In what was a very challenging quarter, the fund generated a negative return of 5.5%. Whilst disappointing, this was well ahead of the -18.9% produced by the JSE Industrial 25 index. For the quarter, the fund was placed first in the industrial fund category, and for the year to end September 2002 was up 6.9%.

The most significant contribution for the quarter came from the funds position in MIHL, which has appreciated by over 70% during the past few months. The fund managers did indicate at the end of last quarter that the stock was substantially undervalued, and that they were building a large position. The recent price increase has been driven by a number of issues, the most notable being a proposed take out offer of minorities by Naspers, announced at the end of September. HL&H also provided a good return as a result of minority shareholders being bought out at a premium by Remgro. The fund managers are always searching for MIHL and HL&H type situations: a good business that is both attractively priced and is a potential take out target. The fund currently holds positions in at least three or four such stocks. The fund relatively high exposure to Telecommunications through holdings in Johnnic, M-Cell and Venfin was the single largest negative contributor for the period. The fund managers continue to believe that the sector is undervalued, and that it is suffering from fear and irrational behaviour, as such they have maintained exposure. Other core positions are largely unchanged, with the only notable activity being the sale of Truworths. The fund managers realised a 30% return on the funds initial entry price to this stock and have now purchased the more defensive, and attractively priced, Shoprite Holdings. The fund managers also increased the funds TMT exposure through purchases of Dimension Data and Naspers.

Market conditions have been very difficult over the past months, with global stock markets under significant pressure. The South African market is not immune from these forces, and as such the fund managers do not expect significant capital appreciation from South African industrial counters until global markets show some sign of turning. Valuations of industrial stocks in South Africa are however still very attractive: the industrial index excluding Richemont and SABMiller is on a 12 month forward PE of 7.6. This valuation level limits the downside and also provides the potential for significant upside under more favourable market conditions. Furthermore, the industrial arena is the least likely to be affected by any value destruction as a result of economic redistribution. The fund remains close to being fully invested, and can see significant opportunities within selected counters in the broader industrial index.

The fund enjoyed another excellent quarter. Gold shares continued to surge, if with unprecedented volatility; the rest of the sector, however, tracked lower, reflecting concerns about the global recovery and a strengthening rand. Sadly for South Africa, and thankfully for the resources sector, the rand's strength did not last. By the end of the quarter, it had again weakened substantially, despite a much weaker US dollar.

In this environment of trendless but highly volatile markets, the fund manager's aggressive trading approach around our core fundamentals has been vindicated. "It don't mean a thing", said Duke Ellington, "if you don't have that swing". In cyclical investing, it is vital to remain on top of perceptions and sentiment as they adjust from day to day. Over the past quarter, the fund manager's "sense of swing" did not let us down.

The fund remains positioned to extract the maximum benefit from the remainder of the gold run. Given a weaker dollar scenario, the fund manager's are finding value in offshore resource equities, and have increased the fund's exposure; the fund manager's also retain a full exposure to diversified miners, whose robust portfolios of offsetting mineral businesses are exactly what one should be looking for in these uncertain times. As we move closer to the end of the year, the global recovery (which remains very much in place) will fuel these counters upwards. The long "tail" of small caps has given the fund a fair degree of stability in these markets, as well as a welcome exposure to the local manufacturing sector, poised for a rebound as the benefits of a weaker rand filter through.

Finally, the performance of the fund continues to attract inflows, providing liquidity and flexibility to position the fund for maximum returns. The fund manager's continue to believe that the fund will generate a positive dollar return for 2002.

The fund had a very successful quarter. The Resources Index continued to provide positive returns, extending last quarter's returns. Gains were achieved through our aggressive positions in the best performing sub-sectors: gold and industrial commodities (Gold Fields and Harmony, and Iscor and Sasol respectively). It was pleasing to see Kumba Resources rerate to fair value, rather faster than we anticipated, the move was expedited by Anglo's pre-emptive strike.
The fund has experienced strong inflows, allowing the fund manager to optimise share selection on a daily basis, with little disruption. The fund manager believes that the fund is now on the radar screen of larger investors, and that this trend will continue. It has been six months since they adopted a more aggressive and proactive investment approach, the obvious success of which has translated to growing confidence in implementing our views. The fund manager anticipates that "front-foot" tactics will continue to serve the fund well as they enter a tougher phase of the commodity cycle.
The fund manager increasingly believe that gold is "refulgent" ("shining, gloriously bright", as per the Oxford English Dictionary), and that PGM companies continue to offer great value. 2002 may well be the year of precious metals. While diversifieds look fairly priced, there are still enough value opportunities to aim for a positive return from the sector this year, perhaps even in Dollars.