The Commodity Fund appreciated by 24% this quarter and under-performed its benchmark, the Resources Index, which rose by 26%. Within the Resources Index, performances were universally strong, and ranged from the Oil sub-sector's huge 36% rally, to the Paper sub-sector's more paltry 1% increase. The Steel, Platinum, Mining-Houses, and Gold sub-sectors all posted strong gains of 28%, 25%, 23% and 22% respectively.

Within the portfolio, the over-weight position in Mittal Steel added to performance. The stock rallied as global steel prices stabilized (China became a net-importer again), causing the market to upgrade steel price forecasts and focus on Mittal's extremely compelling valuation. The under-weight position in Gold shares detracted from performance. Gold shares rallied from an oversold position on gold price strength, due to their current marginal nature, despite weak quarterly earnings, showing margin compression and shaft closures. The portfolio also benefited handsomely with its overweight positions in Sasol and Anglo Ameican: Sasol offers high gearing to the current record high oil prices, and earnings were consequently upgraded, leading to out-performance. Anglo rallied on base metal price increases and the fact that its structure 'traps' value (due to its holdings in expensive listed subsidiaries) which could be unlocked by corporate restructuring.

We believe that we are in a long-term, structural bull trend for real commodity prices. The emergence of China as a consumer of approximately 25% of the world's commodities, coupled with a slower than required supply-side response to the increased demand, has caused this price cycle to be of sufficient strength to put an end to the trend of metals cycles declining in both length and magnitude. That being said, we still believe that smaller cycles will occur around the longer-term real uptrend in commodity prices going forward. The trough to peak rise of this cycle (November 2001 to-date) has been just over 100%. In 1995, the trough to peak gain was 82%, with a gain of over 43% in the 1999 cycle. We therefore, believe that we are closer to the peak of cycle than the trough and that further gains in metal prices should be limited. Given the maturity of the cycle, we now prefer Anglo's more defensive commodity basket to Billiton's

The fund retained its large over-weight position in Mittal Steel. Mittal has lagged other resource shares this year (along with its global steel peers), as the steel price has fallen and after sharp rises in iron-ore and coal input costs. Mittal is now offering excellent value as it trades on 4 times earnings with an 8% dividend yield Oil continues to be supported by a broad front of supply and demand- 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 continue to prefer the platinum sector over the gold. The outlook for platinum is fundamentally more robust and predictable than gold. In platinum Southern Africa dominates. It currently accounts for 75% of mine supply and almost 90% of known resources. Growing metal demand will thus be satisfied predominantly from SA. Within the platinum sector, we still favour Impala Platinum, over Angloplats, due to Angloplats' premium valuation which we feel is excessive, given Implats' earnings growth profile, higher dividend yield and potential as a corporate target. Within the gold sector we have turned buyers of Gold-Fields.

We are still uncomfortable with gold shares' valuations but feel it is no longer prudent for the fund to hold a very low gold exposure. The gold price has finally started rising in all currencies, breaking its negative correlation with the dollar. The metal is now being driven more by a forecast deficit between record jewellery demand and limited mine supply, than by currency concerns

It has been a long wait, but commodity prices have finally recovered to levels last seen in 1980. And though there may be temporary setbacks, Investec Commodity Fund (ICF) manager Daniel Sacks says prices are in a new upward "super-cycle" trend.

But it's a trend investors are wary of. Despite big gains in commodity shares "they do not look expensive relative to underlying commodity prices", says Sacks. Notably, producer price inflation data for September shows the mining sector enjoyed average price increases of 31,6% over 12 months. Sacks says things are also positive on the supply side, as new capacity due in 2006 will now not come on stream until 2007.

Sacks points to Mittal Steel, which is trading on a 4 p:e and 8% dividend yield, as indicative of the market's underpricing of commodity shares. Current earnings are unlikely to be sustained, but Sacks says the market is discounting far too large a fall.

He says platinum shares, which he favours over gold, are also undervalued; Lonmin was introduced into the portfolio during the September quarter. Though a higher metal price may dampen jewellery demand, Sacks says demand from global vehicle producers is far larger and is being boosted by stringent antipollution requirements.

Sacks is also betting on the generally less favoured of the two major platinum producers, Impala. Though Anglo Platinum benefits more from a rising price than Impala, he says the latter, on a p:e of under 10, offers better value than AngloPlat on a 15 p:e.

Tongaat, Barloworld and Delta give some diversity, but the big swing factor in the performance stakes is the balance between Anglo American and BHP Billiton. Sacks is backing Anglo with a 24% weighting compared with 14% in BHP Billiton.

"At present Anglo has the right mix, and it's showing," says Sacks. As a bonus, he says Anglo's restructuring "will also unlock value".

It remains to be seen whether the market will unlock the value that Sacks believes still lies in commodity shares in general. Much hinges on China's economic growth and that of its biggest customer, the US.

Financial Mail - 4 November 2005

The Investec Commodity Fund out-performed its benchmark, the Resources Index, this month. It declined by -7.3% against the index's -8.8% decrease. Within the Resources Index, performances were almost universally poor: The Paper sub-sector led the pack with a massive 21% fall, followed by the Steel, Gold and Mining-houses sub-sectors which declined by 16%, 15% and 10% respectively. The Platinum sub-sector fared the best with a 2% fall.

