The fund performed well in October with its unit price rising by more than 7%. This compared favourably with the All Share Index, which was marginally down on the month.
Early in the month it had appeared unlikely that interest rates would be cut further, given an already over-heated consumer market and the large trade deficit recorded in August. In expectation of ongoing rand strength, we reduced exposure to resources even further, selling out Impala and Sasol. This action was also motivated by the oil price, which appeared to have reached unsustainably high levels in rand terms and by the better relative value of Billiton, which is a major holding in the fund.
As a result of the above, the fund has made the most of a particularly buoyant equity market for the consumer and gross domestic fixed investment (GDFI) sectors. Holdings in Barloworld, Reunert, Altron, JD Group, Ellerine, Foschini and Astral amongst others have been particularly strong. The market's confidence in these sectors is driven by earnings yields, which remain very attractive relative to high real interest rates, Trevor Manuel's commitment to pay out some R300 billion in welfare payments to the poorest of the poor over the next three years, a growing middle-class and plans to step up fixed investment spending by parastatals.
While Uniserv was a star performer for the fund, Trencor and NUEP (previously Aplitec) were laggards. However, Trencor's container operations are booming and near cash holdings comprise at least half the share price, so we continue to enjoy the rand hedge comfort of this high growth and value stock.
Looking forward, we are optimistic about the performance of the South African economy over the next year. The fund is fully invested with new additions Spar and Shoprite. We have cut all short-positions in the futures market, with the rand having strengthened back towards six times to the US dollar.

The JSE extended it's very powerful run, rising by an incredible 5.7% for September 2004. This brings the All Share Index's rise over the last 12 months to +36%, and +61% since the start of the Bull Run in April 2003! The portfolio had a reasonable month relative to the market, which is very pleasing on an absolute basis.
Star performer sectors were Banks (+15%) driven by the market speculation around the acquisition of ABSA by Barclays, and the Retailers (+13.4%) driven by a very robust consumer environment and fuelled by positive public statements by some of these companies.
The fund participated to some extent in the Banks out-performance. However, in retrospect it seems we started to sell too early as we have been reducing our exposure to Banks and raising the allocation to rand-hedges, which has been low for the last two years. Our view is that while we do not expect the US dollar to be very strong, the rand is unlikely to appreciate much further, and is more likely to weaken gradually. In addition, we think Remgro offers great value (NAV discount >20% and more special dividends expected), a cheaper entry point to Firstrand and ABSA, and excellent rand-hedge exposure to British American Tobacco. It is now the single largest holding at nearly 8% of the fund!
Our exposure to Retail and Consumer stocks performed well, and we remain confident that the growth prospects for these companies (in the next 18 months) is still very attractive. Notwithstanding their performance in the last two years, we do not think that they are currently over-valued. Consequently, we retain a healthy exposure to the sector via Edgars, Truworths, NuWorld, Foschini, Ellerine, JD Group and the new listing of Lewis.
While unit-holders have enjoyed strong appreciation in the value of their units in the last 18 months (which may give cause for a more cautious approach), the underlying momentum to the market remains extremely strong. With greater market anticipation of a further interest rate before the end of the year, the short-term outlook is positive.

Still the general equity fund to beat

There are such high expectations for this fund, run by Tim Allsop of Polaris Capital, that to see it slip out of the top three funds to 10th out of 48 over three months might have disappointed some investors.

Allsop concedes that it becomes more difficult to manage a large portfolio - he needs to hold at least R40m worth of a company's shares (which would add up to just 1% of the portfolio) for it to make an impact on the fund.

But Polaris as a whole manages just R6bn, so it is far less constrained than a firm such as Allan Gray with R80bn or Old Mutual with R250bn. The two other multibillion-rand funds in the general equity sector, Allan Gray Equity and Old Mutual Investors, both reflect the house view of their parent companies, limiting them even more than Rainmaker.

Allsop says that fortunately there continue to be good buying opportunities among large-cap shares. Rainmaker is predominantly focused on industrial shares.

Allsop does not hold any gold or platinum shares. Recently he has nibbled on Sasol but he has preferred BHP Billiton for its exposure to oil, and he says an attraction is that Billiton is less exposed than either Sasol or Anglo American to the strength of the rand.

Allsop has a contrarian stance on financials. During the September quarter he sold the majority of his bank exposure, which now makes up 2,5% of the fund. In July Standard Bank alone accounted for 7% of fund assets.

Allsop admits that he moved out of banks too early but he took the fund's exposure to the consumer market through retailers rather than banks, taking new positions in Woolworths, Edcon and the newly listed Lewis Stores.

The main recent change in the fund has been a rebuilding of the rand hedge exposure. For several years this has been anchored in the Trencor/Mobile companies, which account for 4,1% of the fund. The fund recently acquired a position in Grindrod and increased its holding in Remgro . SABMiller and Sappi were also bought.

