The 3rd Quarter of 2008 will be remembered as one of the most volatile and uncertain times for world markets with most global stock markets experiencing dramatic declines. Much of the recent volatility is related to the global credit crisis. The $700bn bail-out package rejected on the 29th of September by the US Congress resulted in $1 Trillion being wiped off the value of US markets in one day and the Dow falling 778 points, the biggest ever single-day point loss. Unfortunately emerging markets were not immune, and experienced severe declines too as investors became more risk adverse and fled to the safety of cash (and bonds).

During Sept 2008 your fund experienced a very large outflow (35.22% of the fund was withdrawn). As a result of the outflow we were forced to sell all our offshore cash in order to raise sufficient liquidity quickly to meet the significant withdrawals (on the 1 September our local cash was 6.90% of the fund; offshore cash - which typically takes "t + 5" days for us to get back into rand - was 17.62%). This had a fairly big opportunity cost to the fund as the Rand depreciated by 6.50% to the US Dollar during the month due to the global credit crunch, falling emerging market equities, and to a lesser extent, the ousting of Mbeki as SA's president.

During the 3rd quarter we significantly reduced your fund's exposure to resources to 5.73% (June: 40.50%) and increased your fund's exposure to financials to 5.68% (June: 0.61%) and to real estate (by the end of Sept: 21.66%). From the 1st of Aug to the 30th of Sept 2008 the ALSI fell 10.07% vs. your fund's decline of 1.83%.

The second quarter of 2008 was characterised by continued volatility on the JSE ALSI and soaring oil and food prices. The oil price closed at $140 a barrel, up 38% since the beginning of the quarter! As a result, there was continued pressure on both SA and global inflation rates. The electricity price increase agreed for Eskom over the quarter will place added pressure to SA's already high inflation rate. SA inflation was 10.9% at the end of May.

Taking all of the above into account, we are happy with our decision to remain heavily over-weight resources as these stocks offer your fund a good inflationary hedge under the currently high inflationary environment. Resources remained the strongest performing of the major sectors for the 2nd quarter of 2008 with the Resources Index returning 13.4%, whilst the Financial Index and Industrial Index declined by 19.6% and 2.7% respectively.

Although SA financials currently appear 'cheap', we believe it is too early to begin increasing your fund's exposure to local financials. Resource stocks are still forecasting earnings growth of 50 - 100% over the next year, whereas financials in our view are due to report flat to single digit earnings growth over the next year. We also retain 30% in cash in various offshore currencies. Going forward, we therefore remain over- weight resources and under-weight financials for your fund.

World equity markets experienced extreme volatility in the first few months of 2008 and the JSE was no exception. The ALSI fell 5.7% in January, and then in February it rose by the biggest monthly gain in nearly 5 years!

Country-specific events also contributed to SA equities being a much less attractive investment destination for global investors than was the case just 3 months ago. These events include: the potential output volume declines across virtually all SA industries due to the sudden unexpected and ongoing Eskom supply crisis; a weakening rand against all major currencies; SA inflation hitting 9.4% and expected by us at ValuGro to rise further (well outside the target range of 3-6%); increasing interest rates (current repo rate at 11.0% and also expected by us to rise further); and uncertainty surrounding SA's government leadership.

We therefore repositioned your portfolio extensively in the quarter. The major changes were an increase in resource sector holdings from 8.31% to 30.50% of the fund due to our bullish view on resources and the weakening rand (the Resource Index returned 17.6% this quarter); reducing our financial sector holdings from 12.23% to virtually nil (due to the uncertainty surrounding the sector globally, our view of more interest rate hikes and our negative view on the size of financial earnings growth for 2008); and moving more of your portfolio offshore, with large quantities thereof being placed in Euro cash.

I am happy to report that your fund ended 2007 as the best performing fund in its unit trust sector.

I mentioned in our first report back in September that we would look to increase our offshore exposure if and when suitable opportunities presented themselves. Over the last quarter, we have raised our offshore exposure to 22%, with 7% of that in equities and 15% in cash (Euros remaining our major currency of choice).

On the global economic and equity front we remain fairly cautious. Subprime write-offs are growing, liquidity tightening, the likelihood of a US "recession" increasing (which we define as two consecutive quarters of negative GDP growth), US housing markets collapsing, employment figures weakening, and concerns over poor US retail trade growing.

Our current local equity exposure is 53% and our local cash 25%. This shows our concerns with local equity prices too as at year end levels.

We remain fairly positive on the rand at present, and hence are in no huge rush to be heavily (eg. 50% +) offshore weighted. However, we are aware of South Africa's growing current account deficit, slowing FDI flows, and political concerns, and will constantly monitor events.