The metals sector has sold off over the past month owing to increasing concern regarding global growth: Recent US economic data has been poor, and the US Dollar took a pause from its weakening trend and was, therefore, no longer a supportive factor for the metals. China, which consumes 25-30% of global metal supply, is still producing good growth, but the focus has shifted to the other global economies, consuming 70% of the world's raw materials, which are experiencing less robust growth. In addition, the two largest global mining stocks, BHP Billiton and Rio Tinto produced uninspiring production quarters prompting the sell-off in resource shares.

The fund did well to have no exposure to Sappi which fell sharply after reporting poor quarterly results and warning that full year numbers wouldn't match the previous years'. Despite the price collapse we do not feel that the share offers sufficient value at these levels to buy yet. The fund was adversely affected by its holding in Mittal Steel which also under-performed, as sentiment towards global steel stocks worsened, primarily due to rising input costs. Unlike its global peers, however, Mittal should remain insulated from the steep rise in its input iron-ore prices, as it buys its ore from Kumba on a cost plus basis.

We, therefore, remain comfortable holders and believe that the market is valuing the share on peak earnings multiples, but the length of the cycle may surprise and earnings forecasts are being upgraded. We remain bullish on longer-term commodity prices, particularly bulk commodity prices, and maintain our view that China should underpin demand for global consumption of commodities going forward, leading to sustained increases in prices ahead of inflation - i.e. a secular change in commodity prices. Although we see the peak in the current upswing in prices at the end of the first half of 2005 for base metals and 2006 for bulk commodities, the trend in pricing should be up, with cycles in pricing still evident along the way.

The Investec Commodity Fund appreciated by 14% this quarter and under-performed the Resources Index, which rose by 17%. Within the Resources Index, performances were mixed, and ranged from the Oil- and Mining-Houses sub-sectors' 20% rally on the upside, to the Paper sub-sector's 6% decline on the downside. The Platinum, Steel and Gold sub-sectors all posted healthy gains of 12%, 5% and 5% respectively.

The commodities produced by these sectors also exhibited differing price performances during the quarter: Oil was the stand-out and rose by 32% while base metals were also stronger, spurred on by strong global growth, an anticipated soft-landing in China, and a lack of new supply in response to the rising prices. Precious Metals fared worse: The Rand weakened during the quarter (by 11%), with the implication that all commodity prices, including precious metals, actually rose, in Rand terms.

Within the portfolio, the under-weight position in Gold shares detracted marginally from performance. Gold shares rallied from an oversold position on the Rand weakness, due to their current marginal nature, despite weak quarterly earnings, showing margin compression and shaft closures. The ongoing acrimonious Harmony /Goldfields take-over battle has further depressed sentiment in the sector.

The portfolio benefited handsomely with its overweight positions in Sasol and Billiton. Sasol offers high gearing to the current record high oil prices, and earnings were consequently upgraded, leading to out-performance.

In addition to producing oil, BHP Billiton sells other commodities which all seem to be in a pricing 'sweet-spot'. Strong copper, coal and iron-ore prices in particular, resulted in Billiton's strong performance. The portfolio also benefited with its underweight position in Sappi which we still believe is overvalued. The positive bet on Impala platinum added to performance but was offset by the negative bet on Angloplats. Both these platinum shares rose in absolute terms during the quarter.

Our assumption of the Rand remaining stronger for longer 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. Billiton's earnings still exhibit upgrade risk despite the strong Rand. Annual contract price increases for the bulk commodities (iron-ore and coal) have been phenomenal and settled at over 70%. These 'locked in' prices should offset any decline in base metal prices, and the company is generating strong cash flows as evidenced by their $1.8b share buy-back and increased dividend.

The fund retained its large over-weight position in Mittal Steel. We remain comfortable holders and believe that the market is valuing the share on peak earnings multiples, but the length of the cycle may surprise and earnings forecasts are being upgraded.

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.

The Investec Commodity Fund out-performed its benchmark, the Resources Index, this quarter. It appreciated by 2% against the index's 11% decline. Within the Resources Index, performances were mixed, and ranged from the Steel sub-sector's 43% rally on the upside, to the Gold sub-sector's 26% decline on the downside. The Oil sub-sector posted a slight gain of 2% while the Mining-Houses, Paper and Platinum sub-sectors all declined, by 9%, 9% and 14% respectively. The commodities produced by these sectors also exhibited differing price performances during the quarter: Oil declined by 14%, Gold rose by 5% and Platinum was flat. The Rand's 17% appreciation, however, was the dominant driver of share prices and dwarfed any of the small commodity price gains. In other words, commodity prices fell in Rand terms.

Within the portfolio, the under-weight position in Gold shares added strongly to performance. Gold shares tumbled as the strong Rand caused the Gold Price to drop in local currency terms. This was evidenced by weak quarterly earnings, showing margin compression and shaft closures. The ongoing acrimonious Harmony /Goldfields take-over battle has further depressed sentiment in the sector. The fund also benefited with its overweight position in Iscor which continues to perform strongly based on solid macro-fundamentals for steel, and a strong valuation underpin evidenced by a return of capital. The positive bet on Impala platinum detracted from performance but was offset by the negative bet on Angloplats. Both these platinum shares fell in absolute terms during the quarter, but Angloplats under-performed as its higher debt levels and marginal expansion projects make it more vulnerable to earnings downgrades in a strong Rand environment.

Ispat Iscor's valuation case is strengthened by a proposed capital repayment. The company is benefiting from a strong Rand steel price, while its vertical integration protects its margin from higher iron ore prices. 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.

We still favour Impala Platinum, at the expense of Angloplats, 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.

Within the gold sector we remain satisfied with our underweight stance. Importantly, 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.