The fund manager's were happy to report that in the first quarter as managers of the Coronation Resources Fund, they managed to produce a quarterly return which exceeded that of the resources sector!

In July, the sector rose 6%, in August 10% but then, in September, it ran out of steam to decline by 5%. This resulted in an overall return for the sector of 10.4%. In turn, the fund returned 14% for the quarter, largely due to the September resilience. Long may the honeymoon last!

The fund manager's approach has been to focus on value and ignore the momentum plays as much as one can in the resources environment. This has seen the fund manager's dispose of gold and raise overall platinum exposure.

The funds maximum weight in Impala was a major contributor to the funds outperformance. We are also significantly overweight Sasol and Iscor purely on valuation grounds.

The fund remains underweight in the diversified miners and feel that the current euphoria around a global recovery has lead to a big commodity upcycle being fully discounted in the prices of these companies. Hence the funds cash levels have risen as the fund manager's await attractive valuations; or alternatively, valuations which more accurately discount the weakness of the US dollar versus the rand.

The resources sector enjoyed a better second quarter than the first, as did the fund. After continuing to slide into April, May saw a strong rebound that left the sector up by approximately 10% by the end of the quarter. The funds modest success in trading gold shares, long positions in Iscorand Billiton and a successful trade into and out of Lonmin at the expense of the other platinum counters, as well as avoiding Sappi (trading update on depressed operating margins due to euro and rand strength), more than compensated for the disappointments in the funds international steel exposures, Mvelaphanda (which did a poor deal for its shareholders with GoldFields) and some of the domestic cyclical plays, which should still come through.

The outlook for the sector remains muted. Global economies are in the early stages of a slow and very faltering recovery, while commodity markets are still working through high inventory levels. The lack of demand masks the good supply side discipline which has formed the bedrock of the fund managers longer term optimism on the sector. This remains in place.

While in the short-term the strong rand remains a headwind, we are approaching a renewed period of gradual rand weakness, and a global recovery should start to assert itself into 2004.

With valuations still reasonable, the sector remains a geared play on global growth. Other recent negatives (royalty legislation and BEE) are gradually fading, leaving the base relatively low.

The quarter was extremely tough for the market in general, and resource stocks were not spared the events of the macro environment. Indeed, in light of the constant stream of negative news from the war in Iraq, the weak global economy, strong rand and the royalty regime for the mining sector, it is surprising that the sector did not retrace further. Resources have now been moving sideways relative to the broad market since the end of its bull run in December 2001, and have not given up the relative performance of the preceding two years.

Global economies remain weak, with the exception of China. While China has proved to be a saviour to some commodity markets, it cannot by itself redeem the global economy. Given the strong currency and global fears, the fund manager's do not expect much positive momentum from the sector for at least six months. The companies are however attractively valued, and within the sector there are fine opportunities in quality businesses at reasonable prices.

The fund manager's focus remains capital preservation, with well diversified positions in smaller caps, some of the European steel companies, and bulk producers with exposure to China, notably CVRD. On the local front, the fund manager's prefer Iscor, driven by internal dynamics, and the quality and diversity of BHP Billiton.

The key features of the quarter were the spectacular run in the gold price and the equally impressive strengthening of the rand. While in both cases the fund manager's expected the directional move, the magnitude took them by surprise.

The macro environment increasingly drifted towards binary outcomes (war: high gold and oil, no war: low gold and oil) during the period. Some months ago Coronation stated that a war was inevitable; and the fund is positioned accordingly. It is nonetheless disappointing that it could not capitalize on these correct views a little more: the rand "dredge" effect doing much to undermine the hedge qualities of these two favoured commodities.

The relative performance of the fund was pleasing, with the negative momentum of the previous quarter reversed.

Sentiment towards the global economic cycle continued to worsen into the final months of the year. Diversified miners still offer good longer-term value, underpinned as they are by their exposure to bulk commodities. There is however little in the near term to drive earnings or ratings. The same is true for most other commodities.

The first half of 2003 should provide clarity on when the defensive stance in gold and oil can be relaxed in favour of more aggressive positions in the pro-cyclical commodity groups (base metals, paper etc). For now, the currency market remains the wild card.