The fund switched Management Company from Sanlam Collective Investments (RF) (Pty) Ltd. to Satrix Managers (Pty) Ltd. on 10 Apr 2014

Market review

The second quarter started on the back foot, with US employment numbers suffering their biggest miss since December 2009 and labour participation rates dropping to 1979 lows. Europe, meanwhile, was recovering from the last-gasp bail out of Cyprus and other peripheral countries were under pressure to get approval for their austerity measures. China fared no better, with concerns about bird flu and a property market clampdown adding to the country's woes after first quarter growth figures disappointed.

However, centre stage belonged to outgoing Fed Chairman Ben Bernanke. As early as the end of May, Bernanke began warning markets that he would start "tapering off" his $85bn a month quantitative easing programme. This led to an immediate bond market sell off and liquidity exiting emerging markets.

The MSCI Emerging Market Equity Index lost more than 9% during the quarter - the worst start to a year since the 1998 Asian financial crisis. In sharp contrast, developed markets gained ground, with the S&P 500 ending the quarter up 2.9%.Iinvestors were reminded that the emerging market risk premium was alive and well.

The FTSE/JSE Shareholder Weighted Index(SWIX) ended the quarter almost flat (up 0.7%). However, the picture looks less rosy in dollar terms, with the index off more than 7% but doing slightly better than its emerging market peer group. Year-to-date, the JSE is down close to 14% in dollar terms; largely due to the sharp depreciation of the rand against the greenback. In fact, the local currency was one of the worst performing currencies in the world.

The rout on commodity prices continued during the quarter. Gold led the downward slide, declining 23% in dollars during quarter and platinum slumped close to 15% - both of which are important exports for our local economy. Industrial metals fared slightly better, with the copper price down just over 10% during the second quarter.

In SA, the economy entered a soft patch, with weak domestic demand at 2.5% year on year, manufacturing production under pressure and the investment side of the economy - especially the private sector- remaining particularly weak.

Given the above picture, it is no surprise that we continue to see financial and industrial stocks bifurcating from resources stocks. Resources were down close to 12%, with gold stocks losing more than a third of their value and platinum stocks down by close to 24%.

In contrast, industrials continue to lead the way, with heavyweights Naspers gaining more than 27%, Richemont up 21%, Aspen 19% and MTN close to 14%.

Portfolio changes and Performance

The FTSE/JSE Equally Weighted Top 40 Index (-2.7%) underperformed both the SWIX40 (0.97%) and the ALSI40(- 0.15%) during the last three months.Analysing performance at a sector level, SA industrials were buoyed once again by the large multinational, rand-hedge stocks, which emerged as clear outperformers and delivered a return of 6.9% during the quarter.Due to the down weighting of the larger shares in the benchmark (equal weight of all shares), the underweight positions benchmark (equal weight of all shares), the underweight positions in industrial rand-hedge companies hurt our performance. The low weighted shares, like gold and platinum, are all upweighted in this benchmark and these two sectors that were down 34% and 24% respectively and that put further downward pressure on performance.

At an individual share level, Naspers, MTN, Gold Fields and African Rainbow Minerals were the main detractors from performance.

Outlook

Investors are now concerned that the Fed and other central banks may remove stimulus from the global economy at too fast a pace. The era of excess liquidity and low funding rates is indeed coming to an end and this could provide another headwind to earnings growth. In addition, the Chinese economy is showing signs of sputtering, which is negative for commodity demand. Markets will remain rocked by emotions - whether it's the Fed's tapering or a demonstration in Tahrir or Taksim square. Our job is to make sure that we profit from these opportunities by not losing our cool when others lose theirs!

The JSE ALSI Index is trading on a forward PE of close to 12.5x, above its long-term average level. We expect earnings growth of 21%, driven by a rebound in resources earnings over the next year. On a sectoral basis, resources and financials are trading on attractive forward PEs compared to the industrial sector.

From a long-term perspective, we believe the SA stock market is now trading slightly above fair intrinsic value.