Buys & Sells
The fund increased its exposure to Aflife, ABSA, Nedcor, NAC and Old Mutual. These shares have been under pressure recently and we feel that they are over sold at current levels. We sold some of our holdings in Abil, Capital Alliance, Discovery, FirstRand, SBIC, Sanlam and Santam.

Performance & Reason
The JSE ALSI index ended down by -11.19% for the 3rd quarter and the financial index was also down by a similar -11.30%. Overall the fund was down by -8.75% ending in first place for the third quarter and is now in 1st position for the year to date. Our overweight positions in small and mid cap shares like Discovery, PGH, Solutions and Peregrine added value to the fund's relative performance. The underweight positions in Nedcor and Old Mutual also added value. Our foreign holdings detracted from our performance.

Outlook
Global stock markets have become volatile and increasingly difficult to predict because of large sentiment swings. South African financial shares currently have very attractive valuations considering the under performance the last four years. Investors with a medium term investment horizon could use the current attractive valuation levels to start increasing their exposure. As a team we are confident that our stock picks will continue to come through for us and we will aim to make this year a good year for the fund as we did in 2001.

The Sanlam Financial Fund outperformed its peers during the second quarter of the year when positions that had gone sour in the first quarter paid off. It had exposure to BoE, African Bank, PSG Holdings and Investec, all shares that tanked earlier this year but came back to life in the second quarter.

Fund manager Adrian Cloete held on to these shares even though they were declining through negative sentiment and, in some cases, bought more on the way down.

The fund had a chunky 5% exposure to New Africa Capital (NAC) before the empowerment life assurer put out a profit warning. "It hurt," says Cloete, "but we still believe it is a sound company that is not going to go out of business. It's just a question of when the value is going to be unlocked." He points out that NAC is trading at a 45% discount to its embedded value.

Underweight exposure to Old Mutual and Nedcor also helped lift the fund's performance during the quarter. Cloete believes Old Mutual is a good company "but relatively fully priced".

A good run in the equity markets has been cut short by worries about the minerals bill and Cloete says that's affecting all the sectors of the market at the moment.

"It's difficult to predict the short-term mood of the market," he says, "but if you look at the valuations of the financial shares they still look attractive." He is confident that if investors stay calm and stick to their guns they will make money in financials in the end.

If interest rates come down the banking sector will benefit, he says, but if international stock markets bounce, the life assurers will outperform. A number of financial services groups are also about to release results, which are expected to be reasonably good.

Cloete points out that all the financial fund managers have outperformed the financial index. Pity that still leaves investors in the red if they got in any time up to three years ago.

Investors in the Sanlam Financial Fund can probably thank their lucky stars that they are at the top of the pile because there have been some close shaves this year that could have turned out very differently.

Buys & Sells:

The fund increased its exposure to Abil, Alexander Forbes, Nedcor, NAC, Santam and Old Mutual. The holding in BOE was sold out completely and the holdings in Aflife, ABSA, Brait, Capital Alliance and RMBH were also reduced a bit.

Performance & Reason

The JSE ALSI index ended down by -3.11% for the 2nd quarter, but the financial index was up by 4.27%. Overall the fund was up by 16.72% ending in first place for the 2nd quarter and is now in 2nd position for the year to date. The overweight positions in Investec, BOE, Sanlam, Alexander Forbes and PGH added value for the fund. The underweight positions in Nedcor and Old Mutual also added value.

Outlook

After the great month during April, financial shares have consolidated a bit. The strengthening currency and better outlook for the sector will continue to be the catalysts going forward. the fund managers don't expect further increases in interest rates in SA. Valuations of financial shares are still reasonably attractive considering the under performance of these shares over the last four years. Financial shares have great earnings visibility, defensive characteristics and reasonable valuations. As a team SIM are confident that the stock picks will continue to come through and they will aim to make this year a good year for the fund as they did in 2001

The fund had a disappointing month. The overweight positions in Investec, BOE, Abil, Sanlam, NAC, Capital Alliance, Aflife and Brait as well as our holding in Saambou detracted a lot from our short term performance. The underweight positions in SBIC, Old Mutual, Liberty, Santam and Discovery also didn't help performance during the last month. The strengthening of the rand from oversold levels caused our foreign holdings to contribute negatively so far this year as well.

However, the fund manager is confident that the stocks will come through in the near term. The fund has increased the positions in Brait, BOE, Capital Alliance, Investec, NAC and PGH. These shares had been oversold and were offering exceptional relative value at the time.

The Sanlam Financial Fund has won the S&P 2002 award for the best fund within the Domestic Equity Financial sector over a one year period.