The Investec Commodity Fund declined by 1% this month, handsomely beating its benchmark, the resources sector, which fell by 8.7%. Once again, huge divergence characterized the performance within the Resources Sub-Sectors. Mining Houses were the worst hit and declined by 11% as the macro environment driving commodity prices appeared to deteriorate: Global Industrial Production Indicators have turned down; high oil prices are sapping global growth; and China indicated a desire to put the brakes on its economic growth by raising interest rates. The fund benefited by being underweight this sub-sector (particularly Anglo-American) but has subsequently built up a larger position in the belief that these shares have been too hard hit despite no risk of earnings downgrades yet. Annual contract price increases for the bulk commodities (iron-ore and coal) are expected to be substantial (double-digit) and should offset any decline in base metal prices, and the companies are generating strong cash flows with payouts to shareholders on the way.
The Oil and Steel sub-sectors also assisted the fund's performance this month, rising by 3% and 16.6% respectively. Oil and Steel have been two of the best performing commodities year-to-date, and the fund remains overweight Sasol, Iscor and Hiveld, with the view that the valuation of these shares do not fully appreciate the earning which will flow from these strong prices.
Gold and Platinum were poor performers this month and both fell by over 8%. We continue to believe that gold shares are pricing in a rand Gold price too high for comfort and will trade these shares on a more short-term basis. On the other hand, all SA platinum shafts are still profitable and the sector remains more attractive than gold.
We feel that Impala Platinum's share price decline has been overdone and that the counter represents good value. Impala's earnings remain robust even in the strong rand environment and a share buy-back program will lend further support.

The Commodity Fund underperformed its benchmark, the Resources Index, this quarter. It appreciated by 18% against the Index's 22% rise.

Performances were almost universally strong in the Resources Index: The Gold sub-sector led the pack with a 28% rally, although this index is still down 17% on a year-to-date basis. The Oil, Mining-Houses, Steel and Platinum sub-sectors, also all posted strong gains (25%, 24%, 23% and 15% respectively). The Paper sub-sector was the only laggard and fell by 3%.

The commodities produced by these sectors all exhibited strong price performances quarter-on-quarter: Oil was the stand-out and rose by 28%, but platinum, gold, steel, coal and the base metals were also good performers, all spurred on by strong global growth, an anticipated soft-landing in China, and a lack of new supply in response to the rising prices.

Within the portfolio, the under-weight position in Gold shares detracted from performance. Gold shares rallied from an oversold position on the initial Rand weakness, following the surprise rate cut, due to their current marginal nature. The portfolio benefited with its overweight positions in Iscor, Sasol and Billiton.

We have upgraded these bulk commodity assumptions for 2005, which has boosted the diversified miners' earnings. In addition our assumption of the Rand remaining stronger for longer also favours the diversified miners over the pure commodity plays. BHP Billiton is the main beneficiary of this and we have increased our overweight bet at the expense of Anglo American.

Oil continues to be supported by a broad front of supply side factors and we maintain our overweight holding in Sasol as it offers high earnings gearing to this oil price upside. Earnings momentum is complemented by Sasol's undemanding valuation and growth prospects.

We still favour Impala Platinum, at the expense of Angloplats, due to Angloplats' premium valuation which we feel is excessive, given Implats's earnings growth profile, higher dividend yield and potential as a corporate target. Impala is more robust in the strong Rand environment and a share buy-back programme will lend further support. Earnings forecasts for the platinum sector as a whole, appear to have downside risk due to seasonal platinum price weakness and the strong Rand. However all SA shafts are still profitable and the sector remains more attractive than gold.

Wwe remain comfortable with our underweight stance in the Gold Sector although it has hurt in the shorter term. We feel that conditions for gold miners have not improved sufficiently and that the shares are still pricing in a much higher Rand gold price than we feel comfortable with. The operational environment for these companies is still bleak and next set of quarterly numbers should reinforce this as the companies hemorrhage.

A shift to a higher than average non mining resource share exposure has helped Investec Commodity reduce the effects of weak metal commodity shares. Manager Daniel Sacks believes this weakness is temporary and not the start of a sustained downtrend and that commodity price prospects are sound thanks to stronger Western demand offsetting lower Chinese offtake. The fund remains a leading sector contender after nearly 10 years.

The Investec Commodity Fund outperformed its benchmark, the Resources Sector, this quarter.

