Startled by a variety of small but worrying economic and political events, stock markets around the world sold off heavily in the second half of September; a trend that has extended into early October. The impact has been felt hard by the resource-heavy South African stock market as it has been accompanied by significant weakness in most commodities; most notably gold, platinum and iron ore, although further weakening of the rand has helped to improve this impact.

For the month, the JSE SWIX declined by -2.4%, the JSE Mid Cap Index declined by 2.8% and the JSE Small Cap Index by -0.6%. The Nedgroup Investments Entrepreneur Fund’s higher cash weighting, which we have maintained for several months, acted as a welcome cushion during the recent bout of market weakness. We have used this opportunity to add selectively to positions across the portfolio resulting in the cash position decreasing to around 3.5%.

As at the end of September 2014 the fund’s weighted PE, dividend yield and Price to Book ratios were 15.3X, 2.8% and 2.0X respectively.

The market continued its inexorable rise upwards into June with the JSE All Share Index appreciating by 2.8% with the JSE Mid Cap Index and the Small Cap Index delivering 1.7% and -0.1% respectively...

The Fund's performance for the month was supported by a wide variety of many of its smaller holdings including Transaction Capital, New Europe Property and Raubex, while equally several of its smaller, less significant holdings were the worst detractors from performance and these included Santam, Eqstra, Invicta and Metrofile.

The steady appreciation of the equity market for several months has resulted in volatility levels dropping to the lowest levels recorded since before the 2008 crisis. We think this is a factor which investors need to consider as it is inevitable that this period of complacency will come to an end and we will return to more normal levels of market volatility. It is evidenced in our efforts to find relative value and the fact that our cash holdings in the fund at about 6% are at the high end of our usual cash exposure. While we make no attempt to try and time the market and follow an approach of remaining fully invested and working hard to pick the right shares, we worry about how the market will experience rising volatility levels. In that regard we continue to look for stable, defensive, highly cash generative businesses that are reasonably valued and which will weather the return to more volatile market conditions best.

As at the end of June 2014 the Nedgroup Investments Entrepreneur Fund's weighted PE, dividend yield and Price to Book ratios were 18.0X, 4.3% and 2.4X respectively.

The market continued the recovery started in February after the January sell-off with the All Share Index rising by 1.8% in March. Banks (+10.3%) and Retailers (+13%) were the star sector performers while the laggards were Basic Materials (-2.0%) and Media (-10.5%) with Naspers retreating off its highs on weakness in primary asset, Tencent.

The Nedgroup Investments Entrepreneur Fund appreciated by 2.8% over the month which compares reasonably with the JSE Mid Cap Index +3.8% (heavy retail weighting in this benchmark) and the Small Cap Index +2.8%. In addition, our analysis suggests the Fund is performing well against its peer group.

Performance was supported by positions in RMI Holdings (+9.0%) and Coronation (+12.5%) while underperformers were Howden (-5.4%) and Trencor (-5.4%).

These last two are especially disappointing as they are both quite large positions (see Top 10 holdings) and Howden published a superb set of record financial results during March. Clearly the market has been disappointed by the opaque reporting presented by the firm’s management and Board decision to pass the dividend while the firm finalises their BEE shareholding and credentials. We are engaging constructively with the company on these matters which we hope to be able to rectify and in the meantime retain the positions.

As at the end of March the Fund’s weighted PE ratio and dividend yield were 16.2%, 3.1% and 2.6% respectively.

December brought 2013 to a close with a strong bull market. The JSE All Share Index appreciated by 3.0% while the Small and Mid-Cap indices produced more modest returns of 0.7% and 1.2% respectively.

For the year as a whole we are pleased to be able to report another excellent year of absolute and relative performance with the Fund returning 22.2% versus the All Share 21.4%, Mid Cap Index +13% and the Small Cap Index +26.3%. 2013 continued to build on a period of several years of consistent and exceptional performance and we will apply our best efforts to maintain this track record in the year ahead.

In our November report we stated that while we do not base investment decisions on aggressive forecasts of currency movements as we feel these are impossible to predict accurately, we were very comfortable with the fact that the portfolio was (and remains) well-positioned to benefit should the rand weaken further. Notwithstanding the substantial decline in the value of the rand versus the US dollar already experienced during 2013, we remained concerned due to South Africa's precarious current account deficit and the unreliable basis on which this has been funded - predominantly portfolio inflows into our local bonds. The further weakness of the rand in early 2014 will continue to be supportive of these positions with British American Tobacco at 8% (held either directly or indirectly through Reinet) as well as Trencor, Naspers, Illovo, Oceana Fishing, Mediclinic and Datatec. These holdings cumulatively represent 26% of the portfolio.

A weakening rand naturally supports the earnings prospects of all exporters and investors may expect us to once again consider the fortunes of our local platinum and gold producers. We have done so but remain skeptical of their ability to prosper given the multitude of headwinds that continue to plague the industry. We are especially cautious of the fractious labour environment in South Africa and anticipate 2014 (an election year) will again be a period of disruption for labour intensive industries, which can be ill afforded.

Our cautious long term investment strategy will continue to be followed and we look forward to 2014 with guarded optimism.

The market launched a broad based bull run in September 2013 with the All Share Index appreciating by 5.1%, the Mid Cap Index +4.9% and the Small Cap Index rising 6.2%. We are a little disappointed that the Nedgroup Investments Entrepreneur Fund lagged a bit, but managed to achieve an improvement of 3.6%. Performance was supported by some stellar returns (such as Italtile +24%) but our now more reduced retail exposure (general retailer sector +10.5% and we hold only Mr Price and Holdsport) and select rand hedges (Oceana -4% and Illovo -3%) had a negative impact on absolute and relative performance for the month.

We remain confident as we enter the final calendar quarter of the year. Several of our larger positions have continued to trend sideways while we remain positive about their prospects in comparison to their valuations.

We expect that driven by the catalyst of publishing earnings they will drive fund performance in the coming months. Good examples here include Reinet, RMI, Netcare, and Trencor.

As we anticipated last month, labour relations in the mining and manufacturing sectors in South Africa have continued to deteriorate. While we have so far been spared any violent incidents, we note that the motor manufacturers have experienced disrupted production for over six weeks and counting. Amplats have had worked stopped at their Rustenburg shafts for the last 10 days and we have yet to get into the difficult stages of 2013 wage increase negotiations. We consequently have little to no exposure to companies affected by these influences.