Against most expectations, the rand strengthened during the quarter (from 6.68 to the US$ to 6.34). At the same time the US Fed continued its programme of regular 25 basis point interest rate increases. This caused the US Dow to remain weak (2.9%) but, remarkably, emerging markets, including South Africa's JSE, remained very strong (19.2%).

Top performers in the financial sector were Sasfin (42%), Coronation (40%) and Nedcor (25%). Some of the small caps, particularly PSG, Peregrine and Brait, also had strong price moves.

The life insurers rerated on the back of the strong market (despite the ongoing problems with the Pension Fund Adjudicator), while the banks also had a good quarter.

The weakest share was Discovery Health (after disappointing results largely due to Destiny Health (its US operation) still being cash-flow negative).

The fund increased its holdings in Liberty and also Santam substantially. Both companies are geared to a rising JSE, while Liberty is particularly good value.

The purchases were financed through sales of our Nedcor and Remgro holdings and the forced liquidation of Absa (Barclays taking 30% of our holding).

At the end of August we posed the question: "Are financials a bit overheated now?" and we are sticking to our answer of "Yes" in the short-term.

But, as said last month, while not as good value as at the beginning of the year, they still remain good value for the long-term holder due to:
o the attractive dividend yield;
o the continued strong growth of the SA economy, and
o the planned infrastructural projects (Gautrain, 2010 Soccer World Cup etc.).

Kokkie Kooyman is one of the genuine stars of retail fund management, and perhaps the only manager associated with a single sector, financials. But his record at Sanlam Financial Fund has not been as stellar as it was when he ran similar funds at Old Mutual and Coronation.

If you are looking for a vanilla exposure to local financials, then either of these funds (or Kooyman's Nedbank Financials) is a better bet than this one. The main attraction of this fund is that it gives investors who do not want the trouble of taking money offshore through the R750 000 allowance the bonus of a 24% exposure to the Sanlam Global Financial Fund, on which Kooyman spends about 85% of his time.

If you have taken money offshore, you might consider putting a portion of it directly into the global fund, where one of your fellow investors would be FirstRand CE Laurie Dippenaar. The fund has thrashed its international competitors through an eclectic approach, going up 12% in dollars in July alone. Its main investments have been in Korea, India, Turkey, Indonesia and Brazil.

Kooyman says these are value investments, which he defines as ones you battle to explain at a trustee presentation and which go up by 100% afterwards. The Global fund used to have a 15% exposure to SA but has fallen to 1% with just two shares, Sasfin and Liberty. Liberty Group and Liberty Holdings combined now make up almost as much of the fund as Standard Bank at 16,1%. Kooyman says Liberty is mispriced in view of its ability to continue to increase sales more profitably and faster than its competitors. Sasfin, which he calls the cheapest banking share around, is the largest small-cap holding, a 5,7% weighting.

Kooyman has built up the holding in Santam to 5,6% as he argues that it is a good way, like the life companies, to get exposure to a broad range of equity investments, but without the problems the life offices face concerning reputational risk from pension funds adjudicator rulings. Kooyman says financial shares look frothy in the short term but dividend yields are still attractive and the projected high growth rates justify the current ratings.

Financial Mail - 16 September 2005

The quarter ended 30 June was characterised by some strong macro-trends. The rand weakened (6%), yet despite that banks performed well (Stanbic +6%, FirstRand +4% and Absa +12% (on the back of the Barclays offer). This is interesting when one compares it to the JSE ALSI performance (+6%) and the Dow (-2%).

The effects of Old Mutual's bid on Skandia and the Pension Fund Adjudicator's rulings on the other life insurers is very evident (Old Mutual -5%, Liberty -6%, Sanlam 1% and Metlife -2%).

Financial services companies and specifically small caps performed exceptionally well this quarter: PSG +29%, Peregrine +27%, Investec +10%, African Bank +12%, Brait +15%, Alexander Forbes +13%, Santam +28%, Remgro +11%, Sasfin +7% and Discovery (after the price fall) +7%. Unfortunately we had little exposure to most of these companies except Santam, Remgro, Sasfin and Discovery.

