The fund is a rebranding of the African Harvest Balanced Benevolent Fund. Fund manager Heather Jackson has maintained a high equity weighting, with most of her performance coming from small caps such as Shoprite, Pepkor, Massmart and Super Group. In the large caps, holdings in Nedcor, Remgro and Sasol hurt. Jackson has kept out of pricey long bonds.

On the 1 November 2003, the African Harvest Renaissance Balanced Fund and the African Harvest Balanced Benevolent merged to form the Nedbank Renaissance Fund. The history of the African Harvest Balanced Benevolent Fund has been retained. This fund is part of the Active Return Range.

The Balanced Benevolent Fund is currently positioned 4th out of 56 funds for the month to August, with a return of 2.98%. For the 3 years to August, the fund delivered 27.21%, placing it 8th out of 56 funds.

Our asset allocation call over the last 6 months has been correct insofar as equities have returned 12.2% against a less impressive 7.7% from bonds and 6.7% for cash. Valuations continue to strongly suggest that equities should continue to outperform bonds and cash. On the bond front, after a virtually straight run of 9 months of curve normalization, where the fund benefited from an overweight exposure to the medium-area of the curve, August followed July in experiencing some retracement of this trend. It was a month where the 3-7 and 7-12 year areas of the curve underperformed the 0-3 and 12+ areas, with the R186 proving to be the strongest bond. We continue to believe that the normalisation seen to date in the bond market is just the beginning. With the BA rate expected to decline by a further 2.00%, if the curve were to normalise to a level of one standard deviation above its mean at 3.00%, this suggests that the long-dated R186 should yield around 11%. It is currently yielding below 9%. Stated differently, with inflation over the next 1-2 years expected to average between 5-6% and an average real rate of 5% for the long bond since 1989, one could expect the R186 to trade between 10-11%. Our portfolio is currently positioned primarily in the medium area of the yield curve where we believe the scope for relative outperformance is greatest.

August was a busy month on the issuance front for corporate bonds, with three new corporate bonds being introduced to the market. These were the R2bn Anglogold 2008 bond (which the fund participated in), the R2bn Sasol 2007 bond and the BMW securitisation. In addition, government issued a new inflation linked bond and the existing IN03 and WS04 bonds were tapped for funds by the issuers. Overall, the fund maintained a yield pick-up relative to benchmark of approximately 60 basis points, which contributed to performance.

On the equity front, the fund had another good month considering the portfolio’s large underweight position in Resources. The fund remains underweight Resources, overweight Financials and neutral Industrials. Resources returned 10%, Industrials 4% and Financials -3%, with the total market return approximating 5%. Once again there was only a slight difference in returns between Mid-caps and the Alsi40 (Large-caps).

One new counter, Comparex, was added to the portfolio during the month. We believe that the uncertainty regarding the SRP ruling, the uncertainty regarding a potential empowerment partner and the soft demand for Comparex’s services and products are more than priced into the current share price. We have valued the group excluding the potential future ‘special dividends’. On this basis the company is currently trading at a deep discount to fair value. Furthermore, the company is trading at a discount to tangible book - not usual for this kind of business.

There were many strong performers during the month. Those in the portfolio that outperformed the All Share by more than 5% include; Anglo Gold, Anglo Platinum, Impala Platinum, Iscor, Massmart, JD Group and Pepkor. Disappointing performers include Investec, Remgro and Firstrand.

The Balanced Benevolent fund is currently positioned 9th out of 30 funds for the 3 years to June with a return of 30.25%. This long-term track record was boosted greatly by the strong equity performance for the quarter ending in June, with the fund delivering 9.44% for the quarter, placing it 17th out of 55 funds [Source: Micropal].

Our asset allocation call over the last 3 months has been the right one insofar as equities have returned 9.7% against a less impressive 6.7% from bonds and 3.4% for cash. Valuations continue to strongly suggest that equities should continue to outperform bonds and cash. On the bond front, it was pleasing to see the R186 give up some more of its stretched gains over the past 3 months. Once again the 12+ area of the yield curve delivered a lower return than our preferred holding in the 7-12 year area, although the difference was not as great as in recent months. Our additional overweight of the 3-7 year part of the yield curve also enhanced performance as this area outperformed the overall All Bond Index.

