The FTSE/JSE All Share index (ALSI) gained 9.7% in rand terms in the third quarter of 2009 (up 13.9% total return) after gaining 8.3% in Q2 2009 on increasing signs of a sustained global economic recovery. After falling to a low of 21665.9 at the July 6, 2009 close, the ALSI rebounded by 19.6% to touch a peak of 25920.7 on September 17, 2009.

Most of the positive performance of the ALSI during Q3 2009 occurred during July (up 10%), with more modest returns in August (up 2.7%) and a flat performance in September as Resources dragged the market lower. A re-rating of the domestic market accounted for all of the gains in the ALSI index, with the PE multiple increasing from 10.6 to 14.5. A key feature of the last quarter has been the continued strength of the Rand exchange rate, with the currency reaching levels of around 7.30 to the US dollar mainly due to Dollar weakness, but also as a consequence of a strong rally in most precious commodity prices.

All the major indices experienced negative earnings growth over the quarter, in line with our thesis that earnings levels are too high. In light of this, we continue with our investment strategy of favouring companies exhibiting the characteristics highlighted below:

-For manufacturing/resource companies, lowest quartile position on the cost curve.
-Lowest cost producers will be the winners in a recessionary environment.
-Companies that are reaping the benefits of previous capital expenditure.
-Companies with strong brands or pricing power in their respective markets.
-Ungeared companies or companies with low gearing levels.

The contraction in earnings over the last year, coupled with rising index levels, has reduced the expected return from the equity market over the next four years. Despite our less optimistic outlook for equity returns, we are still investing in companies exhibiting the characteristics mentioned above.

MTN is a prime example of a company that encapsulates most of the characteristics mentioned above. MTN is also the Fund's biggest holding. We have previously expressed our reservations to MTN management about the potential merger with India's Bharti Airtel and are therefore relieved that the transaction is no longer proceeding. MTN, with operations in 23 countries and revenues in excess of R100bn per annum, is one of the biggest emerging market telecommunications operators. In addition, the group has substantial organic growth opportunities, with mobile penetration rates of less than 50% in most of the countries in which it operates. In addition, the group's strong cash generation abilities, coupled with a virtually ungeared balanced sheet, entrenches its position relative to its competitors. MTN is currently trading at around 12 times our estimate of normalised earnings for the group which we find very attractive for such a world class company.

Portfolio manager
Abdulazeez Davids