During the quarter we sold approximately 3% of the value of the portfolio's assets, and used all the proceeds as well as an additional 4% to increase the holdings in the good businesses we already own. The sales for this quarter imply that the average holding period of these businesses are between four and five years. We would have loved the holding period to be forever, but sometimes we find opportunities to exchange fair value for great value. We would be remiss in our responsibility if we did not do so.
During these volatile times, like investors, we also feel uneasiness in our stomachs. History, however, has shown us that times like these are often times that reduce your overall risk - quality companies can be bought at cheaper prices. After a review of the values we put on these businesses and the price at which they were trading, we acquired more of Sun International, FirstRand, Tiger Brands and Pick 'n Pay. We sold down holdings in Absa (in our view it is more expensive than the other banks) as well as Remgro and Rainbow Chicken. Remgro is one of those businesses that we would like to own forever, but because it is currently being loved by the market it is pricing in a far too rosy future. These are not odds that we particularly like - if it all works out perfectly then the returns are fair (because all good news is priced in) and if any bad news creeps in (which happens, even to Remgro), then we stand to lose some of the capital.
We remain of the opinion that there is very little value in bonds and property and continue to hold little exposure to these areas of the market.
This was a really good quarter for us as we have started to claw back some of our recent underperformance against the benchmarks. But, there is lots of work still to be done and we see ourselves starting to outperform only when this market turns nasty. We define the market as nasty when returns either become negative or move sideways for an extended period of time (three to five years). In the mean time we will try and keep the underperformance in the bull market as small as possible. Positioning the portfolio for troubled times seems to be the most prudent stance we can take with your capital. Although, we do not wish a bear market on any of our clients!

We remind ourselves daily that nobody knows what the future holds. We focus on things we can control, one of which is the amount of risk that we subject your capital to. In April we suggested the equity market would go nowhere, in an interesting way. It has certainly done that and more, but three months is a nonsensical period of time to provide market commentary for. We hope to provide you with a bit of insight into how we think about investing your capital in these circumstances.

The strong market at the beginning of the quarter provided us with opportunities to exit a few of your more illiquid holdings, such as Altech and Datacentrix, at very attractive prices relative to what we believe they are worth. In evaluating these transactions we differentiate between what we think of the underlying businesses and their share prices. A share price often has no bearing on the quality or value of the underlying business.

This is the basic tenet of our very existence! Our view on the quality and value of these businesses has however not changed and when they offer attractive long-term returns we will invest in them again. The sharp drop in the market during May and June, particularly in the banking and industrial sectors, has enabled us to commit more of your capital to selected high quality companies such as Standard Bank, Absa, Firstrand, Metropolitan, Foschini, Pick 'n Pay and Tiger Brands.

In an environment of high market risk (low prospective returns) we believe risk management and therefore stock selection is more important than ever. We continue to avoid accepting market risk by not investing in large index counters for the sake of it when they don't offer value to long term investors. We remain committed to investing in high quality assets and continue to hold significant cash positions in order to buy more of what we like at the right prices.

Are South Africans good investors? We can think of no reason why they should be any different from investors elsewhere. People seem to have a natural affinity to democracy - and markets are the most democratic construction available. Maybe the question should rather read: 'Are people in general good investors?'

To gain a better insight, contrast investing with speculating. Benjamin Graham, doyen of serious investors, said: "An investment operation is one, which upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." To our mind speculating is equivalent to gambling. We have no opinion whether South Africans are good or bad gamblers.

So, what makes a good investor? We have a checklist of the traits that we believe all of the great investors have in common: individualism, patience, mental models and good understanding of risk. This month, we discuss individualism in more detail and will cover the other three areas in the coming months.

Individualism -The best investors are able to generally think and act in a fairly contrarian fashion. Market prices are quite efficient, due to the ability of large groups of people to, on average, get the price right. Under the right circumstances crowds could be smarter than even the smartest person in the group. Crowds are smart under the following circumstances: o Diversity of information, attitude and opinion
o Individual members of the crowd act independently of each other
o An unbiased aggregation mechanism

When one or more of those circumstances aren't present in the price making mechanism we call the market, it pays to bet against the crowd. For as smart as a crowd can be under ideal conditions it can be extremely misguided under the wrong conditions.

Contrarian investors are able to take advantage of this inefficiency -but only if they're psychologically able to stand apart from the crowd when the occasion calls for it.

An extract from FINWEEK, COLLECTIVE insight, Autumn 2006.

Nedbank Managed is not a natural fit with the other funds in this category. The prudential medium equity category is dominated by funds that are aware of their peer group and do not deviate much from the herd position , either in their stock selection or in asset allocation: they are mostly of the standard 65% equity, 25% bonds and 10% cash variety.

And because most fund managers are genetically programmed to talk up equities in all circumstances, it is quite refreshing that this fund's portfolio manager, Piet Viljoen, says he considers cash the most attractive asset class. It accounts for 36% of the fund's assets.

Nedbank Managed does not differ much from Re:CM Core Managed, run by Viljoen's own company, Regarding Capital Management. Core Managed has international assets, but the big difference is in the target market. You cannot access the Re:CM funds through the linked product companies and the minimum investment is R250 000, while you can get into Nedbank Managed for just R300/month.

Viljoen says the only kind of risk that matters is the risk of losing money, rather than tracking error or standard deviation.

A few of his shares, such as Western Areas, don't look risk-free but Viljoen says not even Brett Kebble could have stolen the main asset of Western Areas, which is gold in the ground.

He says there are opportunities to buy more speculative shares (Simmer & Jack is another example) which he would be foolish to pass over, but 70% of his shares have long-term franchises and strong cash flows, such as Richemont, Remgro, Tiger Brands and Pick 'n Pay. He says retailers such as Pick 'n Pay and Foschini are now in the zone in which they are not cheap enough to buy or expensive enough to sell.

Viljoen has no government bonds and just a token exposure to the African Bank, DaimlerChrysler and Sasol corporate bonds. He has been reducing the property exposure recently, selling his entire holding in Grayprop. ARM, Metorex, Consol, Abil and Mustek were also sold in the first quarter.

Financial Mail - 21April2006

It is quite fashionable at this time of year to make some sort of forecast on what the New Year holds for markets. At best, these forecasts are mindless extrapolations of current business conditions. At worst, as evidenced by some recent reports we have received from the sell side, they are mere inducements for investment banking work. Suffice to say that, just like everyone else, we have no idea as to what the future holds, but, unlike everyone else, we will make no forecasts based on what we don't know.
Broadly, your fund's positioning can be summarized as follows: very exposed to good quality medium-sized, locally based companies, primarily operating in the financial and industrial sectors. As such, your fund is quite underexposed to global, resource related businesses. This positioning is not as a result of some top down, economic analysis - it relates directly to our bottom up valuation work.
We consciously focus on medium sized companies for two reasons: they are often better quality and cheaper than large companies, and they are generally not in a widely followed index. Better quality, because they tend to be run by business people and not investment bankers, and less risky, because current elevated market levels are forcing more and more short term orientated traders (like most hedge funds) into the index.
The turnover (ie the amount of buying and selling we did in your fund) amounted to less than 5% of fund value for the quarter - which annualizes to a 5-year average holding period. Coincidentally, this happens to be our preferred holding period! Our inaction doesn't make us popular with brokers, but we think it adds a lot of value to your fund: less brokerage paid equates to more of your money left in the fund to invest.
The fund continues to hold almost no bonds - with bond yields and cash rates very similar, it makes more sense to hold cash.

Piet Viljoen,
RE:CM