The disappointing return from the Resources sectors came largely from a strong rand that firmed by over 5% against the US dollar. The underlying commodity prices were marginally positive with Oil and Gold up 2% and the Platinum price up 4%. Our holding in Gencor finally unbundled its Impala shares. Impala now has a greater free-float adjusted weighting than Angloplats in the All-Share Index following this unbundling. This positive attribute together with the unbundling discount has resulted in a substantial positive contribution to the portfolio this quarter. A new investment in Iscor was taken this quarter after the company showed good value following the expiry of the partial offer to minorities by LNM.

The Financial sectors reacted positively to the cut in the Prime Lending Rate that occurred during the quarter. Banks and Life Assurors were up almost 19% as the out-look for operating margins and discounted valuations improved. Comments from the Reserve Bank seem to support the view that there may be more Interest Rate cuts to come. During the quarter, Coronation Holdings unbundled its stake in Coronation Fund Managers and delisted the rump of the business paying shareholders R37.50 for this. The fund has subsequently increased its holding in Coronation Fund Managers. As the gap of "Discount to Embedded Value" between Sanlam and Old Mutual widened, we switched our overweight from the later to the former and have enjoyed significant out-performance since doing so.

Lastly, turning to our Industrial shares, we had another great month out of our Consumer and Retail stocks. This will have been partly due to the interest rate cycle and partly due to increasing levels of consumer confidence. JD Group and Pepkor were both up 25% and Super Group was up 22%. JD Group took over Profurn during the quarter at what we considered to be a very good price; we therefore decided to stay with the acquirer. Steinhoff recovered by 32% after having been massively down-rated in the face of a stronger Rand and poor economic outlook in Western Europe. We had used this negative performance as an opportunity to take a position. During the quarter we sold Spur following a very successful recovery relative to the market. We also sold our holding in KWV after the underlying discount closed as to be no longer attractive.

The Balanced Benevolent Fund is currently positioned 7th out of 28 funds over 3 years with a return of 7.34%.

Our asset allocation call over the last 12 months has been been the wrong one insofar as equities have returned -29.2% against a more impressive 21.5% from bonds. On the bond front, it was pleasing to see the R186 give up some of its stretched gains over the past 6 months. Our scenario analysis indicates that, for a reasonable range of exit yields and spreads between the R186 and R157, the R186 is likely to continue to underperform the R157, but the argument is less compelling than a few months ago. Consequently, we have begun to modestly reduce our exposure to the R157 and purchase the newly issued DV23 bond. The DV23 has a similar modified duration but trades at a yield premium to the R186. Moreover, the long-end of the yield curve continues to appear vulnerable, as current inflation and growth prospects do not justify the extent of the inversion evident for current bond yields.

The fund remains underweight Resources, overweight Financials and neutral Industrials. The Tier1 index returns had a large impact on the returns for the month of April. Resources returned -8%, Industrials +2% and Finanacials +7% with the total market return approximating -2%. For the first time in many months the ALSI40, Mid Cap and Small Cap indices performed in line with one another. During April the fund outperformed the All Share by approximately 25 basis points.

The fund reduced its stake in Truworths, increased its stake in JD Group and sold its entire stake in Spur Corporation. Spur has had excellent performance over the last year, returning 50% more than the All Share. We believe that the share is now trading at fair value and therefore no longer deserves its place in the portfolio.

The best performers during the month include Firstrand, Investec, Nedcor, JD Group and Altech. Weak performers include Amplats, Gencor, Sasol and Illovo.

Performance Summary
Over the quarter the fund had a negative return of 9.09%. This compares to the negative return of 16.3% for the All Share Index and the positive return of 4.77% for the All Bond Index (ALBI). The equity portion of the fund had a negative return of 14.1% and the bond portion a positive return of 5.07%. On a relative basis, particularly in the longer term, the ranking of the fund to its peer group is particularly pleasing being positioned 2nd out of 16 over the past three years.

Market Outlook
There is no hyperbole in saying that we have just experienced a dramatic quarter. The combination of the resolve of the Americans and British with the defiance of Saddam Hussein proved beyond the ability of the United Nations to handle, and the war in Iraq ensued. As in previous onsets of widely anticipated crises, global equity markets were initially rampant, even setting some record gains over brief periods. This apparently perverse delight may be technically explained as a drop in the (ex-ante) equity risk premium. However, at the time of writing, the probability of a clinical war has meaningfully receded, dragging equity markets with it. Lechers after bad news that they are, bonds have benefited.

