The tapering talk-induced fear that gripped global financial markets during the second quarter of 2013 started to lift during the third quarter, culminating in a relief rally during September. The rally followed the announcement by the US Federal Reserve that they intend to continue with the current quantitative easing programme. Equity markets performed well, with the bellwether MSCI World Index returning 8.3% over the quarter, taking the lagging 12- month return to 20.9%. The outperformance of the developed markets over emerging markets continued, now almost 22% over the last 12 months. The US dollar weakened by 3.5% against the euro over the last three months, while emerging market currencies in countries struggling with large current account deficits like South Africa, India, Indonesia and Turkey suffered significant devaluations. South African equities yielded 11.2% over the three months, bringing the 12-month number to 25.3% (SWIX). Within this, resource shares outperformed other sectors for the first quarter in a long time (but not over the year). The rand again lost value against both the US dollar and the euro, with the 12-month number representing devaluation of more than 17% against the US dollar and more than 21% against the euro. Gold lost nearly 5% of its value over September, although it still strengthened by nearly 10% over the quarter. Brent crude oil performed similarly. Copper and iron ore performed well over the quarter, increasing by 8% and 14% respectively. The fund returned 19.0% (net of all fees) over the quarter, and a pleasing 11.8% compared to the benchmark's 6.5% over the last year. The five- and 10-year numbers are now 6.2% and 17.4% per annum respectively, both convincingly ahead of the benchmark. The offshore component of the fund detracted from performance relative to benchmark over the last year. Zimplats hurt the fund as it declined significantly following the election results where Zanu-PF once again won the majority vote in Zimbabwe. We still believe Zimplats offers an opportunity to investors, despite the significant and obvious political risks. The two biggest contributors to performance over the last year were Mondi and Pan African Resources, and both continue to be large holdings in the fund. Our holdings in Arcelor Mittal South Africa and Sappi again cost us some performance, as did smaller companies Metmar and Sentula Mining. Avoiding the gold majors again proved correct, while holding less than benchmark in BHP Billiton and Sasol cost the fund in relative performance. You have entrusted us with your capital, which is a responsibility we do not take lightly. Based on our assessment of long-term valuations we are excited about the positioning of the fund and specific opportunities that have presented themselves within the resource sector. When building your portfolio, we strive to ignore the constant noise in the market and identify undervalued and mispriced companies based on long-term valuations.

The second quarter of 2013 saw a continuation of volatility in global asset markets. The comments by US Federal Reserve chairman, Ben Bernanke, regarding a slowdown in quantitative easing sent markets into a 'taper tantrum' and affected global markets significantly. While the comment that quantitative easing cannot continue indefinitely should not have come as a large surprise to investors, it translated into a significant repricing in global and domestic bond markets. The US and South African 10-year government bond yields increased by 64 and 78 basis points respectively, and led to a capital loss for investors in this supposedly low risk asset class. The reassessment of risk also triggered sell-offs in perceived riskier assets such as emerging market bonds, equities, currencies and commodities. The only asset class that was up over the quarter was developed world equities. The FTSE/JSE All Share Index delivered a negative total return of 0.2% in rands and -7% in US dollars, in line with other emerging markets. The rand weakened by a further 6.9% against the US dollar to R9.87/$ at the end of the quarter. All commodities declined over the quarter, led by gold's 24% decline. Platinum and palladium was down 16% respectively, copper 10% and the oil price declined by 3%. Given this backdrop, the resource sector continues to lose value, underperforming the All Share by 28% over the last 12 months. For the quarter, the sector delivered a negative 11.8% return. Gold and platinum miners declined by 33% and 24% respectively over the last 3 months as commodity price declines added to the woes of the labour situation in South Africa's deep underground mines. In this environment, the fund's quarterly performance of -11.6% was only slightly ahead of the benchmark. Despite the poor absolute returns, the fund has outperformed its benchmark over all meaningful periods. A significant portion of the fund's outperformance of its benchmark derives from not owning any gold shares except for Pan African Resources, which has continued to do relatively better than other gold companies. Our holding in Mondi also continues to deliver sector beating returns, and we have reduced our position further. The biggest detractor for the quarter and over the last 12 months continues to be our positioning in Anglo American and BHP Billiton, the two largest companies in the sector. BHP Billiton has continued to outperform the sector, while Anglo's share price has significantly underperformed both BHP and the sector. The reasons for its underperformance are long and include the performance of Amplats, a shocking capital allocation track record, and uncertainty regarding their Brazilian iron ore project coupled with a very uncertain outlook for commodity markets. Anglo American remains the largest holding in the fund. We have no insight as to when the underperformance will turn around or why, but we believe the value of the assets owned by Anglo will deliver good returns for long-term shareholders. At current prices, we believe the market prices Amplats within Anglo American at R75 per Amplats share (versus its market price at ~R280), De Beers at a third of what was paid for it less than two years ago and all the other assets at a 20% discount to our valuation. We believe the margin of safety between share price and value is sufficient, and are at the maximum position allowed.
Portfolio managers
Henk Groenewald and Duane Cable

