The recent market rally waivered in the 2nd quarter on renewed fears of a global growth slowdown and further downgrades to consensus earnings estimates. The All Share Index was up 1% for the quarter in volatile trading, with returns driven by certain sectors and themes. Interest rate sensitive sectors like retailers (+7.3%), banks (+2.7%) and property (+10.3%) received a boost from the change in interest rate expectations during the quarter. Rand weakened by around 7% relative to the dollar, in line with the "risk-off" theme, and this was broadly beneficial to the nonresource rand hedges. However, the 10% or so pull back in commodity prices for the quarter resulted in resource shares derating by a further 3%. This was negative for the general SA equity managers as they had been increasing their exposure to resource shares as valuations have become more attractive. We notice however that their exposure to resources has moderated during the 2nd quarter as (1) fears of a "double dip" environment similar to that experienced in mid 2011 resurfaced and (2) resource earnings were downgraded (-24% year to date).

Pleasingly, the Fund outperformed its benchmark during this difficult time. Key to this outperformance was NedGroup Entrepreneur, up over 3% for the quarter, driven by a lack of large cap miners and an overweight position to BTI, SA retailers and other mid and small caps. Entrepreneur was included in the Fund in October 2009 at a 10% weight. Over the past 3 years it has outperformed the general equity peer group by over 12% p.a. and as a result of this outperformance, as well as it current exposure to the more expensive parts of the market, we have chosen to down weight it back to 10% of Fund. Coincidentally the worst performing underlying fund for the quarter was Rainmaker (both managed by ABAX), which had around 42% in Resources at quarter end, of which around 10% was in gold shares. This proved disastrous with gold shares and general miners down 2.2% and 1.6% respectively for the quarter.

Looking forward we feel that whilst PE valuations are attractive relative to history the macro-economic and political environment is not supportive of the market and downside risks are re-exerting them self. Resolution of the debt crisis in Europe is critical, which in itself is likely to contribute to the stability in global growth required to support earnings delivery. Consensus earnings growth for the SA equity market has been downgraded by 10% year to date to around 15% in 2012. In our opinion risks to earnings are to the downside, which is likely to put pressure on equities in the medium term unless a surprise package of global stimulus is delivered that has a meaningful impact on global employment and growth.

South African equities delivered a 6.0% retum in the 1st quarter 2012 driven largely by improved sentiment from the liquidity boost to European banks by the ECB late in December. In addition there was a continued improvement in US economic data (manufacturing and employment), and the Fed committed to keeping rates low at least through late 2014. Markets were also encouraged by further eurozone developments - finance ministers approved a financial rescue for Greece, and the ECB provided a second round of lending to European banks. Despite the strong return from our market, eamings growth has kept pace, resulting in a PIE ratio remaining at a level around the long term average. Looking forward, unless there is a re-rating of shares, delivery of eamings growth becomes the key to continued stock market gains. This will be largely impacted by the global macroeconomic environment; in this regard we still see a lot of uncertainty, especially in the eurozone with yield spreads widening again, and particularly in Spain where government bond yields recently spiked above 6%. Softer economic data coming out of China is also a concern. The Fund performed well for the quarter, producing a return of 7.1 % and ranking 31 st out of 92 general equity funds.

NedGroup Entrepreneur was the best performing fund in the mix for the 2nd quarter in a row, having benefited from its high allocation to industrial goods & services and consumer services, and low exposure to resources. Prudential was our next best performing fund, benefitting from good stock selection - positions in Naspers, Vodacom, Imperial, Woolworths and Coronation all contributed positively to performance. Our Coronation funds also performed well, with the Coronation Top 20 benefiting from its overweight to banks. Allan Gray struggled with its defensive positioning, and exposure to gold miners detracting from performance.

The equity market has enjoyed a strong start to the year on the back of a more balanced economic outlook. Many of the major developed and emerging markets have low or falling interest rates and this should continue to be a boon for markets over the remainder of 2012. The FTSEIJSE Shareholder Weighted index is on an historic PE of 13.4X, with earnings growth delivery of7.8% year to date. While valuations remain somewhat attractive, markets are looking stretched from a technical point of view, and continued global macro concems warrant a fair dose of caution.

South African equity delivered an 8.4% return in the 4th quarter 2011 driven largely by attractive valuations but also supported by prospects of stronger global economic growth, improvements in US unemployment and perceived fiscal resolution in Europe. Ultimately however it was not enough to save equities from a disappointing year relative to our expectations (low double digit returns). In 2011 the All Share index produced a return of 2.6% in spite of earnings growing by greater than 20%. This is the second year running that earnings have outstripped share prices, effectively de-rating and leaving equities attractively priced should fundamentals reassert themselves as the key driver of equity markets. This is however being hampered by a fragile global macro-economic environment, which has promoted significant market volatility as sentiment and confidence has swayed between extremes. In spite of this volatility, the Fund performed well for the year, producing a return of 5.4% and ranking 18th out of 79 general equity funds (source: Morningstar).

NedGroup Entrepreneur was the best performing fund in the mix for the year, benefiting from a near 7% exposure to BTI which was one of the best performers on the JSE for the year. Exposure to listed asset manager Coronation, which benefited from significant fund inflows, along with other consumer orientated mid cap shares like Mr Price and Foschini also benefited returns. The fund also benefit from being significantly overweight the industrial sector, which produced the strongest returns in spite of their relative overvaluation, and significant underweight exposure to Resources, which was the worst performing sector for the year. ABAX stable mate Rainmaker also outperformed the peer group handsomely. In face of much criticism for its defensive positioning, the Allan Gray Equity Fund recovered strongly in the second half to again be a top performer for the year. Coronation had its first poor year in many with its general equity fund underperforming the peer group by around 1%. It was dragged back by an overweight exposure to financials, particularly banks and the up weighting of resources during the 2nd half, which proved too early. Interestingly value as an investment style underperformed growth for the year.

The equity market is enjoying a strong start to 2012 on the back of a more balanced economic outlook. Many of the major markets have low or falling interest rates and this should bode well for markets in 2012. In South Africa the All Share index is on an historic PE of 13.2X and we are expected earnings growth of between 10% and 15% in 2012. This makes equity look fairly attractive, albeit that it comes with a large global macro-economic health warning.