The fund generated a return of 13.52% for the quarter, and 33.53% for the 12-months to 30 September 2004.
While global markets continued to de-rate, the local equity market experienced a strong third quarter buoyed by better-than-expected profits, a slightly weaker currency and corporate action speculation. The JSE All Share Index returned 17.4%, Resources 23.7%, Financials 16.7% and Industrials 11.3%.
After a softer patch and some doubt in the second quarter, the third quarter saw a resumption of the cyclical trends which emerged towards the end of 2003: synchronised global economic growth, high commodity prices, rising inflation and increasing interest rates. Major concerns for global markets remained largely structural, including the size of the US trade deficit (and its potential impact on the dollar) and the significant indebtedness of the US consumer (and what the effects will be of higher interest rates).
In South Africa, economic news remained positive with declining inflation, low interest rates and rising consumer confidence leading to a strong improvement in consumer expenditure. Shares across all sectors moved higher over the quarter fuelled by the combination of positive global and local economic news. We benefited from this strength in the equity market by maintaining a high weighting. However, given our more defensive stock selection, equity returns slightly ahead of resource heavy market indices were achieved. Low weightings in the gold sector, and Anglo American in particular, counted against us.
Financial shares continued to perform well over the period, benefiting from the surprise rate cut, higher equity markets and the potential bid by Barclays for a majority stake in Absa. The fund benefited significantly from large holdings in Absa, Sanlam, Metropolitan and Standard Bank, while avoiding Nedcor, which significantly underperformed in the financial sector over the quarter.
Within the industrial sector, companies continued to achieve good growth in underlying profitability. Many are considering taking advantage of lower interest rates to more optimally structure their balance sheets and increase returns to shareholders. Holdings in the retail sector (Edcon, Foschini, Woolworths and Truworths) and diversified industrials (Bidvest and Barloworld) continued to deliver healthy gains for the fund. The disappointments of the quarter were Telkom (deregulation) and Delta Electrical (strong rand leading to poor returns).
Ongoing positive inflation surprises, the unexpected interest rate cut and strong global bond markets resulted in yields moving down to levels much lower than we anticipated. As a consequence, our short duration position as well as and underweight position in bonds in favour of cash detracted from performance. This was mitigated by strong performance from our property investments, in particular, Liberty International, Marriott and Sycom.
The SA market is now fairly valued, but given the low potential returns on cash and bonds, it remains the most attractive domestic asset class.

The fund closely follows the Coronation house view and it has benefited from weighty exposures to shares such as Telkom and Naspers. Fund manager Morné Marais has reduced the exposure to equities, excluding property, from 75% to 72% in the three months to September and has acquired Alsi put options. Corporate bonds such as Super Group added value.

