The second quarter of 2008 was very similar to the first quarter. The FTSE/JSE All Share Index delivered a positive return of 3.4% compared to 2.9% in the first quarter. This again masks the fact that only resources produced a positive return (up 13.4%) while financials (down 14.5%) and industrials (down 2.7%) performed poorly. Within resources, the top performing sectors continued to be oil & gas (up 19.8%) and basic materials (up 12.1%). Both sectors were driven by record oil prices as well as renewed speculation that Anglo American plc will be taken over by its larger rivals.

Within industrials, not all was gloom as media (up 14.6%) and fixed line telecommunications (up 12.8%) produced excellent returns. The former was driven by strong performance from Naspers in anticipation of good financial results, while the latter was driven by corporate activity surrounding Telkom that could potentially unlock significant value for shareholders. Financials had a horrendous quarter, with all the sub-sectors showing negative returns. Real estate (down 16.8%) and banks (down 14.8%) were hardest hit as the inflation and interest rate picture continued to deteriorate locally and globally.

During the quarter, we took advantage of opportunities that were previously not available due to liquidity constraints, namely Assore and Palamin. We also added to Stefanutti & Bressan after the company underperformed significantly over the last six months. We funded these purchases from the sale of Naspers and Aveng, both of which had good performances.

The FTSE/JSE All Share Index ended the quarter with a positive return of 2.9%. This, however, masks the fact that only three out of 31 sectors had a positive return, namely industrial metals, with a return of 44.3%, followed by mining and oil & gas producers, with returns of 18% and 14.6% respectively. The rest of the sectors performed poorly, with returns ranging from -2.1% for forestry & paper to -21.6% for healthcare equipment & services.

During this period, we reduced our holdings in those counters that have done extremely well, such as Arcelor Mittal, Anglo American plc and Impala Platinum, which returned 44%, 16% and 31% respectively. We used some of the funds raised to take advantage of lower prices in counters such as Investec (down 14%), Mustek (down 41%) and Stefanutti & Bressan (down 20%).

The fund is heavily weighted towards financial and industrial shares, and less exposed to resources relative to widely used benchmarks. Within financials, we continue to prefer large banks due to their low valuations, which more than take account of the tough economic environment. We also like Remgro for its defensive characteristics. Within industrials, we maintain our holdings in MTN and Naspers as we believe in the long-term business case of those companies. In terms of resources, our preferred exposure continues to be Impala Platinum because we like the long-term outlook for platinum prices, and smaller miners such as Palamin, Metorex and Merafe for their rising production profiles.

The fund has used the recent volatility in the market to consolidate the holdings in the fund, so that it will be able to adapt to any decline in the market. Exposure to resources has been consolidated so we can focus on areas where the strong demand for metals underpins valuations. We have large holdings in platinum and steel shares. Holdings in smaller miners give us opportunities in companies that are growing their production profile and will be able to report higher earnings while the environment is favourable.

The fund also has sizable positions in selected financial and industrial shares that we believe continue to be undervalued by the market. We continue to prefer exposure to the banking sector that, despite significant increases in domestic interest rates, is expected to continue delivering robust results going forward. The defensive nature of some banking shares is underestimated, with sentiment very negative due to the sub-prime fall-out in global markets.
On the industrial front, the fund continues to have large positions in MTN, Naspers and Astral, all of which are not pricing in their long term prospects. We have also added Telkom due to its cash generative nature, low rating (despite the low earnings growth profile) and this share's relative value after its large price fall over recent months.

The overall gearing of the fund relative to financial markets has steadily declined while the dividend yield has improved.