Our thoughts are with all who lost loved ones in the tragedy which unfolded in Marikana over the last quarter. Our thoughts are also with any hardworking South Africans who may have been intimidated by threats of violence into staying away from work. The Fund has an exposure of just under 11% to the JSE-listed gold and platinum miners (including exposures to Anglogold, Goldfields, Harmony, Impala, Lonmin and indirectly, Angloplats). Productivity at South Africa's gold and platinum mines has been declining for most of the last decade. The many causes include: escalating 'section 54' safety stoppages, more stringent safety standards which result in slower mining and leaving behind high-grade ores in shaft pillars, declining grades, mining activity moving further from the shaft, an ageing workforce and strike disruptions. In addition to requiring more inputs for each unit of output, input costs (notably labour and electricity) have been compounding at rates far in excess of the general inflation rate. These pressures push high-cost shafts into losses, and ultimately into closure with the consequent loss of jobs and economic activity which surrounds a mine. Any intensification of these pressures accelerates the demise of high cost shafts and undermines the incentive to build new shafts. The gold and platinum mines remain a vital contributor to South Africa's dollar export receipts which are required to fund our imports. However, their importance is being obscured for now by the very strong inflows into our bond market from foreigners. RSA bonds are rapidly becoming one of South Africa's biggest exports. It would be a mistake to assume, because some shafts should be closed and are worthless, that all remaining shafts are worthless. As each unprofitable shaft is closed, the remaining operating shafts become even more important and valuable as earners of foreign currency. This is especially true in the platinum industry as South Africa produces the bulk of the world's platinum. But it is true for the gold mines too - when Goldfields' South Deep mine is the last remaining gold mine in South Africa, it will probably be a very valuable asset. Of course, there is a risk that shareholders may not derive their rightful share of this future value because of higher taxes and resource rents or nationalisation. It is impossible to know how much further the momentum of rising costs, declining productivity, shaft closures and job losses can continue until the rand depreciates towards a level which restores some equilibrium. In this light, the Fund's exposure to the gold and platinum miners is significant but not yet at a maximum possible exposure, and the Fund's exposure is spread across a number of mining companies. Furthermore, it should be noted that a large and increasing proportion of the value in the gold mining companies is to be found in their assets outside of South Africa.

A passive investor in the FTSE/JSE All Share Index is currently paying 12.4 times the aggregated trailing 12-month profits of all the companies comprising the index. This is fractionally above the average multiple since 1960 of 11.9 times profits. However, the current multiple of 12.4 does not tell the full story. It is the weighted average of high multiples on consumer facing shares, middling multiples on financial and telecommunications shares and low multiples on mining shares. Many foreign investors are enamoured with the growth prospects for South African retailers. But if one is paying more than 25 times profits for a company, such as is currently the case with Shoprite or Massmart, then the question one should be asking is not whether the company will grow, but whether it will be able to grow fast enough and for long enough to justify the value the market is placing on it. Globally, investors have become increasingly willing to pay higher prices for quality companies such as SABMiller or British American Tobacco, and these companies now trade on relatively high multiples too. Financials and the mobile network companies are generally being priced between 10 and 15 times their profits over the last year. While these multiples at first blush appear attractive relative to those on the consumer facing stocks, one needs to remember that banks require capital to grow and that their returns on equity will probably be lower over the next decade than they were over the last 10 years. Banks are also considerably geared, which means that small changes in the performance of their assets can have magnified effects on the residual equity value attributable to shareholders. We expect the profitability of the mobile networks to continue to be challenged by competitive and regulatory pressures. Many of the mining and resource stocks are trading on less than 10 times their reported profits. These are enticing multiples, but we believe that these reported profits will be hard to sustain as commodity prices and the mining companies' profit margins fall to more normal levels. Furthermore, their reported profits generally overstate their free cash flow if one takes account of capital expenditure required to stay in business. We believe that the market is directionally correct in pricing mining shares on lower multiples relative to financials, which are in turn on lower multiples relative to consumer-facing shares. The hard bit is assessing whether the market is now doing this to the appropriate degree. The Fund owns specifically selected shares which fall into the high, middling and low multiple groups. The Fund continued adding to its positions in the mining companies at a measured pace as they continued to underperform over the last quarter. However, high-quality defensive names such as British American Tobacco, SABMiller, Remgro, Sanlam and Reinet continue to feature prominently in the Fund's top 10 shares.