Although we were disappointed at not being invested in these companies during the quarter, one must bear in mind that some of them are either too illiquid or too expensive to have large exposures to - hence during the periods when they "run" one must be disciplined not to get sucked into the frenzy.

The exposure to the SIM Global Financial Fund paid off this quarter. While the fund only gained 1% in US$ (due to flight from emerging markets in April), converted to rand this is a satisfactory 8%.

Our view on the sector remains unchanged - lower, stable interest rates have created a higher growth economy, which is a very positive environment for bank shares. Both bank shares and life insurance shares are still on healthy dividend yields with good growth prospects. We remain very positive about exposure to the sector.

The financial funds remain the best-performing sector along with small caps over a year, and they have done materially better than small-cap funds over six and three months.

In the first year after Kokkie Kooyman moved from Coronation to run this fund in January 2004, it lagged behind its peers. It had a holding in the Sanlam Global Financial Fund, which peaked at 28% of assets last month, but which was reduced to 24% in early May.

More recently, this holding has proved to be a useful diversifier in periods of weakness in the financial sector - in March, for example, only Discovery and the global financial fund made a positive contribution to returns.

But Kooyman says that, even though financial shares tend to underperform in times of rising world interest rates, this time will be different: US growth is not sustainable, so the uptrend in global interest rates will be brief, and there is no pressure for the SA Reserve Bank to increase interest rates.

Kooyman is comfortable with a 15,5% holding in Standard Bank and 14,5% in Absa. This is not very different from his competitors. His big differentiator is Sasfin (which he also holds in Nedbank Financials). He considers it to be the most neglected and undervalued financial share on the JSE. Fortunately, as the fund is less than R100m, he can buy enough of the share to make a difference to performance - though he says he also held it in Coronation Financial when it had more than R800m under management.

This is the main second-tier share in the fund, though he also holds Brait.

Kooyman says that prospects remain better for banks than for life assurers and he has trimmed back the life holdings. He says the two offices with the best prospects are Liberty at the top end of the market - which is increasing market share, has cut costs and looks certain to unlock value from its acquisition of Capital Alliance - and Metropolitan in the mass market.

Sanlam is also a core holding as Kooyman says the Absa and Santam holdings act as a vital underpin to the share.

Recently, Kooyman bought African Bank Investments when the price fell below R16,50. It has since bounced back above R17.

Financial Mail - 27 May 2005

Fund manager Kokkie Kooyman suffered in two ways from the fund's 20% exposure to his Sanlam Global Financial Fund: from the strength of the rand and the fact that SA banks outperformed banks in all the foreign markets in which Kooyman is invested. The fund differs from its competitors through its 4,5% holding in Nedcor (bought below R60). Recently he has been a large buyer of Liberty and has nibbled on Old Mutual.

Financial Mail - 25 February 2005

The fact that only one share had a negative return for the quarter showed how the whole sector was re-rated. The trigger was the strong rand. This meant that interest rates stayed low. The lower interest rates propelled house prices and domestic consumption, which in turn has meant that South Africa can look forward to GDP growth exceeding 4% in 2005.

At the same time the US$ weakness and prospects of poor US and European growth caused international investors to search for higher-growth economies, hence the strong interest from international investors in South Africa.

The above scenario bodes well for 2005. It means job creation, more local activity and lower bad debts. One cannot help but interpret all the building and renovating activities as a sign of newfound confidence in the future.

Despite the strong price moves South African financials are not yet expensive, as they came off a very undervalued base (in October 2003 they were at 40-year lows).

Earnings growth will be strong during 2005; more importantly, managements have learnt from the past and are paying out excess capital to shareholders.

The US$ return of the Sanlam Global Financial Fund for the full year was 30%. This is an excellent return but unfortunately the strong rand (13% gain against the US$) meant that the return measured in rands was diluted.

We remain of the opinion that the 20% offshore exposure will add value to the fund, both in terms of performance and also in the event of any possible rand weakness.

We remain positive about economic growth prospects for South Africa in 2005. As long as the rand and interest rates remain stable, financial and industrial shares remain excellent investments for 2005.