These outcomes were echoed if not amplified locally. As mentioned above, the All Share Index fell 16% in the quarter, while the return on the All Bond Index was a positive 5%. The enigmatic rand, which plunged after September 11th, and staged an astounding recovery over the past 15 months, was a common thread in those market returns. The rand's strength led to sharply lower earnings forecasts for resource companies; for bonds, the effect was to augment already bold forecasts of future inflation.

As always, our job as portfolio managers of your assets is to take a dispassionate stance, especially amid geopolitical turmoil. It behoves us to separate common knowledge from marginal knowledge or, more feasibly, to assess mis-valuations that exist in spite of such common knowledge. For example, we know there is a high stakes war under way, and that there is a host of dreadful potential outcomes. However, this should not lead unambiguously to the conclusion that it is a bad time to be invested in equities. To do so would be to assume that the marginal seller of Anglos, say, is habitually better informed than the marginal buyer, and trades after all, do not take place without both a buyer and a seller!

A sensible starting time for comparative analyses is the beginning of 1990. This roughly represents both the inception of monetary policy independence (for the Reserve Bank from Parliament) and of the new political dispensation in South Africa. (Although 1990 pre-dates democratic elections, it coincided with the decision to lift the ban on several political parties and with the demise of apartheid). Over that time, the earnings yield on the equity market was only once as generous as it is now, and that was in the 1991 recession. We are clearly not in a recession now, nor have we been since then. In fact, on this measure the market is considerably cheaper than it was during the Mexican, Russian or Asian crises. For clients concerned about imaginative accounting and worse, the same holds true on dividend metrics, and dividends don't lie. Moving from absolute valuation levels to comparisons across asset classes, bond yields look very thin compared to equity valuations. This situation is exacerbated for most of our clients since they are taxed on interest income but not on dividend income.

Further, the logical association between banks' ratings and yields to maturity on bonds has completely decoupled. Both markets cannot ultimately be vindicated, so we have to make a call on whether banks are cheap, bonds are expensive, or both. In this context, it is instructive to calculate a crude breakeven analysis between long bonds and money market assets. Today one can secure a return of 12.80% by simply investing in 12 month NCD's with a top rated bank. At the opposite extreme of the yield curve, the R186 (maturing in 2026, with a coupon of 10.50%) offers 9.26%. To match the return on cash, the long bond yield needs to fall at least another 36 basis points to 8.90% or lower. This is rather unattractive when contrasted to current inflation of over 11% or even to the upper end of the Reserve Bank's inflation target of 6%.

In summary, the investment world feels like a grim place, but grim places can often be where great bargains are to be had.

Portfolio Overview
On the equity front the quarter once again was characterised by a strong performance from the Mid. Cap and Small Cap sectors. In addition the Banking, Real Estate and Cyclical Services sectors all had materially better returns than the market.

During the quarter the fund sold its entire holdings in Venfin, Absa and Anglovaal Mining. Both Absa and Anglovaal outperformed the market by close to 40% over the last 12 months, whilst Venfin outperformed by 20%. In all three cases we believe that their valuations were now fair and that better value opportunities were available elsewhere. New counters include Investec, Steinhoff and Nedcor. Steinhoff is currently trading at a 50% PE discount to the market. The company has strong rand hedge qualities, excellent ROE and very low gearing. At its cheapest rating since listing, we believe that market concerns over the sluggish European market, its low tax rate and the strengthening rand have been overdone. Using some of our internal valuation measures, Steinhoff is currently amongst the 3 cheapest stocks within the ALSI40. Investec has had a precipitous fall recently, continuing a 5-year derating against the All Share and Banks Index. We believe that the concerns over the offshore operations are overdone. We have priced the offshore operations at extremely low multiples and in some cases at nil value. After including the offshore operations at such discounted prices the rest of the operations still look very appealing. The company is currently trading on a 40% PE discount to the market and a 20% premium to its book value when excluding a valuation for fund management, but a 10% discount to book including a conservative valuation for fund management. The company trades on a dividend yield of close to 8%, more than twice the market's. All other transactions were due to fund flows and/or rebalancing.

Most of the strong performers during the quarter were small and mid caps. Sasani returned 25% more than the market, Coronation 17%, Profurn 12% and Massmart 8%. Disappointments included Old Mutual, Sanlam and Anglo Platinum.

In the bond portion of the portfolio we slightly lengthened the duration of the portfolio at the end of January in anticipation of an increase in the ALBI. We sold the 2008 R194 bonds and bought the 2010 R153 bonds. At the end of the quarter the duration of the bond portion of the portfolio remained shorter than the ALBI at 4.43, compared to the ALBI duration of 4.71.