Financial Mail - 12 November 2004

August was one of the strongest months since the bottom of the market in March 2003. The All Share Index gained 8.75%, with the Resource sector again one of the largest gainers, led by Gold Miners reporting a 17.9% increase. Primarily as a result of our underweight exposure to the better performing Resource sector, the fund under-performed the All Share Index. However, we are confident that unit holders will not find this entirely unsatisfactory!
The big surprise was the 0.5% cut in the Repo rate. Market commentators see this as a potential change in monetary policy strategy by the Reserve Bank, from a conservative approach of severe inflation targeting to one trying to generate growth, resulting in a weaker rand. Because of the unexpected rate cut, the rand weakened against the US dollar (from R6-20 to R6-60), which predictably led to an immediate response by the more geared sectors to currency weakness - notably Gold, Platinum and the Mining Houses. We see this as an over-reaction and further significant rand weakness must follow to justify the re-rating of these sectors.
We do not believe the broad market is in expensive territory - especially taking into account that the market earnings yield is currently around 7% - very attractive relative to the after-tax yield of a cash investment.
Our focus remains on Industrial shares such as Barloworld, Remgro, Altron and Reunert - all of which are paying good dividends, while containing rand-hedge components. While the Industrial sector underperformed the Resource sector during the month, we believe that it offers better valuation and growth prospects.
We are still well exposed to the Retail sector and see consistent growth for at least another year. It is remarkable to see the movement of the LSM (living standards measurement) groups over the last five years from LSM 1 and 2 into LSM 3 and 4 - resulting in the emerging middle market driving retail sales beyond expectations. This phenomena is assisted and further fuelled by lower interest rates and low inflation, driving household and corporate spending.
We continue to search for high yielding shares on reasonable valuation multiples, with strong cash flows. This may result in under-performance relative to a strong market, driven by short-term currency weakness, but we are comfortable in the knowledge that we are invested in good quality, well priced shares that will deliver performance over the medium-term.

The Nedbank Rainmaker Fund is the product of the amalgamation in November 2003 of the former African Harvest Rainmaker Fund and the FTNIB Prime Select unit trust. Management of the combined portfolios has been with Polaris Capital since that company's inception in July 2003.

To be at the top end of the top quartile, as this fund has for the past three years, is a rare feat, especially in view of the large size of the fund. At almost R3,5bn, it's one of the larger unit trusts in SA. The bigger a fund becomes, the more difficult it is to show sustained growth, either in relative or absolute terms. Apart from the fact that it becomes increasingly difficult to pick stocks that will improve performance at this rarefied level, the larger a fund becomes, the more difficult it is to make meaningful improvements.

But fund manager Tim Allsop - director and primary founding member of Polaris Capital - is an old hand at this game and his experience shows. He managed both the Prime Select Fund and the African Harvest Rainmaker fund before their amalgamation.

During the second quarter, a number of additions were made to large resource stocks - Anglo Gold Ashanti, Anglo American Plc and BHP Billiton. In a similar vein, a big addition was made to Iscor. New industrial counters were Sappi, Richemont, JD Group and Telkom. The group disposed of its holdings in RMB, PPC and Venfin, and reduced its FirstRand holding considerably. The fund's holding in banks, though significant at just under 7%, is much lower than it is at many other general equity unit trusts.

July was uninspiring for most unit trusts and Rainmaker was no exception, rising by only 0,2%. Performance was aided by switches out of banks and into Remgro and Barloworld. Allsop continued to direct strong cash inflows into cheap stocks with some rand hedge exposure, such as Barloworld, Altron part prefs, Remgro and Reunert. He also favoured Santam, with its high cash holdings and favourable short-term insurance trading conditions.

June was a difficult month for the market, with the All Share Index declining 2.71%. The fund managed a positive return, primarily attributable to the maintained under-weight exposure to the Resource sector, which took another battering (-7.1%) in the face of an appreciating rand (+4.7% vs. US Dollar).
The fund maintains a very low exposure to the Resource sector for as long as the rand remains so strong. The fund manager's have special concerns for the gold miners where the gold price in rand terms is R82 500 per kg (on average) for the quarter, from R88 000 per kg for the previous quarter. This does not bode well for marginal producers such as Harmony, Western Areas and Durban Deep, and there is an increasing likelihood of labour disruption - these companies will be forced to cut back operations and costs.
The opposite of the above holds true when looking at South African retailers. Retailers have expanded margins over the last two years, and are now in a position to expand stores and grow credit sales at a faster rate as the South African consumer remains in a very healthy position. The fund manager's expect a second wave of investment in retailers and are well positioned for this with a weighting of 10% to Retail.
The fund manager's never ending search for good dividend yield paid off during the quarter as Reunert announced a 10% share buy back, and Remgro declared a special dividend of R2 per share, over and above their normal final.
The fund manager's still prefer to be invested in companies where they feel more certain of their growth prospects, while a strong balance sheet provides plenty of opportunity for the companies to pay special dividends, buy back their own shares or make good acquisitions.

The fund, run by Tim Allsop, has been consistently in the top quartile of the general equity sector, proving past performance can be an indication of the future. He likes to ferret out companies with world-class ideas that will enable them to show high growth. He was an early investor in Aplitec and Uniserv.

The fund used to have exposure to foreign equities, and Allsop has owned companies such as Siebel and Nokia.

Because of changes to foreign-exchange regulations, Rainmaker now operates purely as a domestic fund.

Last year, it also had a bias towards domestically focused companies, such as retailers Edcon, Pepkor and Foschini .

But in 2004, Allsop has reorientated the fund towards rand hedges that will benefit from renewed global economic growth, particularly in China.

He says even though resources look expensive relative to, for example, banks on a historic p:e, the momentum in commodity prices cannot be ignored.

In the fourth quarter, Allsop took a new position in Anglo American and in January BHP Billiton was introduced.

In January, he also topped up on rand hedges such as Barloworld, Iscor and AngloGold, and cut back on domestic shares such as Netcare, African Bank and Standard Bank. He sold Sasol and Gold Fields, which he expects to underperform other resource shares, and took advantage of a wobble in FirstRand's share price - when Anglo sold its final stake - to increase his holding.

Allsop doesn't like to be pigeonholed in the value or growth categories. Like a growth manager, he has an overweight position in the technology, media and telecom sector, topped up in January with purchases of Naspers, Reunert and Altech. But like a value manager, he has also bought counters on p:e ratios of less than 10, such as Group Five, Murray & Roberts, Tiger Wheels, Oceana and City Lodge. These can be relied on to produce solid growth over the next year.

He has also favoured solid companies with high cash flows such as Barloworld and Nampak.