The overall market recovery continued into the third quarter, aided by strong international markets. The improved global economic outlook proved particularly beneficial for commodity stocks. Interestingly, gold, which is traditionally seen as a hedge in times of uncertainty, also performed extremely well, boosting the share prices of the gold counters.

This seemingly incongruous set of events was muted in the local markets by the strength of the rand throughout the period. The fund was well positioned for local equity markets but less so for the run in gold shares. The fund manager's continue to believe that, despite the reasonable outlook for the gold price, the local gold shares are way over-priced.

The Market Plus Fund returned a pleasing 5.3% for the quarter bringing the six month return to 15.4%, versus the overall equity market return of 14.7% for the same period. This was achieved despite the fund only being 70% -80% invested in equities -demonstrating once again the excellent returns that can be achieved in a properly managed asset allocation fund.

As the market favoured resources over the quarter, financial shares underperformed, detracting somewhat from the fund's performance. The fund manager's do not expect this to continue and continue to hold a large weighting in the financial sector.

Within the fixed interest environment, uncertainty surrounding the timing and extent of rate cuts enabled us to take some short-term trading positions which have since been profitably closed out. Given the fund manager's view on the trend for short-term interest rates and inflation, they believe there is very little value in this asset class, and have increased the funds equity weighting accordingly.

As discussed in previous commentaries, the fund manager's believe the South African equity market is fundamentally cheap. While the strong rand has dampened the outlook for the resources sector, the outlook for other sectors is still benign. As valuations are pricing in a very negative view, the fund manager's believe that a long-term investor stands to gain significantly from this current market opportunity.

The fund is positioned with large weightings in the domestic industrial and financial sector but underweight resources due to the strength of the rand and the high valuations in this sector. Focus remains key in the way the fund is managed, with the top 10 stocks making up just over 60% of the equity portion of the portfolio. The fund manager's expect the fund to continue to outperform its benchmark and to continue to deliver positive real returns over the medium-term.

Last quarter the fund manager's stated that the fund was positioned for a turnaround in the equity markets, although the fund manager's couldn't say with certainty when it would occur. Over the past quarter, the fund manager's did see a very strong rebound in international markets, and a similar pick up in the local markets, although the strong rand muted this in the end.

International markets seem to have taken their lead from fewer concerns in the Middle East and are reflecting the fact that the massive selling of equities by institutional holders has abated. The S&P returned a massive 15% in US dollar terms over the quarter, rapidly moving that market back into more expensive territory; while the JSE still managed a respectable 8.1%, despite the rand strengthening by 6% against the dollar.

Once again stock picking and asset allocation were extremely important over the period, with significantly different relative returns between various sectors. For example, over the quarter the resource 20 index returned 2.6% against the financial sector's 17.6%. The fund delivered a 9.5% return due to being well positioned with an overweight exposure to equities and also holding the correct equities: overweight financials and domestic industrials, underweight resources.

The fund manager's believe that a focused selection of equities will deliver substantial outperformance. The fund manager's have not been afraid to take significant bets away from the index in order to achieve the returns, and will consistently use this approach to generate the benchmark beating performance the fund has delivered since inception.

With regard to fixed interest, positioning on the interest rate curve was important in order to achieve maximum benefits from the change in the repo rate. As a result, the funds exposure to 12 month NCD's paid off handsomely. As rates continue to come down, the running yield on the various fixed interest instruments are starting to look less attractive, thus the fund manager's are looking to corporate issue and specific quality property stocks to provide a yield pick up.

With dividend yields on SA industrial stocks ranging between 4% to 6%, one is close to achieving a real after tax return before any capital gains, enabling one to hold on to equities without being prejudiced.

As nominal interest rates continue to fall, more and more cash investors will look for opportunities of better yield, which will result in equity valuations improving. These kinds of switches cannot be timed to perfection, which is why the fund remain overweight equities in the fund.

The fund is now moving into its third year, with an excellent track record of outperforming its benchmark and delivering a real return to its clients despite poor equity markets. The fund manager's will continue to endeavour to produce these returns.

The first quarter of 2003 has seen the continuation of volatile equity markets across the globe. In South Africa, the continued dollar weakness and rand strength has been the biggest driver of both equities and bonds. The stronger rand threatens the margins of most SA resource companies and impacts the price of the London listed companies. At the same time, it benefits the inflation outlook and is very supportive for bonds. As was the case in 2002, correctly forecasting the rand will be the driver of asset allocation and stock selection for the remainder of the year.

The SA equity market has fallen further than most global markets this year due primarily to the rand, but also due to political concerns over such issues as the financial charter and the mining royalty bill. The net result is that a falling market tends to drag all equities lower regardless of the differing fundamentals of the various companies. This has resulted in some excellent companies trading at very cheap prices, an opportunity which the fund manager's have taken advantage of to increase the funds overall equity weighting. Not only are the prospects of good capital returns available, but the potential stream of tax-free dividends from these companies is also very attractive. In the short term, negativity could persist, but longer-term the potential gains from equities are extremely compelling.

Interest rates have remained high due to the SARB's very strict policy of attempting to meet its inflation targets. The first rate cut is only expected in June, with further cuts anticipated thereafter. In the meantime, the fund manager's choices are achieving attractive yields on the short-term money market and continue to hold a small number of high yielding corporate bonds. Given the relative attractiveness of the equity market the fund manager's have reduced the funds position in interest bearing instruments.

The fund is positioned for a turnaround in equity markets but only through careful stock selection and mindful of the impact of the strong rand. Continued outperformance of the benchmark is expected for the coming year.

The rand's strength has surprised even the most bullish on the currency, and has now reached a point where it is likely to do more harm than good to the local economy. That said, the fund manager's don't believe its strength will continue into the new year as exports decrease due to the reversal of the rand, and imports increase as pent up demand for foreign goods once again takes off.

Late last year, the rand's weakness boosted commodity stocks, hence the fund's large exposure to equities at that time. During the course of the year, however, the fund manager's substantially reduced this equity position and tended to favour domestic equities. The fund manager's are once again increasing the funds equity weighting, particularly to rand sensitive stocks, as the fund manager's firmly believe that there will be some retracement of the gains made in the last two months of 2002. Despite the strengthening of the currency and the prospect of interest rate cuts into 2003, the interest rate sensitive stocks, and in particular the banks, have not shown any re-rating, and the fund manager's continue to selectively acquire companies in this sector.

On the fixed interest side, the fund manager's have further reduced the funds holdings in bonds after the strong run, and continue to hold 12-month and shorter exposures where the yields are better and there is less risk of exposure to a sell-off by foreign investors. While inflation is expected to drop quite quickly in 2003 the fund manager's still believe that yields on the longer-term bonds are not attractive.

2003 will be interesting as South Africa's look to signs of recovery in the global markets and assess the impact of the strengthening currency on domestic stocks. The fund still has the advantage of favourable equity valuations and a reasonably strong economy, which is being driven at the margin by more expansionary fiscal policy from government. The fund is well positioned to outperform in 2003.