A luta continua!
Eager readers of our quarterly musings will be as surprised as we were by the arrival of the final round. If we were on the ropes in the previous quarter, we were in the centre of the ring putting together combinations in the last - with a few vicious right hooks ultimately slaying the opponent!
We had our best quarter so far this year, with the fund returning 18.7%. The index returned 22.62% with the help of the diversified miners at the death.
Our larger individual stock exposures performed admirably with Sasol, Iscor & Impala returning 25%, 20% and 10% respectively. Impala has also announced a share buy-back instead of the special dividend we had alluded to in previous quarterly comments - we are very happy with this alternative approach as it holds permanent benefits for equity holders. Iscor continues to deliver a strong operational performance and also holds the promise of a significant capital distribution. Sasol has benefited from the 'end of cheap oil' (to borrow a phrase) and is a core holding in our portfolio.
The biggest change to our equity positions during the quarter was the virtual doubling of our gold exposure, mainly in the form of Gold Fields, very early in the quarter. This was motivated by a view that a Rand Gold price of 79000 R/kg was unsustainable, and that Gold Fields offered the best opportunity to exploit this view. To our considerable surprise this action has born fruit much sooner than we had expected, with the Rand Gold price rising to 87392 by quarter end, up 11% on the 79000 value at the start of the quarter. Tito Mboweni played a valuable role by cutting 50 basis points in the middle of the quarter - thus aiding the 4% devaluation of the rand we experienced over the period. The US Dollar Gold price did the rest, appreciating 6% over the quarter! Goldfields itself returned 34% for the quarter.
So the 'Rumble in the Jungle' might be over, but as one sporting goods brand was keen to emphasise 'There is no finish line' or if politics and not sport is your poison 'A luta continua!"

The bell has rung!
The second quarter is over and the bell could not have come a moment to soon. No doubt about it, we were clinging on - doing the rope a dope - like the great Muhammad Ali in the 'Rumble in the Jungle'; as the epic bout between Ali and Foreman was billed. If you've had the pleasure of seeing 'When we were Kings' you'll know the outcome of the fight.
Well that's enough beating about the bush; the Resources Fund returned a negative 7.25% for the quarter, outperforming the JSE Resources Index by 6.13% as the index declined by a staggering 13.6% for the period. Our beloved currency started the quarter at R6.30/US dollar and ended at R6.21, while touching R7.04 on the way!
Low gold exposure continued to help the fund as the average rand gold price declined to 83231 R/kg for the quarter, from 88430 R/kg in the first quarter of the year. The rand gold price ended the quarter at 79000 R/kg, resulting in the South African gold sector having a torrid time!
The only good news amongst our big positions was Iscor which rose from 3620 to 3860 over the quarter. Impala continued to suffer incredibly, declining from 51565 to 47100. Sasol held steady from 9800 to 9610 - despite announcing a positive earnings surprise due to the stronger oil price!
We continue to trawl for opportunities especially amongst the underperformers - like the golds - but nothing looks compelling just yet.
We can sense your suspense regarding the 'Rumble in the Jungle', and so we'll put you out of your misery and reveal the outcome. Ali lies on the ropes for the entire fight being pummelled by Foreman. In the final round he comes out fighting and unbelievably knocks an exhausted Foreman out.
We continue to roll with the punches and look for our stock specific opportunities!

From 1999 to 2002, virtually all growth in the all share index was attributable to the resource shares.

But, despite a 13% rally in the December quarter, resource shares underperformed last year, with the benchmark resources & basic industries index up just 8,5% compared with 25,3% for industrials and 17,9% for financials.

Coronation has historically not been bullish on resources. Its resources fund began life as the Cyclical Growth Fund, which trawled far wider than companies that dig holes in the ground.

Ever since the fund was turned into a fully fledged resources unit trust, it has made full use of the latitude given it by the Association of Collective Investments to buy companies that do not form part of the benchmark, including sugar producer Tongaat Hulett ; Bell Equipment and Barloworld, which supply capital goods to the mining industry; and Delta Electrical, which is harder to pin down as a resource company.

Co-fund manager Hugo Nelson says investors need to have conviction that the fortunes of the resource companies have changed before investing in such funds; Coronation itself is not so sure. Nelson says he is not convinced that the rand will now weaken on a sustained basis. He argues that certain resource counters are already pricing in a rand/dollar exchange of close to R8.

He says the fund focuses on searching for shares that provide a margin of safety even if the rand remains firm, rather than investing in shares that are benefiting from the momentum in the current market. The "safer" shares include Implats, Sasol and Iscor.

BHP Billiton and Anglo, which make up well over half of the benchmark, account for just 17% of the fund. Since the beginning of the year, this low weighting has hurt it.

The fund has an 8,5% holding in international shares to diffuse the effects of the strong rand, the bulk of which is held in Brazil's CVRD and Petroleo Brasiliero, as the fortunes of the local currency are closely aligned to the US dollar.

The resources sector ended the year strongly, up 13% for the quarter ended December 2003. The backdrop was characterised by a stronger rand (although some of the November gains were given back towards the end of December), surging precious metal prices (gold, platinum and silver) and rampant base metal prices (nickel price close to a 15 year high).

The fund remains underweight diversified miners on the basis that most of the global recovery and the strong run in base metal prices have already been priced into the equity prices. To make matters worse certain resource counters are already pricing in a rand/dollar exchange rate of close to R8. If the fund manager's view on the implied currency is correct then the option on the rand hedge component will only kick in above the R8 level.

While the commodity run continues the fund manager's will remain focused on searching for correctly priced securities that offer a margin of safety, rather than playing the momentum game. This may lead to some short term underperformance, but should generate real returns over a longer term horizon.

The fund manager's preferred counters remain: Impala, Sasol, Iscor, AECI and Delta.