Relative to the first two quarters of this year, the third quarter could be termed as quiet, yet it has by no means been an uneventful period. Coming off a weak base from the previous quarter, the market was quick off the block with a strong reversal of fortune which saw the market surge to a confident 16.4% over a 10-week period. A stable range-bound rand (average R7.40/US$), strong commodity prices (Gold at US$390, Platinum at US$700+) and an optimistic overseas market were strong contributors to the performance during this period. The Kagiso Top 40 Protector Fund, with its high resource exposure, benefited significantly during this period.

September saw the market lose much of its gains as the rand rallied on the back of a weakening US dollar and a poorer economic outlook in the US and Japan. Not even a 100bp cut in local interest rates from an emergency Monetary Policy Committee meeting could prevent the strength which saw the rand break R7/US$ (last seen Dec 2000). Renewed uncertainty from the South African trading partners put pressure on the South African market even though local economic data was positive.

The Kagiso Top 40 Protector Fund's underlying equity is invested in the constituents of the FTSE/JSE Africa Top 40 index, which is its benchmark. The fund utilises its proprietary investment model to dynamically allocate exposure between the cash and equity markets. During the early part of the quarter, the fund systematically increased equity exposure over the upward cycle. However, over the last few weeks when the market gave up its gains, the fund rapidly decreased its exposure to equities.

Over the quarter, the fund returned 4.52% with 11% volatility while the FTSE/JSE Africa Top 40 index returned 7.39% with 19% inter-day volatility. For the year, the fund has returned a positive 1.7% with a volatility of 12% against the market which returned a negative -3.1% with a volatility of 21%.

Futures were traded during this period to control the exposure to the equity market. This allowed the fund to be protected over the downward cycle and participate through the upward momentum. Equity exposure for the fund varied from 40% to 70% over the quarter.

The strong performance of the Industrial (10.8%) and Resources (11.3%) sectors is a positive sign for growth in the SA economy. Coupled with a lower interest rate environment, the local market is showing signs of strength. For the third consecutive quarter, MTN remains a darling stock of the Top 40, up 22.4%, with only Impala Platinum (34.1%) and Iscor (33.1%) posting better returns. After a stellar second quarter, local financial shares came under pressure with a paltry performance of -2.3%, with all the major banks in negative territory -Standard Bank (-1.1%), ABSA (-1.9%) and FirstRand (-4.4%). Nedbank's woes continued this quarter and it has remained the worst performing share in the Index with a -20.39% return.

The Kagiso Top 40 Protector Fund remains highly correlated to the equity market, and expects to deliver returns equivalent to two-thirds of the market upside and one-third of its downside with significantly reduced volatility over any 24-month period. The equity prospects for the last quarter remain positive. Strong domestic economic data over the past months, coupled with still lower interest rates, although tempered by a strong currency performance, bode well for the local market. Uncertainty in developed markets, a strong rand and changing commodity prices could result in a continuing volatile stock market which is advantageous to the fund.

Along with the conclusion to the Iraqi war, most of the world stock markets rebounded to show positive returns in the early part of the quarter. The domestic market, however, was impacted by a dominant rand that strengthened to a 24-month high of R7.05 to the US dollar. As the currency weakened, the market surged to return 21.9% over a 7-week period. However, in the final weeks of the quarter, the market gave back some of its gains due to renewed currency strength.

The Kagiso Top 40 Protector Fund's underlying equity is invested in the constituents of its benchmark the FTSE/JSE Africa Top 40 index. The Protector Fund utilises its proprietary investment model to dynamically allocate exposure between the cash and equity markets. During the early part of the quarter, the Protector Fund systematically reduced equity exposure over the downward cycle, with the fund increasing equity exposure to participate strongly in the upward market movement.

The Protector Fund returned 7.10% with 15% volatility, whilst the FTSE/JSE Africa Top 40 index returned 9.16%. Futures were traded during this period to control exposure to the equity market. This allowed the fund to be protected over the downward cycle and to participate through the upward momentum. Equity exposure for the fund varied from 35% to 70% over the quarter.