'Many of the biggest mistakes in the business and investment worlds have to do with cycles. People extrapolate uptrends and downtrends into eternity, whereas the truth is that trends usually correct: rather than go well or poorly forever, most things regress to the mean. The longer a trend has gone on - making it more permanent - the more likely it usually is that the time for it to reverse is near. And the longer an uptrend goes on, the more optimistic, risktolerant and aggressive most people become…just as they should be turning more cautious.' - Howard Marks

The fund was flat for the quarter against the benchmark return of -6.0%. For the 12-months to March, the fund returned 3.2% against the benchmark return of 0.2%. The fund has outperformed the benchmark over 3, 5 and 10 years. The greatest contributors to quarterly performance were our overweight positions in Mondi, Zimplats and Northam Platinum. Our underweight position in gold equities, Impala Platinum, Anglo Platinum and Assore also contributed to performance. Our overweight positions in ArcelorMittal and Metmar detracted from performance. During the quarter we took advantage of lower price levels to add to our positions in Anglo American, Exxaro and the rhodium ETF. We have taken some profits in Mondi and Northam Platinum given their strong relative outperformance and reduced margin of safety to our assessment of intrinsic value. Early in the quarter we reduced our overweight position in Impala Platinum given increased concerns around the lack of mining flexibility at the Lease Area and reduced margin of safety. We have also exited our positions in Petroleo Brasileiro and the natural gas ETF given the reduced margin of safety. The economic growth outlook for the world's major economies remains uncertain. Downside risks to growth forecasts remain elevated, however central bankers seem committed to do 'whatever it takes' to stimulate economic growth. We believe the consequences of the unprecendented level of monetary stimulus we are currently experiencing will be higher inflation in the long term, although over the shorter term these risks remain muted given sluggish global economic growth. Against this macroeconomic backdrop, commodity prices (measured in US dollars) have had a poor start to 2013. In March, most commodity prices declined. Gains were limited to thermal coal and platinum group metals (PGMs), with a particular strong performance by rhodium and palladium. The decline in commodity prices were predominately driven by concerns over statements by Chinese government officials about measures to cool the property market, which led to increased caution around demand growth expectations. The decline in commodity prices continues to weigh on the resource sector. The returns for the resource sector has been poor, underperforming the industrial, financial and property sectors over all meaningful periods (see table below). It is human nature to extrapolate past performance when making future investment decisions. It is therefore no surprise that the industrial sector has become the darling of the market, whereas the resource sector is largely unloved. We have for some time highlighted the relative attractiveness of the resource sector in our market. We believe that cycles matter and it would be a mistake to extrapolate the current downward trend in resources into eternity. The environment in 2007/2008 was extremely frothy for both commodity prices and resource equities. Regular readers of our commentaries will remember our cautious tone during that period, while many market participants were becoming more optimistic and risk tolerant. It is interesting when contrasting 2007/2008 to the current environment, where today's headlines are filled with doom and gloom for the sector. We believe it is important to behave counter-cyclically in a cyclical industry. While many market participants have grown increasingly cautious on the outlook for the sector we have become increasingly bullish. Our bullishness is not simply a naive belief in mean reversion, but based on specific opportunities we have identified based on our fundamental bottom-up research. We remain underweight gold equities despite the poor relative performance to both the underlying metal and the benchmark, as we simply do not see sufficient value (except for the company specific case of Pan African Resources) relative to other opportunities in the sector. Our top holding in the fund remains Anglo American. Anglo has been a significant underperformer relative to both the benchmark and BHP Billiton. We don't believe one can build an investment case on relative underperformance alone. At current prices one is buying Anglo at 8 times our assessment of normalised earnings and 0.8 times book value. This means that the market assumes Anglo will not deliver returns in excess of their cost of capital through the cycle, which has not been the case historically. Anglo's recent track record on capital allocation has been poor, overpaying for acquisitions at the top of the cycle and subsequently having to impair those investments. The risks of further impairments are likely, however these concerns are more than reflected in the current share price. Anglo has some high quality assets, however poor capital allocation, underperformance of Anglo Platinum and weak management has detracted from the investment case. The new CEO, Mark Cutifani, comes with operational experience and a much improved capital allocation track record, which should go some way to getting the business back on track. We believe the improved focus at board level on capital allocation and fixing underperforming assets will unlock a tremendous amount of shareholder value. You have entrusted us with your capital, which is a responsibility we do not take lightly. Based on our assessment of long-term valuations we are excited about the positioning of the fund and specific opportunities that have presented themselves within the resource sector. When building your portfolio, we strive to ignore the constant noise in the market and identify undervalued and mispriced companies based on long-term valuations.

