We are living through history in the making. Fears of a global economic recession and deleveraging after the credit bubble are forcing stock prices to new lows daily. The S&P 500 Index was down 9% in September. At the time of writing, it is down more than 20% so far in October. We have not escaped these chill winds in South Africa, and the FTSE/JSE All Share Index has now more than halved from its peak in US dollar terms.

There are some silver linings to all the gloom and doom. A global recession should weed out inefficient businesses and excessive consumption, and will hopefully provide firm foundations for more sustainable development. Recessions are a necessary and healthy season in the economic cycle. Fortunately the Fund has been invested in the JSE-listed securities that we believe provide the best possible protection from such events. This positioning was handsomely rewarded in the September quarter, which was one of the Fund's best ever quarters in terms of relative outperformance.

Avid readers of this commentary will notice that we now have 10 years of performance numbers to report for the Equity Fund. It has been a fantastic 10-year period in which the original investors in the Fund have grown an initial investment of R1,000 into R17,149, despite the recent negative returns! By comparison, if they had invested the same R1,000 into the benchmark FTSE/JSE All Share Index, it would have grown to R6,283.

When the Fund was launched in October 1998, the FTSE/JSE All Share Index had fallen by roughly 40% from its peak and we were in the grip of an emerging markets crisis. We have no idea what will happen to stock prices in the short term, but the recent market declines are hopefully setting the base from which the Fund can deliver another 10 years of satisfactory returns to investors.

Allan Gray Limited restricts itself to buying not more than 25% of a company's issued share capital for its clients, except in rare circumstances when the limit can be increased to 30% for a limited number of companies. Our clients currently hold 10 shares where the aggregated client holding amounts to more than 24% of the companies' issued share capital. Concerns are sometimes expressed that these holdings are illiquid. On the contrary, and quite paradoxically, these holdings sometimes prove to be amongst our most liquid when an opportunity arises to sell our clients' stake to a strategic buyer. The Fund's holding in Avusa is a prime example. During the month the Fund sold most of its Avusa shares at a substantial premium to the prevailing market price as part of a transaction whereby Allan Gray Limited sold a 25.5% stake held in Avusa by its clients to the Mvelaphanda Group. This contributed positively to our performance for the month, but unfortunately only put a small dent in the short-term underperformance arising from our underweight positions in Anglo American and BHP Billiton. We continue to see much better value in the Fund's holdings than in these two shares which account for more than 30% of the Fund's benchmark, the FTSE/JSE All Share Index.

The cash proceeds from the sale of the Avusa shares were used to follow the Fund's rights to subscribe to Anglogold Ashanti's share offering. This accounts for the Fund's increased position in Anglogold, which is now the Fund's sixth biggest holding. We believe that Anglogold's successful rights offering is a positive development for the company, which will give it much more flexibility in allocating capital to early deliveries into its hedge book and it promising exploration and development projects, particularly those in Colombia. You can read more about the investment case for Anglogold Ashanti in our June 2008 Quarterly Commentary.

Regular readers of this commentary will know that the Fund's portfolio is constructed based on the intrinsic (or true underlying) value that we see in the companies owned by the Fund. On the other hand, the portfolio of the Fund's benchmark (the FTSE/JSE All Share Index) is constructed based on the size of its constituent companies. This means that companies with relatively big free-float market capitalisations (the Index's measure of size) are accorded relatively high weightings in the Index. Anglo American and BHP Billiton are the two biggest companies on the JSE, and together they account for roughly 30% of the FTSE/JSE All Share Index. But the Fund does not own these two shares at all. The substantial differences between the Fund's portfolio and that of its benchmark will naturally result in very different investment performance. We are confident that this difference will be positive for the Fund over the long-term. But it has resulted in short-term underperformance as the Anglo American and BHP Billiton share prices have appreciated substantially in the first quarter. We would be surprised if the prices of some of their most profitable commodities prove sustainable in light of the very attractive payback periods on investment in new mines at current prices (copper and iron ore - one year and nickel two years, for example). We thus see much better value in the Fund's holdings, and are excited about the Fund's potential for long-term outperformance.

The Fund has returned 14.8% over the last year and 31.6% p.a. over the last five years. This has been an exceptional period for South African equities. While the Fund has delivered outperformance over the last five years it has lagged the return of the benchmark FTSE/JSE All Share Index over the last year. After an extended period of strong equity returns by the market it is not unusual for disparity within the market to diverge with parts of the market becoming overvalued. We have previously discussed the types of investments that we are finding attractive in what is now an expensive overall market. Remgro, MTN, SAB and Richemont are the Fund's largest holdings. They are all high quality companies with good management whose earnings are likely to outperform the market and which can still be acquired at reasonably attractive prices. The Fund is however very underweight cyclical companies whose earnings are now at extremely high levels. While their earnings may go higher in the short-term, we believe that they are likely to substantially underperform the earnings growth of the Fund's holdings over the medium term. Should these shares move from expensive to irrational levels the Fund may very well underperform its benchmark in the short-term. As you know, in terms of our investment philosophy, which we have consistently applied over the last 34 years, we are willing to accept short-term underperfomance by being different to the benchmark and by not buying shares that are trading above their underlying intrinsic value even if they could rise further in the short-term. This philosophy reduces the risk of capital loss and enables the Fund to take advantage of the opportunities for long-term outperformance that arise during times like this. While overall market levels imply much lower future return prospects for all equities we remain confident of our ability to outperform the benchmark index and through our proprietary fundamental research continue to find investments that should generate attractive long-term returns for our investors without assuming greater risk than the market.