The All Share index ended down 2.4%. The equity market was very volatile during the month and as to be expected in volatile markets large cap stocks took the brunt of the pain, whilst the less liquid Midand Small caps performed better. Financials were the best performers delivering -1.3% whilst the Resource stocks, despite the weakness of the currency ended up the worst performers of the large cap stocks. The bond market returned 0.63% for the month. It will however be very difficult for local bonds to deliver strong performance whilst faced with weakening global bond markets, inflation pressures and a building current account deficit going forward.

The Select Manager Prudential Active FoF returned -0.77% for the month. Our flexible managers had reduced their equity exposure considerably in the run up to October which helped to protect the fund against the downturn. During the month we began to switch out of the Nedbank Managed fund into the Investec Opportunity Fund. Clyde Rossouw, the manager of the Investec Opportunity Fund, has consistently impressed us over the past few years and we expect the inclusion of his fund to enhance the risk/reward characteristics of our portfolio.

Another 10% from equities in September makes it close on a 48% return for the 12 months. Resources were simply rampant, led by the gold index which ended the month 31% higher. Oil and platinum stocks also rallied and of course the dominant Billiton and Anglo American. Industrials did well to keep up, returning a sterling 8.2%. A heavy exposure to financial stocks certainly hurt during September as the financial sector returned only 3.6%. The relative valuation gap between equities, bonds and cash did narrow during September and the equity market is vulnerable to a short term correction.
The story did not change much this month as equity managers struggled to outperform the All Share index due to the massive relative outperformance of Resources versus Financials and Industrials. The Select Manager Prudential Active FoF returned 3.8% for the month. Worth noting is the 8.4% return of the Investec Equity Fund. Their large holding in Resource stocks paid off handsomely. Frater's Flexible fund also did well returning 5.9% on the month, this with an equity exposure of close to 50%. Their stock selection was the major contributor to the strong performance.

This fund's initial fee was reduced to 3% (3.42% incl. VAT) on 18 July 2005

On 27 May 2005, the Select Manager Prudentiall Active Fund of Funds changed sector from the Domestic Asset Allocation Prudential Medium Equity sector to the Domestic Asset Allocation Targeted Absolute and Real Return sector. The performance history was retained.

During March, RMB Value Fund was replaced by Investec Equity Fund in our portfolio. Value stocks returned strong positive performances during 2004 and in line with our view that markets are close to fair value; we have rotated exposure into Investec Equity Fund where Gail Daniel has shown significant skill in decisively positioning her portfolio timeously to suit changing market conditions.

The All Share Index was down in March largely due to a weaker Rand and negative emerging market sentiment as the US interest rates rose. Resource stocks managed a positive return as the Rand weakened, but none of our equity/flexible fund managers where able to maintain positive performance during the month due to their underweight resource positions. The bond market also performed poorly which negated our downside protection fixed interest positions within the flexible funds. We maintain our view that equity valuations are close to fair value, but equities still offer better value than bonds. Our underlying managers echo this sentiment by all displaying defensive equity weightings with higher allocations to industrial and financial stocks. All our managers continue to increase resource exposure where appropriate.

During February, RE:CM Core Managed fund was replaced by Nedbank Managed fund in our portfolio. Both funds are managed by Piet Viljoen of RE:CM on exactly the same basis, but the Nedbank Managed fund does not have a performance fee.
The All Share Index continued it's rally during Feb buoyed by positive global sentiment and the continued rise in resource stocks despite the ever strong rand. Presently, our view is that equity valuations are close to value, but equities as an asset class still offer better value than bonds. Our underlying managers echo this sentiment by all displaying defensive equity weightings with higher allocations to Industrial and financial stocks. Since December, our managers have been increasing resource exposure where appropriate, but in the face of softening commodity prices and a persistently strong Rand valuations in other sectors of the JSE are far clearer.

A decision to actively allocate to resource stocks, thus overriding the current views of our underlying managers, would require a strong view. Although financial and industrial stocks had a significant rally last year and in relative terms resource stocks have not really begun to move, the outlook for resources remains murky.

Over the past few years we have experienced some significant commodity price appreciation, especially when measured in dollars. Increased Chinese demand, increasing global growth, and dollar weakness have been major factors in this appreciation. One of the key pillars underlying the above has been record low US interest rates. As US interest rates rise, global growth is expected to soften in 2005. This being the case, some of the support for global commodity prices should ease over the coming year. Nonetheless, robust demand for commodities from China is likely to continue.

The Rand is the wildcard in the whole scenario. At current levels, most of our underlying managers believe that resource counters are showing little value and only begin to do so when using R/$ of 7 or more in their valuation models. The strong rand along with other cost pressures in particularly mining stocks have led to margin compression despite high commodity prices. Currency forecasting is inaccurate at best, but there are many factors supporting the Rand at levels below R/$7. Recent Rand weakness will support the current run in resources, but if material Rand weakness does not materialize, resource stocks are likely to underperform. Furthermore, rand weakness that is the product of dollar strength (rather than broad based rand weakness against a basket of currencies), is likely to be accompanied by lower dollar commodity prices, which is what we have seen so far this year in gold prices. Therefore careful stock picking within the resource sector remains the best way to gain exposure to resource stocks.

A number of our underlying equity managers have been increasing their exposure to resources selectively over the last few months, but they are all still underweight vs. the ALSI. Careful stock picking has led them to names like BHP Billiton (diversified commodity exposure), Sasol (for oil exposure) and platinum counters. Gold stocks are not a favourite. A look at the charts on the next page shows which of the resource sub-sectors have performed well year to date, and what is clear is that diversified metals have led the sector, with platinum and energy also performing well, yet gold and steel have lagged. Thus the stock picking of the underlying fund managers has contributed positively. At the end of this comment is the current resource allocation/stock picks within the Prudential Active equity portfolio. It shows that the fund's equities are approximately 20% in the materials sector compared to the ALSI weight of over 37%. Note that this weight is about 5% greater than that shown on the factsheets, since the Materials Sector in the database used below includes paper, packaging and chemicals, which are not part of the ALSI Resources Sector.
The managers remain more comfortable being overweight industrial and financial stocks where valuations and earnings growth are clearer. Our fund managers have also been increasing exposure to rand hedges over recent months, yet have been looking more in the industrial sector, where they see better valuations. For the time being we do not intend to overrule their positions by buying a separate resource fund.

The Select Manager Prudential Active FoF has returned 19.09% since inception in May 2004 comfortably beating its benchmark whilst still providing capital protection by means of careful diversification.
The ALSI reached new highs again during December ending the month up 1.44%. Positive performance came predominantly from financial and industrial stocks while resources once again suffered Rand strength coupled with declining commodity prices. This trend has persisted all year so choice of sector has been very important for good returns. All our equity managers comfortably outperformed their benchmarks and the ALSI owing to large overweights to both industrial and financial stocks and material underweights to resources. On balance, the ALSI is very close to being fully valued and we remain wary of the rising current account deficit and declining interest rate differential with other developed markets.