Portfolio managers
Henk Groenewald and Duane Cable

Please note that under a new fund classification system for the unit trust industry, effective 1 January 2013, the fund category name has been changed to South African - Equity - Resources (previously Domestic - Equity - Resources & Basic Industries).

The 2012 calendar year turned out to be a very good year for most asset classes worldwide. Locally, the JSE All Share Index returned 26.7%, surging to new all-time highs in December. Global markets also had a strong year, with the MSCI World Index returning 16.5% and MSCI Emerging Markets Index 18.6% in US dollar terms. The rand weakened by 4.1% against the US dollar over this period. The strong returns across asset classes were generated despite the deepening fiscal crisis in Europe, concerns around the looming fiscal cliff in the US and generally anaemic economic growth. Unfortunately, investors in the global growth-exposed resource sector did not share in the general bounty. Domestic financial and industrial indices delivered returns for the year of 38.1% and 40.7% respectively, while the resource sector eked out a barely positive return. The poor return from the resource sector was mainly driven by declining earnings, as commodity prices came under pressure and costs continued to increase. The most dramatic collapse was the decline of iron ore prices by 23% in August, but the subsequent recovery meant a decline of 9% for the year. In aggregate, resource sector earnings declined by 12% for 2012. Specific to South Africa, the events at Marikana and subsequent general labour instability and strikes illustrated the riskiness of labour intensive deep level mining in this country. Earnings from platinum companies were decimated, more than halving over the year. In this environment, the fund delivered a return of 2.5% for the year, pushed into positive territory by the final quarter's return of 6.3%. This is slightly behind the benchmark's return for the year of just over 3%. Longer-term returns for the fund, although anaemic in absolute terms, are still ahead of benchmark. The main contributors to fund's underperformance over the year were our preference for Anglo American over BHP Billiton, and Arcelor Mittal. We still believe Anglo American to be one of the cheapest global mining shares, but poor operational performance and questionable capital allocation has led to a large underperformance of sector-leading BHP Billiton. In Arcelor Mittal's case, declining global steel fundamentals have led to a decline in our assessment of fair value, but we still believe it offers value at current prices. Mondi and Pan African Resources were the two stand out performers in the fund over the year, both of which we continue to hold. The resource sector has underperformed the rest of the South African market over the last 1, 3, 5 and 10 years. We believe many of the companies represented in the sector are already pricing in most of the bad news, and expect much better relative performance in future.

Portfolio managers
Henk Groenewald and Duane Cable Please