As a result of massive inflows, the Nedbank Entrepreneur Fund has closed to new investors with immediate effect. Lumpsum investments from existing clients will be accepted until 31 December 2005. Following its closure, the fund will still continue to accept recurring debit orders from existing clients, and we will re-open the fund should circumstances change.

The fund had a reasonable month with a return that was in line with the JSE Mid-Cap Index (+2.8%), a little behind the JSE Small-Cap Index (+4.3%) but ahead of the JSE All Share Index (+2.0%). After the phenomenal fund returns achieved in July this is considered satisfactory. The returns would have been even better had the largest holding in the portfolio not had it's price artificially suppressed on the last trading day of August - a position from which it has quickly recovered.
During the month we were reminded of some of the dangers of investing in small-cap shares - some prices came under intense pressure after reporting extremely disappointing financial results that were well below our expectations. These included Metair, Amalgamated Appliances and Gold Reef Casinos and Resorts. Fortunately, we did not hold enormous positions in these companies and have been able to sell out completely, or significantly reduce our exposures. This is a demonstration of the benefit of our investment approach - not taking too large a position in a company unless we feel extremely confident.
We have taken a lesson from this experience and have sold out several other companies in which we had small positions, about whose prospects we are not highly confident and whose valuations are not obviously compelling. These include Iliad, Dawn, Grindrod, KAP, Wesco, Glenrand MIB, Advtech and AVI. Some of these are firm favorites of some of our competitors, so time will have to be our judge.
A consequence of this rationalisation process has been that cash has built up in the portfolio, to over 13% by the end of August 2005. While we recognise that we run the risk of lagging the market should the powerful bull run continue, we are having greater difficulty in finding attractively priced companies in which to invest, and are worried about the short term market prospects. Consequently, we are happy with the fund's current structure, and would use market weakness over the next two years to add to those companies, about whose prospects we feel confident.

July 2005 was a phenomenal month, with performance that is unlikely to be repeated in the near future. The fund appreciated well in excess of it's various benchmarks, such as the JSE Mid- Cap Index (an impressive +9.1%), the JSE Small- Cap Index (+8.0%) and also the JSE All Share Index (+7.2%).
We are particularly pleased to report this performance, as at the start of the month we felt that the market, after a good run from the start of May and throughout June, should go through a period of some consolidation. Consequently, we held an unusually large proportion of the fund in cash at that time - 14.5%! This view proved to be totally incorrect and we spent much of the month searching for investment opportunities that had lagged the market. We find ourselves at the beginning of August with a much lower cash component of the fund.
Our performance in July was driven by our share selection, but in particular the phenomenal performance of some companies such as Net1 Technologies (previously Aplitec), which successfully moved their listing onto the main board of the Nasdaq exchange in the United States and Sun International, Mr Price, Bytes, Gold Reef, Ellerines and Altron.
In light of the performance over the last quarter, we find ourselves nervously contemplating what prospects for further appreciation we could still possibly expect. As conservative South African fund managers we consider the market on a PE of 15 times and a Dividend Yield of 2.5% to be fairly fully valued. However, we also subscribe to the view that in light of low and stable inflation (regardless of the oil price) and low interest rates, that the equity market can justify a higher rating. This is particularly valid in the context of a robust economy, and our high level of confidence of strong earnings growth from our domestic Financial and Industrial companies for the next 12 months. Consequently, we remain fully invested for the time being.

The fund is run by Anthony Sedgwick of Polaris Capital, and follows the same process of choosing shares on individual merit as Nedbank Rainmaker, run by his colleague Tim Allsop. The strength of the stock picks is indicated by the fund's continued above-average performance in spite of being caught unawares by the strength of the market since June quarter-end.

Sedgwick had predicted that the market would go through a consolidation phase, and he was battling to find small and midcap shares that offered good value: consequently he had allowed the cash holding to increase to 14,5%.

The main driver of performance recently has been the now unlisted New Aplitec Part Trust, which owns shares in Aplitec (since renamed Net1 Technologies) on the Nasdaq exchange in the US.

Other strong contributors have been Sun International, Mr Price, Bytes, Gold Reef, Ellerine and Altron.

Sedgwick says that, like Rainmaker, the Entrepreneur fund prefers to access the expected boom in SA fixed investment through electrical and cabling businesses such as Reunert and Altron rather than construction businesses. He has sold out of Group Five and reduced exposure to building supplies businesses such as Iliad and Dawn, though he has held on to Ceramic Industries.

Sedgwick is not averse to some tactical trading, though. In July, he bought a position in Liberty Holdings, which he has sold after making a quick R12/share profit. New holdings in the fund bought in July included Distell, Truworths, Verimark, Advtech and Foord Compass. FrontRange was the only outright sale.

Chicken producer Astral remains the largest holding in the fund. Sedgwick says the company has exciting prospects.

He says he is concerned about the frothy earnings multiples of around 15 on the JSE, but he says this time it is different as shares can justify a higher rating in view of low and stable inflation, and the prospect of strong earnings growth from financial and industrial shares.

