This quarter was characterised by significant labour unrest within the local resources sector, which placed South Africa high on the international news agenda. The unprecedented tragedy that occurred at Lonmin's Marikana mine was the catalyst for further strikes, which have subsequently spread to other sectors of the local economy. Despite this, the South African equity market held up well over the quarter and reached an all-time high during September.

Globally, most developed economies continue to grapple with slower economic activity and high unemployment. The US economic weakness has brought about yet further quantitative easing measures by the Fed. The economy has become a key focal point of the upcoming US presidential elections and the US faces automatic fiscal tightening in 2013, unless further action is taken to extend current fiscal stimulus measures.

Economic weakness persists in Europe, with the latest data indicating that this region went into contraction during the second quarter of this year. GDP growth in the world's second-largest economy, China, has begun to slow. Given that its major trading partners are facing tough economic conditions, the South African economy continues to be weak, with the situation exacerbated by recent labour unrest.

Global markets were generally up during the quarter, with the exception of Japan, which was down 1.5%. The US (S&P 500 Index) was up 5.8%, the UK (FTSE 100 Index) was up 3.1% and the MSCI Emerging Markets Index was up 7.9% (in US dollar terms).

The FTSE/JSE All Share Index gained 7.3% during the quarter, with the recent material sectoral diversion continuing - industrials were up 10.5%, financials were up 6.5% and resources were up 2.9%. Foreigners were net sellers of equities, particularly in the resources sector where they appeared to be unnerved by the labour challenges facing miners. However, this sell-off was offset by significant foreign inflows into our bond market. Foreign investors continued to favour local consumer-oriented industrial shares, causing these exceptionally expensive shares to accelerate upwards to new all-time highs.

Commodity prices strengthened this quarter, with most commodities relevant to South African miners gaining - platinum was up 16.8%, gold was up 11.1% and copper was up 6.8%. After a significant fall last quarter, the oil price (Brent Crude) increased by 16.1%.

The rand weakened by 1.8% against the US dollar and 3.2% against the euro. Inflation has dropped back into the upper region of the South African Reserve Bank's target band, where we expect it to remain in the medium term. The Reserve Bank dropped the repo rate by 50bps in July, and left it unchanged at their most recent Monetary Policy Committee meeting. Interest rates are currently at multi-decade lows.

The Kagiso Islamic Balanced Fund outperformed the average fund in the Domestic Prudential Variable Equity sector for the quarter due to our large positions in Sasol, Tongaat and Mondi. While our current overweight position in resources shares and underweight position in industrials has affected our short-term performance, we believe it is appropriate to position our clients in deeply undervalued shares in anticipation of strong capital gains and avoid the permanent capital losses we expect in vastly overvalued Industrial shares. MTN (up 16.1%) and Mondi (up 21.5%) were strong performers for the fund, while our exposure to Lonmin (down 25.1%) and Anglo American (down 8.8%) detracted from performance.

Looking ahead, we remain cautious over prospects for developed economies with high levels of government debt, high levels of unemployment and demographic trends moving slowly against them. On the positive side, we believe that there are strong prospects for companies focused on emerging market consumers, although much of this optimism seems to be priced into South African consumer stocks.

We remain defensively positioned from an asset allocation point of view, with significant non-equity positions in place. We have increased the fund's exposure to foreign assets to over 10% as we continue to find more attractive opportunities outside the domestic market. The fund continues to be appropriately positioned in our best stock and commodity selections, based on our team's proven bottom-up research process.

The South African equity market outperformed most global markets during the second quarter of 2012 and, despite continued market volatility, the All Share Index achieved a new high of 34,788 during June. The Kagiso Islamic Balanced Fund outperformed its peers (in the Domestic Asset Allocation Prudential Variable Equity sector) for the month of June, but underperformed for the quarter - due mainly to our generally defensive orientation and our increased resource sector exposure, especially the Oil and Gas and Platinum sectors.

After an excellent start to the year for the US market, the S&P 500 fell by 3.3%. The UK market was relatively flat, up by only 0.5%, while the Japanese market was the worst performer over the quarter with the Nikkei down 10.7%. The MSCI Emerging Markets Index was down 8.8% in USD, underperforming the MSCI Developed Markets Index ( down 4.9%).

Commodity prices weakened over the quarter as global economic data, from China to Europe and the US, was lower than expectations. The oil price fell 21.9% (Brent Crude), and most commodities relevant to South African miners were negative for the quarter, with: copper down 9.2%, gold down 3.8% and platinum down 12.9%. The rand lost 6.0% against the US dollar and 1.0% against the euro. The South African Reserve Bank kept interest rates unchanged at multi-decade lows, however, recent inflation readings and the weak domestic economy increases the likelihood of another rate cut at the next monetary policy committee meeting. Globally, many developed countries continue with their aggressive easing policies to kick-start their respective economies.

The FTSE/JSE All Share Index gained just 1.0% during the quarter, with considerable sectoral diversion as resources shares (down 3.6%) substantially underperformed industrial (up 2.6%) and financial shares (up 4.6%). Foreigners became net buyers of equities this quarter (+R3.2 billion), and bonds continued to be positive with further strong inflows (+R27.3 billion).

