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 Equity Alpha Fund slightly underperformed the average fund in the Domestic General Equity sector due to our large position in undervalued platinum miners and low exposure to overvalued consumer-oriented industrial shares. While our current overweight position in resources shares and underweight position in industrials is affecting 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 shares. The fund remains number one in the Domestic General Equity sector since its inception in April 2004 - a testament to the value of our investment philosophy over the long term.

MTN (up 16.1%), Mondi (up 21.5%) and Naspers (up 19.2%) were strong performers for the fund, while our exposure to Lonmin (down 25.1%), Anglo American (down 8.8%) and Standard Bank (down 2.5%) 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.

Going forward, we remain defensively positioned from an asset allocation point of view, with significant hedging in place. The fund continues to be appropriately positioned in our best stock selections, based on our team's proven bottom-up stock picking process.

The South African equity market held up relatively well at aggregate level in rand terms over the quarter and touched its all-time high during the period. This, however, masks a massive sectoral diversion, with financial and industrial shares strongly up and resources shares continuing to head lower. The weaker currency also supported the market, given the heavy weighting towards rand hedge shares in our market.

Global markets were generally lower, with the S&P 500 in the US down by 3.3%, Japan's Nikkei down 10.7%, the MSCI Emerging Markets index down 8.8% (in US dollar terms).
The Kagiso Equity Alpha Fund underperformed the average fund in its sector (the Domestic General Equity sector). This was due particularly to the large position we have in platinum miners - which were very weak - and the low weighting in consumer facing industrials which were very strong. The fund remains number one in the Domestic General Equity sector since its inception in April 2004 (number six over the last 5 years and number thirteen over the last 3 years).

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. Money market expectations moved materially during the quarter - from expecting rate increases to a situation where an interest rate cut in 2012 is now priced in. Inflation looks to have peaked and to be securely heading into the target band. The South African economy continues to be weak, with a generally poor employment environment and economic weakness in our major trading partners.

The FTSE/JSE All Share index gained 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 were net buyers of equities again this quarter, with a particular appetite for consumer stocks.

Tongaat Hulett (up 20.3%), FirstRand (up 11.4%) and Nampak (up 9.5%) were strong performers for the fund. Our exposure to Lonmin (down 20.7%), AECI (down 13.5%) and Sasol (down 6.1%) detracted from performance.

Looking ahead, we remain cautious over prospects for the 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. Given the massive share price underperformance there appears to be significant value in resources shares at present, although they will remain volatile.

Going forward, we remain defensively positioned from an asset allocation point of view, with significant hedging in place. Our bottom up stock selection process has caused us to move the portfolio significantly out of industrial shares, many of which are trading at all-time highs and anticipating very strong earnings prospects, and into resources stocks, especially platinum group metal miners. This has raised the market sensitivity (beta) within the portfolio.

The fund continues to be appropriately positioned in our best stock selections, based on our team's proven bottom-up stock picking process.

The first quarter of 2012 saw the South African equity market underperform most global markets, partly due to the weak performance of resources shares as news of growth slowing in China outweighed continued positive US economic data. Many South African companies, especially amongst the industrials, were pushed further above their all-time high share prices.

It was an excellent start to the year for the US market with the S&P 500 index enjoying its best first quarter in 14 years, up by 12.0%. The UK market lagged and was up by only 3.5%. The MSCI Emerging Markets index was up 14.1% in USD, outperforming the MSCI Developed Markets index (up 11.7%) and the Japanese market had a strong quarter (the Nikkei was up 19.3%). The Kagiso Equity Alpha Fund outperformed its peers (in the Domestic General Equity sector) again this quarter - despite our generally defensive orientation and our, now, increased resource sector exposure. The fund remains number one in the Domestic General Equity sector since its inception in April 2004 (number three over the last 5 years and number five over the last 3 years).

Commodity prices were mostly positive for the quarter. Oil prices were up significantly, mostly during February, +14.9% (Brent Crude), given ongoing Middle East instability and slightly stronger economic news. Most other commodities relevant to South African miners were up, with copper up over the quarter by 11.7%, gold up 6.7% and platinum up 18.8%. The rand gained 5.4% against the US dollar and was 2.4% stronger against the euro. The South African Reserve Bank kept interest rates unchanged at multi-decade lows due to ongoing global economic uncertainty, despite inflation remaining above the official target of 6% pa. Inflationary pressures are coming from the weaker currency and higher transportation, electricity and food prices.

The FTSE/JSE All Share index gained 4.9% during the quarter. There was considerable sectoral diversion for the quarter: resources shares (-3.3%) substantially underperformed industrial shares (+10.5%) and financial shares (+12.8%). Equity markets experienced continued volatility, with most of the positive performance coming through in January. Foreigners continued to be net sellers of equities in the first quarter (-R4.1 billion), but bonds remained positive with further strong inflows (+R21.2 billion). Mondi (+25.8%), Naspers (+22.0%) and Discovery (+17%) were strong performers for the fund, but our exposure to Impala Platinum (-8.9%), Sasol (-3.9%) and MTN (-2.7%) 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 biting 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. Given the massive share price underperformance there appears to be significant value in resources shares at present, although they will remain volatile. Going forward, we remain defensively positioned from an asset allocation point of view, with significant hedging in place. Our bottom up stock selection process has caused us to move 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. This has raised the market sensitivity (beta) within the portfolio. The fund continues to be appropriately positioned in our best stock selections, based on our team's proven bottom-up stock picking process.

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 Kagiso Equity Alpha Fund slightly underperformed its peers (in the Domestic General Equity sector) for the quarter - due mainly to our generally defensive orientation and our, now, increased resource sector exposure. The fund remains number one in the Domestic General Equity sector since its inception in April 2004 (number two over the last 5 years and number three over the last 3 years).

Commodity prices were mixed for the quarter. Oil prices were up 4.5% (Brent Crude), given ongoing Middle East instability and slightly stronger economic news. Gold was down 4.6%, as was platinum (-10.4%). Most other commodities relevant to South African miners were significantly down, while copper was up over the quarter (8.5%).

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.

The FTSE/JSE All Share Index gained 8.4% during the quarter, coming off a low base at the end of the third quarter, ending the year just 2.6% up. There was little sectoral diversion for the quarter: resources shares (+7.3%) underperformed industrial shares (+9.2%) and financial shares (+8.7%). Equity markets experienced continued volatility, with most of the positive performance coming through in October (+9.4%) and thereafter fluctuating in a range, influenced mainly by developments in Europe. Foreigners were net sellers of equities in 2011 (-R17.2 billion) while flows were fairly flat in the fourth quarter. However, inflows into bonds remained strong during the year (+R47.4 billion).

Sasol (+18.5%), Brait (+13.4%) and Richemont (+13.1%) were strong performers for the fund, but our exposure to Lonmin (-7.2%), Royal Bafokeng Platinum (-3.3%) and Mondi (-2.4%) 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. 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.

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.

The fund continues to be appropriately positioned in our best stock selections, based on our team's proven bottom-up stock picking process.