Equity and bond markets experienced a difficult quarter. Overshadowing evidence of a synchronised global economic recovery and dramatic improvements in corporate profitability were soaring oil prices, ongoing terrorist activities, rising global inflation, increasing interest rates and fears of a sharp slowdown in the Chinese economy.
In South Africa, economic news remained positive with low interest rates and higher real disposable income fuelling exceptionally strong consumer spending. Over the period, companies operating in the domestic market continued the trend of delivering financial results well ahead of market expectations, and in many cases achieved record levels of profit.
However, for an equity market largely dominated by rand hedge shares the dramatic strength in the currency provided a significant headwind leading to a decline in the JSE All Share Index of 4.7% over the quarter.
The Balanced Plus Fund's defensive stance and sound stock selection led to the fund delivering a small positive return of 0.14% in the face of the adverse conditions experienced during the quarter. Positive contributors were Kersaf, Foschini, Absa, Naspers, Remgro, Standard Bank and Telkom. The low exposure to resources shares once again mitigated the negative currency impact, nonetheless, some of the fund manager's stockpicks (Impala Platinum, AECI, Delta Electrical and VenFin) did suffer as the rand gained strength.
The fears of a slowdown in China and the strong rand exposed the vulnerability of the resources sector which produced a negative return of 13.6% for the period. However, the funds underweight stance mitigated the impact on performance. These price declines, combined with what the fund manager's view as excessive rand strength, have led to more reasonable valuations and the fund manager's would look to build on resources positions as the global economy moves past its peak in the second half of the year. Within this sector of the market, the fund manager's favour holdings in Impala Platinum, Sasol and BHP Billiton.
Financial shares performed well over the quarter and have now outperformed the overall market by more than 10% since the start of the year - vindicating the fund manager's overweight position in our equity and flexible funds. Banking shares, in particular, fared well as growing consumer credit and falling bad debts resulted in record levels of profitability. The life assurance sector performed slightly below expectations (although still ahead of the overall market) hampered by weaker equity and bond markets. Valuations in the sector remain attractive, and as a consequence we remain overweight financials favouring holdings in Standard Bank, Absa, Metropolitan and Sanlam.
The industrial sector provided varied returns, with companies exposed to the domestic consumer (credit retailers such as Foschini and Edcon) materially outperforming companies with rand hedge qualities (such as AECI, Delta Electrical, Richemont and VenFin). Momentum on the domestic economy is strong and the fund manager's expect this relative performance trend to endure should the rand remain at current levels. The fund manager's continue to favour large holdings in Naspers, Telkom, SAB and Remgro. Amongst smaller companies the fund manager's believe good investment opportunities exist in Woolworths, NuClicks and AECI whilst the strong performance trend in Foschini and Edcon is expected to continue.
The weak performance by the overall market over the past quarter and anticipated currency weakness leads the fund manager's to believe that the SA equity market will deliver sound returns over the next 12 months outperforming bonds and cash.
Over the quarter, SA bond yields followed international yields upwards. This resulted in the All Bond Index returning 0.4% which is well below the 2% delivered by cash. The correct curve positioning of the fund's bond portfolio, favouring the 3 - 7 year area of the yield curve, resulted in the funds bond portfolio ending the quarter ahead of the market benchmark. This strategy combined with a lower than normal bond exposure contributed to performance. The fund manager's continue to look for long term bond yields to move to levels above 10.5% to increase the duration of the fund.

Surging markets, strong economic data and a slightly more settled political backdrop characterised the closing quarter of 2003.
The Balanced Plus fund performed strongly over the last quarter of the year delivering a return of 14%. This was driven by excellent stockpicking leading to equity returns of 19.8%.

The greatest contributors to performance came from our large holdings in Telkom, Naspers and VenFin. In addition, the fund had some very pleasing returns from the funds smaller holdings such as Santam, AECI and Foschini. The greatest disappointment came from Nedcor, where company-specific problems eroded the good performance from the banking sector (Absa and Standard Bank were the funds banking winners).

The key ingredient to any forecast for 2004 is the level of the rand. The fund manager's remain committed to a view of gradual weakness, which should provide a better environment for the South African resource sector shares. However, a significant re-rating of these shares has already occurred in US dollar terms, driven by the surge in the global commodity price rally. Thus an underweight position in resources would be advisable, with selective exposure to the medium term potential in the likes of Impala Platinum, Sasol and Anglogold. Despite the increase in the gold price in the last quarter on the back of a weak dollar, the fund manager's continue to find little appeal in the SA gold shares where the effect of the strong rand has been largely ignored. Even a weaker rand off these levels will add little attraction.

A different way of playing a weaker rand is exposure to the likes of Remgro, SAB Miller, or even Liberty International. These shares offer currency leverage via owning offshore businesses or assets that are themselves attractively priced. There are also other beneficiaries of a weaker rand, such as exporters/global players like Delta Electrical and infrastructure and engineering plays like Aveng.

It has been a good year and a good quarter for domestic shares, with most benchmark indices being up around 18% since September. Despite these returns the fund manager's are still bullish on the outlook for the funds equity portfolio and for many quality South African blue-chips (eg, Standard Bank, Absa, Bidvest, Tiger Brands). The fund manager's see no major impediments to consumer demand locally, and expect industrial and producer behaviour to be only temporarily affected by the stronger rand. As a result, industrial and bank share earnings growth should remain reasonable and these sectors and shares will provide further gains under a benign global backdrop.

The SA equity market is very attractively priced, with forward dividend yields on a host of shares still offering returns competitive with after-tax cash yields. As a result, 2004 should be another good year for SA equities, although risks from global and political issues remain.

SA bond yields continued to benefit over the quarter, but gains were far more muted than those recorded in the first half of the year. The fund manager's believe that yields have normalised, and remain wary of the effects of reflation on global bond yields. The funds bond exposure (and its duration) continues to be a little below what the fund manager's would consider the longer term average.