Performances were mixed within the Resources Index: The Paper, Steel and Oil sub-sectors rose (by 9%, 5% and 0.2% respectively), despite further Rand strength. The commodities produced by these sectors all exhibited strong price performances quarter-on-quarter (Pulp was up 7%, Steel up 14%, and Brent up 12%) and led to share price gains. On the other hand, the quarter witnessed a pull-back in both base and precious metals prices, and consequently the Gold, Platinum, and Mining Houses sub-sectors all fell (by 26%, 13%, and 12% respectively). The fund benefited by being overweight Sappi, Sasol and Iscor (the old JSE non-mining resources shares) and underweight gold shares.

Metal prices fell, principally on fears regarding Chinese economic growth and the impact of a rise in Fed Fund rates on metal markets. We believe there will be a second leg-up in commodity prices as continued demand absorbs available supply. Chinese industrial production has slowed to 35% from its February high of 46%, and we expect it will continue to slow. However, there will still be strong positive demand, and anecdotal evidence suggests the Chinese are starting to buy raw materials again. Furthermore, China, whilst a sizeable presence in most metals markets, at approximately 20% of demand, is less important than the 80% of demand outside China which only recently has started to rebound: Global growth is re-balancing, with US IP and Japanese IP up 6.3%and 8.7% respectively.

Lastly, in most past cycles, metal prices have risen WITH rising interest rates and if metals have indeed recently peaked for 2004/5, then this would have been a very untypical metal cycle. This quarter's sell-off has hopefully succeeded in shaking out speculative positions, while not altering the underlying fundamentals (supply remains restricted relative to growing demand. This can be seen in contract markets where hedge funds have not been active: Prices for both Iron and Coal haven't fallen).

We continue to prefer the mining-houses at the expense of the more domestically focused, single metal operators, due to the strong earnings momentum which these shares will exhibit this year.

The Resources Sector rose by 0.25% this month, in line with the broader market. The Investec Commodity Fund underperformed this benchmark by returning a negative 1.7% for the month.

The under performance was a result of the fund holding large positions in Sasol and Sappi; two shares which declined this month despite rises in the prices of the commodities they sell (oil and paper respectively). We believe that both these shares currently offer value as they trade on reasonable forward multiples given the earnings growth forecast. The fund also missed out on a rebound in gold shares. This has proved to be short-lived and we remain underweight in this sub-sector until valuations become more attractive.

The fund remains heavily invested in the mining-house sub-sector with holdings in Anglo and BHP Billiton. We have not revised down our forecast earnings for these two companies which should both show massive earnings growth. Our commodity price assumptions are still conservative relative to year-to-date averages, with lower metal prices being offset by soaring coal prices and strong iron-ore and oil prices. We also continue to like Iscor and Impala. A growing cash pile in both companies suggests a high possi bility of special dividends or share buy-backs.

The Resources Sector declined by 7.3% this month, underperforming the market by 5%.

The metals sector has sold off over the past month owing to increasing concern regarding Chinese economic growth and the impact of a stronger US Dollar on metal markets. In particular, we have seen an exit of speculative money from the reflation trades, triggered by a coincidental squeeze of growing expectations of a rise in Fed Fund rates, possibly as early as June and the engineered slowdown in 'too hot' Chinese GDP growth. This has simultaneously put downward pressures on both commodity prices and the Rand (which are umbilically linked any way). A large part of the movement in commodity prices has been sentiment driven, with hedge funds in particular exiting the market.

We believe these are viable concerns but would point out that China, while a sizeable presence in most metals markets, at approximately 20% of demand, is less important than the 80% of demand outside China which only recently has started to rebound.

Furthermore, in most past cycles, metal prices have risen with rising interest rates and if metals have indeed recently peaked for 2004/5, then this would have been a very untypical metal cycle. The current sell-off should succeed in shaking out speculative positions, whilst not altering the underlying fundamentals. (Supply remains restricted relative to growing demand; note that contract markets where hedge funds have not been active have barely moved - Iron and Coal. Furthermore the oil price has shown no sign of weakness.)

We believe that the downward price correction in commodities has been overdone and that prices should bounce back (because fundamentals are still strong), although prices may oscillate around current levels for some time, as the forces of fundamental buying and speculative selling battle it out.

The fund outperformed this month owing to its large holding in Sasol and Sappi, two stocks which produce commodities which were unaffected by the sell-off. Both the oil and paper prices actually rose during the month, leading to share price gains. The fund also remains heavily invested in the mining-house sub-sector with holdings in Anglo and BHP-Billiton. We have not revised down our forecast earnings for these two companies which should both show massive earnings growth. Our commodity price assumptions are still conservative relative to year-to-date averages despite the current price weakness in metals markets. Furthermore, rand weakness is helping to cushion the blow of falling dollar commodity prices.

Our view that the miners currently offer a good investment opportunity is therefore based on metal price forecasts which may prove to be conservative and hence we feel that our valuations are firmly underpinned.