In general, world markets performed well during the third quarter of the year with the MSCI World Index returning 6.9%. In US dollar terms, the S&P 500 Index and Dow Jones Industrial Average were up 3.6% and 2.8% respectively. Over this period increasing US interest rates, higher oil prices and higher commodity prices proved to be key drivers of global market performance.

During the quarter, the dollar remained relatively unchanged against other major currencies. The rand however strengthened, closing at 6.32 to the US dollar, 4.8% stronger than its closing level in June 2005.

The local market had an excellent quarter with the FTSE/JSE All Share Index up 20.3% over the period. The local bourse was driven primarily by favourable domestic fundamentals, positive GDP surprises and a surge in commodity prices. GDP once again surprised on the upside coming in at 4.8% (annualised year on year) well above the consensus forecast of 4.4% and provided additional impetus to the local market.

The FTSE/JSE Resources Index was the top performer over the quarter, up 25.5% mainly on the back of stronger oil and commodity prices. Robust domestic fundamentals coupled with reasonable equity valuations saw the industrial and financial stocks also close in positive territory for the quarter. The FTSE/JSE Industrial Index returned a respectable 19.9% for the quarter while the FTSE/JSE Financials Index returned 13.1% for the quarter.

Within the FTSE/JSE Top 40 Index, the top performing stocks for the quarter were resource counters, as platinum, gold and oil prices surged to multi-decade highs. The top performing stocks were Kumba and Sasol up 77.4% and 36.2% respectively. Liberty International and Sappi were the worst performers over the quarter returning -0.9% and 1.3% respectively.

For the quarter, the Kagiso Protector Fund produced a total return (net of fees) of 12.6% with annualised volatility of 7.0% relative to the benchmark which was up 20.5% with annualised volatility of 12.0%. The path of the market was mostly upward trending resulting in an average equity exposure of 64% for the quarter. The cash exposure helped to reduce the volatility of the fund in periods of extreme volatility.

Few corporate actions impacted the fund during the quarter. In particular, the Absa/Barclay's corporate action required the fund to sell 32% of its Absa holding at a 4% discount to the market price, repurchase the holding at a higher price and then to sell the holding a month later as the FTSE/JSE Index committee finally reduced the weight of Absa in the index.

Kagiso Asset Management
Portfolio Manager

World markets, in general, ended the quarter in negative territory with the MSCI World Index down 0.2%. The performance of US indices were mixed with the S&P 500 Index up 1.4% for the quarter while the Dow Jones industrial average was down 2.2% for the quarter.
During the quarter, stronger commodity prices and higher oil prices were key features in the global economic landscape. The spot price of oil closed the quarter at US$56.50 per barrel, up a staggering 41.7% from its closing level at the start of the year. The higher oil price that prevailed once again raised inflationary concerns and resulted in a cautious stance from investors as fears of a possible slowdown in global growth resurfaced. Going forward, the oil price is expected to remain a key driver of market performance.
The rand weakened sharply over the quarter mainly on the back of more encouraging US economic data and a further narrowing of interest rate differentials. The rand closed the quarter at R6.65 to the dollar, 9.2% weaker than its March 2005 closing level.
The local market performed well over the quarter as robust local fundamentals, rising commodity prices and a weakening currency provided a favourable backdrop for the local equity market. The Resources Index was up 9.1%, while the Industrials and Financials indexes returned 6.7% and 5.4% respectively.
Within the FTSE/JSE Top 40 Index, resource stocks were the top performers for the quarter. Anglo Platinum and Sasol were the top performers, returning 27.4% and 26.4% respectively. The worst performers for the quarter were Mittal Steel (down 26.0%) and Kumba (down 13.8%).
For the quarter, the market presented conducive conditions for the performance of the Kagiso Protector Fund - a high volatility and trending market. The fund produced a total return (net of fees) of 5.61% with volatility of 7.29% per annum relative to the benchmark which was up 7.2% for the quarter with 14.22% volatility. The fund outperformed its benchmark, the two-thirds of the market upside, and still managed to cap the volatility at about 50% of the market volatility. This is fully attributable to the design of the fund which is expected to work best under highly volatile and trending markets.
Going forward, the markets are still jittery due to mixed signals on global economic performance. The local economy still has encouraging fundamentals which should support a positive market trend. We believe that the market volatility will remain high and the Kagiso Protector Fund will perform as expected over the next quarter.

World markets ended the quarter in positive territory with the MSCI World Index returning 7.9% for the quarter. The major US indices were up strongly with the S&P 500 Index up 9.4% and the Dow Jones Industrial average up 7.1% for the quarter. On a year to date basis, these indices returned 11.0% and 3.3% respectively.
During the quarter, a key feature of the economic landscape was the weaker US currency. The US dollar lost ground against all major currencies as concerns resurfaced about the growing current account deficit and the "easy" monetary policy pursued by the US Federal Reserve. As a result, the euro rallied to new highs against the dollar - breaking through the 1.36 level and finally retreating slightly to end the quarter at 1.35 to the dollar. In the quarter, the rand strengthened by 13.0% against the dollar, closing the year at 5.64 to the dollar, 14.9% stronger than its closing level a year ago.
Despite the stronger currency and its negative impact on certain sectors of the economy (export-orientated companies, certain manufacturers and resources stocks), the local market performed well. The local bourse rallied strongly, returning 8.1% for the quarter, as encouraging economic news led to more buoyant market conditions. GDP growth for the third quarter (5.6% annualised) provided a strong impetus to the market as the final figure came in well above forecasts. In addition, robust consumer demand, a favourable interest rate environment and a benign inflation outlook provided a favourable backdrop for the local equity market.
The FTSE/JSE Resources Index was down 10.9% for the quarter as the currency continued to weigh on the index and commodity prices looked vulnerable. Negative performances from the gold mining index (down 25.8%) and mining finance sector (down 18.2%) were the main contributors to the poor performance of the index. Over the quarter, the Financial and Industrial Indices continued to build on their previous quarter's strong performance returning 19.5% and 22.0% respectively.
On a stock level, the resource counters were the worst performers for the quarter with Harmony and Anglo American Platinum down 41.9% and 23.9% respectively. The industrial counters were the top performers for the quarter, with Edcon returning 59.9% and PPC returning 57.5%.
For the quarter, the Protector Fund returned 3.47% (net of fees) with 7.08% volatility whilst the FTSE/JSE Top 40 Index returned 6.25% with 11.94% volatility. On a risk adjusted measure this implies the Protector Fund underperformed the FTSE/JSE Top 40 Index by 0.23%. The underperformance is mainly attributed to corporate actions that took place during the quarter, namely the unbundling of Spar from Tiger Brands, the delisting of ABI through the buyout of minorities by SAB Miller and the Liberty BEE deal which added to portfolio turnover and therefore transaction costs. The main detractor of performance, accounting for 20% of the underperformance, was the Liberty BEE deal where the fund was required to sell a portion of its holding at a discount to the market and then later repurchase the holding at a higher price.
During the quarter, all changes were timeously acted upon so as to minimise the relative risk of the fund. Kagiso Asset Management Portfolio Manager