The anticipated interest rate cut in June and positive economic indicators enabled local financial and industrial shares to perform strongly, with the sectors returning 17.6% and 13% respectively. The resources sector pulled the market lower with a 2.6% return due to the strength of the rand in June. Domestic shares again outperformed the dual-listed shares and shares with high foreign-based earnings. Most counters finished positively with the exception of unhedged gold shares AVGold (-6.1%) and Durban Deep (-5.9%).

Sasol's profit warning resulted in a return of -1.6%. MTN remains the darling stock of the Top 40, up 35.9%. Investec, which lost a lot of value in the early part of the year, has since shown signs of recovery, leading the financial shares with a return of 29% for the quarter. Major retail banks Standard (24.6%), ABSA (22.6%) and First Rand (17.5%) posted strong returns. Nedbank's poor trading update in May resulted in the company being punished by the market (1.7%) for the quarter.

The Kagiso Top 40 Protector Fund remains highly correlated to the equity market, and expects to deliver returns equivalent to 2/3rd of the market upside and one third of its downside with significantly reduced volatility over any 24-month period.

Prospects for equities for the third quarter still look optimistic. Strong domestic economic data over the past months, coupled with lower interest rates, although tempered by strong currency performance, bode well for the local market. The market is still, however, expected to be volatile, which will be beneficial to the fund.

Early optimistic sentiment on the SA economy produced a positive start to the year for the local market. However, the uncertainty surrounding the war on Iraq sent world markets plummeting, which resulted in the JSE ALSI losing more than 20% from its early year high. The quarter was highly volatile, with large intra-day swings being a common occurrence. Amidst difficult trading conditions the Kagiso Top 40 Protector Fund utilised its proprietary investment model to dynamically allocate exposure between the cash and equity markets.

The fund's underlying equity is invested in the constituents of its benchmark, the FTSE/JSE Top 40 index. During the period, the fund systematically reduced equity exposure over the downward cycle yet increased equity exposure to participate strongly in the short-term upward market turns. As such, it outperformed the benchmark by 8.25%, with a return of -9.10% against the FTSE/JSE Top 40 index return of -17.35% for the quarter. A broad market sell-off saw all shares in the FTSE/JSE Top 40 index end down for the quarter, while the fund provided a partial hedge against the downturn and responded well to upward movements relative to its competitors. Equity exposure varied from 40% to 70% over this cycle.

Domestic shares outperformed the dual-listed shares and those with high foreign-based earnings due to the continued strength of the rand against foreign currencies, particularly the US dollar. Unhedged gold shares: Goldfields, Harmony and Durban Deep, were particularly hard-hit with returns of -29.8%, -33.6% and -37.5% respectively, while a fall in the platinum price saw Amplats and Implats end 26% down. Financial giants Old Mutual and Sanlam were not left unscathed, both down by 20%, and Investec lost 32.3% of its value due to poor off-shore prospects.

Luxury goods supplier Richemont was down 34.4% in what was a difficult trading period for the company. MTN and parent company Johnnic showed some resilience, down by only 2.3% and 3.1% respectively.

Corporate activity over the quarter resulted in structural changes to the fund's benchmark, the FTSE/JSE Top 40 index. The long-awaited public listing of Telkom took effect on 4 March, which saw the share immediately enter the FTSE/JSE Top 40 index, with Didata, once the darling of the market, exiting the index. The quarterly rebalancing of the index saw Naspers replace Alexander Forbes.

The Kagiso Top 40 Protector Fund remains highly correlated to the equity market, and expects to deliver returns equivalent to two thirds of the market upside and one Third of its downside with significantly reduced volatility over any 24-month period. The equity prospects for the second quarter look to significantly improve should the war in Iraq end swiftly. Strong domestic economic data over the past months, coupled with lower interest rate expectations bode well for the local market. However, high levels of volatility are anticipated, which will be beneficial to the fund.