Two of the important concepts underpinning the management of the Fund are relative value and valuation-based investing. Relative value means that the allocation of capital to any share should be assessed in relation to possible alternative investments, which in the case of this Fund are restricted to other shares listed on the JSE. This means that when the overall stock market is expensive, the Fund may have to settle for holding fairly valued, or the least over-valued (in extreme cases) shares listed on the JSE. Valuationbased investing means that the Fund is prepared to allocate capital to any share listed on the JSE if the price at which it can be bought compares more favourably with its intrinsic value than similar comparisons for other listed shares.

The Fund's recent acquisition of shares in BHP Billiton (1.6% of the Fund at quarter-end) illustrates these two principles in action. For some years now, we have been emphasising the risk that a slowdown in Chinese infrastructural investment presents for metal prices, especially iron ore. We continue to see this as a significant risk, and we believe that prices of many metals and the profitability of many mining companies are currently substantially above the normal levels one could expect to see through the full commodity cycle. So what has changed, and why have we bought a position in BHP?

In short, the price of BHP shares has declined significantly relative to other shares which the Fund owns. For example, one year ago BHP closed at R270 per share and SABMiller at R243 per share. At this quarter-end, BHP closed at R234 and SABMiller at R307. The Fund still retains a significantly larger position in SABMiller than in BHP, but we believe that the current prices warrant some holding in BHP.

All the risks that we have previously identified regarding BHP remain valid. But its share price is now somewhat more reflective of these risks with the share trading on less than 10 times earnings. Although steel-making materials (primarily iron ore and coking coal) presently contribute more than half of BHP's profits, we find other characteristics of BHP attractive relative to the South African gold and platinum mines. BHP's mines generally have a longer expected life than the underground South African mines, which will require more capital as mining activity moves deeper, and the risks of 'resource nationalism' are arguably lower for BHP than for South African mines.

When a representative of one of the largest institutional shareholders in BHP is reported to be selling its shares and is quoted by Bloomberg as saying: 'Some of the decisions they are making are very good in terms of long-term strategy but are you going to make money from it in the next three years, which is our investment horizon?', then it is probably time for long-term investors such as ourselves to be taking a closer look at the share.

The benchmark FTSE/JSE All Share Index (ALSI) returned 2.6% for the 2011calendar year. The ALSI closed the year a fraction below 32 000 points, which was slightly down on its January 2011 opening level of just above32 000 points. The total return of the ALSI for the year was thus entirely derived from dividends. Overall South African stock market returns for2011 were disappointing relative to those of domestic bonds (8.8% for the All Bond Index) and cash (5.7%), but especially disappointing relativeto global equities (15.9% in rands for the MSCI World Index) and global bonds (29.6% in rands for the JP Morgan Global Bond Index). The lackluster returns from the South African stock market are not surprising given the relatively full valuations on South African shares at the start of the year.

The Fund had a good year, outperforming the ALSI by 7.5 percentage points. Notable contributors to this outperformance were the Fund's substantial holdings in British American Tobacco, Sasol and SABMiller. The biggest detractor from the Fund's performance was Sappi.

We are mindful that this good year follows underperformance in 2009 and2010. Investment managers can never afford to rest on their laurels, and we continue to work hard to identify the South African shares offering the best relative value for inclusion in the Fund. Our success in this task will determine the Fund's future long-term returns relative to its benchmark.

In our experience, our investment actions are often 'early', which means that shares can continue to fall after we have established a full position, or continue to rise after we have sold out. We accept this as an inevitable consequence of our investing style if it happens when the momentum of irrational markets drives share prices far past their intrinsic value. But it can also occur if we misestimate a company's intrinsic value. Obviously we strive to minimise such errors.

Less frequently, a share price can rise suddenly before we have established a full position. Old Mutual is a good example of this. By the end of 2011, 2% of the Fund was invested in Old Mutual. We had been accumulating shares in Old Mutual through the year. We were attracted by its substantial discount to embedded value, but more importantly by the resolve of the new management team to de-risk the business, allocate capital sensibly and unlock value for shareholders. Old Mutual traded in a range of R13 to R15per share for most of the year, before rocketing to over R17 per share in December on the news that the company would be selling its Scandinavian business for a great price. Clearly the market was just as surprised by this announcement as we were.