may occur as the markets digest whether or not the current soft patch is something more sinister. Whilst it is difficult to forecast the exact path of macroeconomic variables, based purely on valuations, we believe that equities can deliver between 10% and 15% returns over the next 12 months.

The Portfolio had a pleasing year, producing an 18.9% retum and outperforming the average of the General Equity Peer Group by 0.8%. It was ranked in the top half for the year (34 out of 84 funds) and three years (26 out of 73 funds) respectively. Key to this success during 2010 was the funds exposure to the Nedgroup Entrepreneur Fund (+26.1 %), which benefited from the outperformance of small (+24.7%) and mid (+30.3%) cap shares relative to large (+17.2%) cap shares during the year. Following a strong rally in mid and small cap shares, we started to reduce our exposure to this Portfolio in the 2nd half in anticipation of a relative rerating of large cap shares, which is playing itself out. Coronation had another good year being one of the best performing equity managers in South Africa, particularly the Coronation Equity Fund (+24.6%) but also the Coronation Top 20 Fund (+20.6%).

Although our exposure to Coronation has remained around 35% in total, we did switch half the exposure from the Top 20 Fund to the Coronation Equity Fund in September 2009, which has proved to be a correct call during 2010 as small and mid cap shares drove the outperformance of the Coronation Equity Fund. As the global economic recovery gathered momentum in 2010, Resources became an emerging theme. The Portfolio benefited from this in the 2nd half via its exposure to the ABSA Rand Protector Fund. With Resources still on attractive valuations and the Rand looking increasingly vulnerable / expensive, we believe this theme is likely to continue into 2011 and therefore maintain our exposure to the ABSA Rand Protector Fund. Allan Gray had a disappointing year by their standards however their performance was very much in line with our expectations. They remain defensively positioned and will certainly benefit the Portfolio if the Rand weakens or the global macro environment deteriorates. We maintain this hedge in the Portfolio. Both Rainmaker and Prudential produced retums marginally ahead of the peer group for the year. The global macro environment is evenly balanced with a relatively robust profit outlook and fair valuations being offset by country default risk and sticky unemployment. As such, we would be pleased if equities produced low double digit retums for 2011 and we could add an additional 1 % in alpha through good manager selection and portfolio construction.