The fund's overweight positions in Resources, notably platinum miners, continued to detract from performance for the month of June. In addition, our underweight positions in Industrials and specifically retail shares, also detracted from performance. The fund remains overweight Resources stocks, with Sasol and Lonmin as well as Tongaat remaining our top picks on valuation grounds. Whilst the global macro environment continues to weaken and consequently exerts downward pressure on commodity prices, we remain confident that the abovementioned stocks provide sufficient margins of safety in the current environment and in the absence of commodity price support.

The recent continued divergence between Industrials and Resources has extended the disparity in valuations in the South African market. We remain convinced that domestic industrial counters are significantly overvalued and Resources are offering good value, on a selective basis. Whilst this will remain the key focus and strategy of the fund, it is difficult to predict when these disparities will normalise. Going forward, we remain defensively positioned with a strong focus on quality, lower risk companies, which are attractively priced. We favour companies with strong balance sheets, high franchise value and/or dominant market positions, low fixed costs and defensive earnings streams. Over the last year we have moved the portfolio significantly out of industrial shares, many of which are trading at all-time highs and anticipating very strong earnings prospects, and into selected resources stocks, especially platinum group metal miners.

Going forward, we remain defensively positioned with a low equity exposure. We have exposure to domestic sukuks and are increasing the fund's foreign exposure on a selective basis. The fund continues to be appropriately positioned in our best stock selections, based on our team's proven bottom-up stock picking process.

The domestic equity market continued its strong performance from the fourth quarter of 2011 into the first quarter of 2012 with a 6.0% total return. In the process the market recorded a new all-time high, with the FTSE JSE All Share Index breaching the 34000 point level for the first time. Despite the robust performance, the local market underperformed both developed markets and other emerging markets. The US market was particularly strong, with the S&P 500 index up by 12.0% for the quarter that marked the index's best quarterly performance in over ten years. The UK equity market continued to outperform emerging markets with a 7.6% dollar return and the Japanese equity market (Nikkei 225 Index) rebounded from its poor performance in the final quarter of last year to post a commendable 19.3% equity return for the quarter. Commodity prices were mixed for the quarter. Oil prices were up 15.4% (Brent Crude), given ongoing Middle East instability and concerns around an imminent strike against Iran. Gold was up 6.6%, whilst platinum rebounded strongly (up 18.8%). Most other commodities relevant to South African miners posted gains between 6.0% and 12.0% over the quarter. The rand strengthened against the US dollar (+5.4%) and 2.3% stronger against the euro. The South African Reserve Bank kept interest rates unchanged at multi-decade lows, against a backdrop of rising inflation, which breached the official target in November - partly due to the weaker currency and higher transportation costs. Domestic economic growth prospects are looking softer, however. The FTSE/JSE All Share index gained 4.9% during the quarter, thus setting a new high intra-quarter. Sectoral diversion in returns was significant: resources shares (-3.3%) underperformed industrial shares (+10.5%) and financial shares (+12.8%). Equity markets experienced continued volatility, with most of the positive performance in the financial sector coming through in January (+6.0%) whilst Resources experienced a disastrous March, declining by 8.5% in the month. Mond Plc (+25.7%), was a strong performer for the fund, but our exposure to Anglogold (-17.2%), Implats (-8.9%) and Sasol (-3.9%) were a drag on performance. Looking ahead, we remain cautious over prospects for the developed economies, with high levels of government debt, high levels of unemployment, stimulus removal and austerity measures looming and demographic trends moving slowly against them. Going forward, we remain defensively positioned with a high rand cash balance and relatively low equity exposure. We have exposure to sukuks and a tactically reduced foreign exposure. Within equities we have a strong focus on attractively priced quality, companies and have increased our resource sector exposure at the expense of very highly priced industrials.

The fourth quarter of 2011 was a very strong period for global equities, bouncing off their third quarter low points, amidst high volatility. Positive US economic data emerged amidst the European gloom and co-ordinated central bank measures were announced to provide Europe with much needed banking sector liquidity. Many South African companies, especially among the industrials, ended 2011 at all-time high share prices.

The US market was particularly strong (the S&P 500 Index was up by 11.2%), as was the UK market (up 8.7%), outperforming most emerging markets (MSCI Emerging Markets Index was up 4.4% in USD) and the negative Japanese market (the Nikkei Index fell 2.8%).

The Rand was little changed against the US Dollar (+0.1%) and 3.4% stronger against the Euro. The South African Reserve Bank kept interest rates unchanged at multi-decade lows, against a backdrop of rising inflation, which breached the official target in November - partly due to the weaker currency and higher transportation costs. Domestic economic growth prospects are looking softer, however.

Looking ahead, we remain cautious over prospects for the developed economies, with high levels of government debt, high levels of unemployment, stimulus removal and austerity measures looming and demographic trends moving slowly against them.

Going forward, we remain defensively positioned with a high rand cash balance and relatively low equity exposure. We have exposure to sukuks and a tactically reduced foreign exposure. Within equities we have a strong focus on attractively priced quality, companies and have increased our resource sector exposure at the expense of very highly priced industrials