Financial Mail - 26 August 2005

In May 2005 the rand depreciated by 11% versus the US dollar from R6,08 to R6,76. We remind investors that currency weakness constitutes the greatest threat to RELATIVE fund performance. As is to be expected, while the fund did produce a very satisfactory positive return (more than reversing the negative performances recorded in March and April), it lagged the JSE All Share Index return of +9.8%.
The primary reason for the under-performance was the much larger exposure to geared rand-hedge companies in the All Share Index, which respond immediately to currency weakness. Our mandate precludes us from investing in ALSI-40 shares. The fund out-performed the JSE Mid- Cap Index (+4.8%), but under-performed the JSE Small-Cap Index (+8.2%), primarily because we own no Durban Deep or Aflease shares. While these companies are highly geared to currency weakness, we consider them to be highly speculative with extremely insecure financial futures, and consequently avoided them completely. We did, however, derive enormous benefit from our exposure to select other rand-hedges such as Highveld Steel, Grindrod, Altron and Metair, which are powerfully supported by their fundamental value and growth prospects.
Since the beginning of 2005 we have held the view that following a period of three consistent years of rand strength, some weakness should be expected this year. This has indeed been the case, although the volatility by which it has occurred has not been ideal. Although opportunities are limited in our purchase universe, we have made significant progress in tilting the fund to have greater exposure to companies that will benefit from currency weakness. Our preference is for stocks that offer attractive earnings and dividend yields, backed by cash flows and solid growth - that have demonstrated the ability to grow earnings during periods of rand strength, but whose earnings growth rates should accelerate with rand weakness. Currently 38% of the fund is positioned in companies that will benefit from rand weakness to some extent, and additions to positions in Tiger Wheel, Mvela Resources and Altech during the last month are examples of how we continue to move in this direction.

April was a reasonable month for the fund. Relative to the Mid-Cap Index decline of 1.1% and the Small-Cap Index rise of 0.9% the fund performance is satisfactory, particularly in context of the following.
One of our largest holdings (over 5% of the fund at the beginning of April 2005) - NUEP suffered a decline of 17%. These shares are held via a trust, which only allows us to sell the shares we hold. Consequently, we continued to hold them, even though they had reached a relatively expensive level after a superb run in February and March 2005. Our longterm opinion of the company's growth prospects and valuation remains very positive, and we are happy to live with a period of short-term underperformance.
In the context of ongoing net outflows from the fund and an unsettled equity market struggling to find direction, we continued to adopt a relatively defensive stance in the portfolio. We have reduced the number of counters held in the fund, and added to the ones we feel offer the highest comfort with respect to their valuation - supported by strong cash flow, a high and growing dividend yield and where we are confident of earnings growth.
Consequently the most significant decisions implemented in April were to add to our holdings in Ellerines and Foschini, while disposing completely of the positions in JD Group, Woolworths, Consol and Edgars - thereby reducing the fund's overall exposure to the domestic consumer.

While it was a difficult month for the fund, the performance is satisfactory in the context of the Mid- and Small-Cap JSE Indices decline of 3.7% and 2.8% respectively. The fund also retains a very high ranking against its peer group of other unit trusts.
Our decision to raise the cash component of the portfolio in January 2005 added value in a declining market, and some specific shareholdings made significant contributions. One of these was NUEP (Aplitec), and we remain positive about the Company's prospects.
As has been the case throughout the first quarter of 2005, the volatility surrounding the rand/US dollar exchange rate causes immediate volatility in the mid- and small-cap sectors. The reason for this is because investors immediately commence rotating out of domestic, usually consumer oriented, companies in favour of large market cap, usually Resource based companies. This rotation cannot be justified on the basis of fundamental valuation, but occurs as a result of an expectation that the rand is about to weaken still further. Disappointingly, during subsequent strengthening of the rand the reverse flow of funds does not happen to the same extent, and consequently the domestic industrial companies have not regained all of the losses they suffered during rand weakness. We anticipate that this volatile pattern will continue for the next few months, and that the rand is likely to continue to weaken gradually.
In this environment, stock selection is as difficult as ever, but we continue to apply investor's funds to companies that offer sound fundamental value - in line with our unchanged and long-standing investment approach. While short-term volatility may cloud investment markets, fundamental value will always re-establish itself in the long run.

December 2004 brought to an end an extremely rewarding year for investors in the South African equity market and more particularly, unit holders in the Nedbank Entrepreneur Fund. The following returns were generated in 2004: All Share Index 25.40%; Resource Index -5.00%; Financial & Industrial Index 48.80%; General Equity Sector Average 38.05%.
Remarkably, the year was dominated by a third year in succession of rand strength versus the US dollar. Notwithstanding a powerful bull run in commodities (most notable in copper, steel and coal), the strengthening rand negated the positive impact of rising commodity prices to mining companies. Consequently, the listed resource sector battled, while domestic financial and industrial companies thrived in an environment of low interest rates, rampant consumer spending and a surge in household expenditure on durables.
It is highly unlikely that the returns generated in the past year can be repeated in 2005. We also feel a more conservative stance with respect to expectations of further rand strength and indefinite, strong consumer spending should be adopted. We have therefore raised cash to approximately 7% of the fund, realised some profits in 2004 high flyers such as Foschini, Edgars, Grindrod and PPC, while favoured rand hedges such as Trencor and Omnia have been added to (in part necessitated by the delisting offer made by Uniserv). We remain confident of the future prospects for our holdings exposed to building activity, and retain a total exposure of 15% to the sector through a number of companies.
While we have modest expectations for returns from the equity market in 2005, the current environment of low interest rates (with the possibility of still further reductions) and reasonable equity valuations (many of the companies in the fund are on historic dividend yields of nearly 4%) causes us to look forward to 2005 with cautious optimism.