World stock markets in general ended the quarter in negative territory, with the MSCI World Index losing -0.9%. US Markets were down for the quarter as a result of mixed economic data resurfacing doubts that the US recovery might be slowing. In addition major US indices were put under pressure by rising inflationary concerns, rising oil and commodity prices, geopolitical risks and investor uncertainty. For the quarter, the S&P 500 Composite Index and the Dow Jones Industrial Average were down 1.9% and 3.4% respectively.
The local market remained resilient despite the uncertain global environment. In August, the Reserve Bank unexpectedly cut rates providing additional support for the local economy and further extending the local spending boom. Rates were dropped by 50 basis points leaving the repurchase rate at 7.5%. Despite higher commodity prices and oil reaching multi-decade highs, the local inflation environment remains relatively benign.
The effect of higher oil and other commodity prices were largely offset by a strong R/$ exchange rate that prevailed during the quarter. The strong rand again resulted in a weak manufacturing and exporting sector as local businesses were faced with a barrage of cheaper imports and a slowdown in export revenue. Despite this, local markets were up strongly, with the All Share Index returning 17.4% for the quarter. The rand ended the quarter at 6,48 to the US Dollar, 4.2% weaker than the June 2004 closing level.
The main driver behind the strong performance of the All Share Index was the Resources Index, up 23.7% for the quarter, mainly on the back of higher commodity and oil prices. In particular, the Gold Mining and Oil and Gas sectors showed stellar performances - up 27.6% and 25.4% respectively. Financials and Industrials ended the quarter in positive territory, returning a respectable 16.5% and 11.4% respectively.
The Kagiso Protector Fund returned 9.82% (net of fees) with 8.5% volatility, whilst the FTSE/JSE Africa Top 40 Index returned 18.2% with 16.99% inter-day volatility. For the year to date, the fund has returned 8.51% with a volatility of 9.02% against the market which returned 16.21% with a volatility of 17.17%. The fund started the quarter with 46% exposure to equities on the back of negative returns from the previous quarter. As the market gained upward momentum, after the interest rate cut, the fund's equity exposure was increased substantially. This allowed the fund to participate through the momentum. The increase in equity exposure lags the market on sharp upward market movements, as was experienced this quarter, resulting in the fund giving up some of its relative gains. The equity exposure was increased to 64% over the quarter.
A significant corporate event that affected the fund during the period was the Standard Bank BEE transaction that forced the fund to sell a portion of its holding at a 17% discount to the market and later having to repurchase the holding at market prices to efficiently track the FTSE/JSE Africa Top 40 Index.
Within the Top 40 index, the gold counters were the top performing shares with Harmony and Goldfields up 35.5% and 34.7% respectively. Within Financials, Absa continued to build on its last quarter's strong performance, up 27.65% as rumours were confirmed that the bank was in discussions with Barclays regarding a possible corporate action. The worst performers for the quarter were Telkom (down 7.5%), Sappi (down 3.4%) and Nampak (down 3.1%).

World stock markets in general rose this quarter with the S&P 500 Composite Index up 1.7%, and the MSCI World Index up 1%. The Japanese economy continued its forward momentum driving the Topix up 1.1% for the quarter and 14.3% for the year.
Locally, the currency was again a significant influence on the local market as it strengthened by a further 1.4% this quarter to R6.22 to the US dollar. This weighed heavily on the resources index, which ended the quarter down 13.6%. Gold shares were, in addition, negatively affected by the 6.6% drop in the gold price. The gold index was consequently down 26.3% for the quarter. The industrial index showed positive gains, despite the rand strength, ending the quarter up 1.0% as consumer confidence continued to improve. The financials index rose 2.9%.
In this quarter, the FTSE/ JSE Top 40 Index experienced high levels of volatility. It was down 9.7% by mid-May and bounced back 7.9% by mid- June. These conditions were ideal for the Protector Fund which dynamically managed the cash and equity exposure so as to reduce the fund's exposure to downside risk whilst still maintaining a reasonable participation in the upside.
Over the quarter, the Protector Fund returned -3.46% with 9.53% annualised inter-day volatility, whilst the benchmark achieved a total return of -5.15% with 19.85% annualised inter-day volatility. For the year, the fund has returned 11.67% with 9.64% inter-day volatility, and the benchmark has returned 23.43% with 17.61% inter-day volatility. Over the year the market has been dominated by a number of sharp upward trends in performance. In order to protect the downside the fund still maintained a cash cushion over these periods, and so gave up some of its relative performance.
Within the FTSE/JSE Top 40 Index, the industrial counters performed well this quarter with PPC up 21.9% and Nampak up 11.7%. Banking shares continued to build on their last quarter's strong performance led by ABSA (up 11.7%) and RMB Holdings (up 8.3%). The mining counters were the worst performers for the quarter with Harmony Gold down 33.8% and Anglogold down 24.9%.
The Protector Fund remains highly correlated to the equity market and is expected to deliver returns equivalent to 2/3rd of the market upside and 1/3rd of its downside with significantly reduced volatility over any 24-month period.

Effective from 15 Mar 04, theKagiso Top 40 Protector Fund has changed its name to the Kagiso Protector Fund.