Over the last quarter we have added to the Fund's position in Sasol. It is currently trading on 12 times its last reported earnings, which we believe to be below normal, and on a dividend yield of 3.3%. These simple value metrics compare favourably with the FTSE/JSE All Share Index, which is trading on 17 times earnings and a 2.3% dividend yield.

Further factors which we believe strengthen the investment case for Sasol relative to other shares on the JSE include:

- There is considerably more scope for Chinese oil consumption to grow relative to its own economy and relative to global consumption, than there is for growth in Chinese consumption of steel-making materials and base metals (and also less downside risk to Chinese oil consumption);
- Future growth in the supply of oil is more constrained than it is for iron ore, which is a key profit contributor for most diversified mining companies;
- Sasol has started to take a sharper look at its costs and efficiencies;
- Sasol has a considerably longer reserve life than many of its oil and gas peers;
- A weaker rand increases Sasol's profits (all other things being equal) - The recent fall in natural gas prices makes Sasol's GTL (gas to liquids) technology a relatively more attractive alternative to LNG (liquefied natural gas) for countries aiming to monetise their stranded gas reserves.

As always there are risks in equity investments. Sasol is planning to spend approximately R40 billion on capital expenditure over the next couple of years. This equates to circa R62 per share compared to the current share price of circa R315 per share. There is always a risk of large capital projects disappointing.

But we believe that investors are adequately rewarded for taking on this risk at the current price and Sasol is now one of the top three shares in the Fund.

The Fund's defensive positioning helped performance in June when the local equity market fluctuated in a 2 000-point range. Short-term volatility is positive for long-term investors as price movements offer opportunities for the Fund to exploit. The volatility in the market highlights the low confidence that investors currently have in the predictability of future earnings.

Aggregate real earnings for the local equity market have fallen 24% over the last year and are now on their long-term trendline. This puts the ALSI on a 'normalised' PE of 16.7, which is still well above its long-term average. Any study of long-term real earnings will show that it is very rare for real earnings not to fall below trendline after a peak such as we saw in 2008.

We therefore continue to invest a significant portion of the Fund in businesses where we have greater confidence in the predictability of their future earnings than those of the average business, and those businesses whose earnings we believe to be below normal levels.

The composition of the Fund's holdings remains largely unchanged except for price movements, which for example have led to Dimension Data entering the Top 10.

Many South African financial and industrial shares are close to their 2007- 2008 highs. We believe that the current valuations on many of these shares create more scope for disappointment than pleasant surprises. For example, some South African retailers are trading at high multiples on high earnings.

We are finding better relative value in high quality industrial companies with sustainable and steadily growing profit streams such as: SABMiller, British American Tobacco (BAT) and Remgro. Other significant exposure to the industrial sector arising from holdings in two or more companies are: paper (Mondi and Sappi), sugar (Tongaat and Illovo) and technology (Didata and Datatec).

The South African life insurers are slowing transforming into more complete savings and financial services businesses. The proposed merger of Metropolitan and Momentum may accelerate further changes in the industry. The life insurers' shares are generally priced fairly close to embedded value (the value of the shareholders' assets and the existing book of the business), which limits the potential downside with the upside potential coming from any new profitable business written and further measures to improve efficiency. We are finding more attractive value in the life insurers than the banks, which we believe are already pricing in a substantial recovery from the loan impairments of the last couple of years.

We have been adding to the Portfolio's position in Sasol. China already consumes about 40% of global production of most base metals and it buys two-thirds of seaborne iron ore. Yet it burns only about 12% of global oil production. We prefer the upside/downside potential in Sasol to that in Anglos and BHP.

Many of the Portfolio's holdings will benefit from a weaker rand either because they own South African-based export businesses or because they own offshore businesses. Non-South African businesses account for a substantial portion of the value in six of our top 10 shares (SABMiller, BAT, Anglogold, Mondi, MTN, Sappi).

The first decade of the 21st century was a remarkable one for the Fund. It returned 22.1% per year for the decade, which amounts to a significant growth in the real purchasing power of Fund investors' capital, as the inflation rate averaged only about 6% per year over the same period.

The Fund's returns compare favourably with those of most stock market indices for the decade, (measured in rands and annualised for ease of comparison):

FTSE/JSE All Share Index 15.8%
FTSE World Index 3.0%
S&P500 0.9%
MSCI Emerging Markets Index 12.1%

Although the Fund has outperformed its benchmark, it should be recognised that the Fund's strong absolute returns are also attributable to the very strong performance of emerging markets and commodity producers from what would now seem very depressed valuations at the turn of the century. It would be extraordinary if the Fund were to enjoy a second consecutive decade of such favourable conditions; we expect real returns to prove much more elusive over the next decade.

One of the keys to long-term wealth creation is the preservation of capital in bear markets. We continue to seek opportunities for the Fund to invest in companies which we find to be relatively undervalued, and which thus offer the best prospects for longterm capital preservation. However, as an 'equity' fund, the Fund remains fully invested in the stock market, which means that its value may well decline in the event of a repeat of the declines of 2008.

In seeking the best relative value on the JSE, the Fund's composition may differ significantly from that of the benchmark index. This can lead to periods of short-term underperformance, such as for the 2009 calendar year, but we remain confident that it will translate into long-term outperformance