Market Review
The recovery in credit markets continued in the third quarter, with the improvement in corporate debt prices outstripping a buoyant equity market and corporate bonds almost reaching pre-Lehman's levels by the end of the period. Global financial shares, in particular, continued to rebound strongly on the back of better-than-expected earnings and plans to repay capital borrowed from governments at the peak of the crisis. We don't think we are alone in being somewhat surprised at the extent of the rally and we remain cautious of its sustainability. It certainly appears that the market has priced in most of the expected recovery already. The SA financial reporting season contained few real surprises, with Liberty Holdings a noteworthy exception. This confirmed the resilience of our financial institutions despite the SA economy officially being in recession. Despite a continued strong recovery since February, local banks underperformed the broader indices, as well as the emerging market peer group. One of the main factors driving this was worse-than-expected bad debt charges that have ballooned to recent historical highs. There should be a turnaround in credit quality as a result of interest rates coming down 500 basis points. Better loan origination in the last 18 months should also underpin a strong recovery in earnings despite modest loan growth. On a longer term basis, SA financials appear attractively priced.

What detracted from and added to performance
Within the fund, we try to maintain a reasonably stable mix between banks, life companies, small-cap financial shares and foreign financial equities; preferring to pick the best performers within the sub-sectors. However, despite financials offering good long-term value, we remained cautious during the quarter, retaining higher levels of cash than normal. Given the strong rally in financial shares, this detracted from the fund's performance during the period. Despite this, the fund's exposure to foreign financial shares largely offset the underperforming cash holdings. The fund also benefited from its exposure to some of the better quality small-cap financial shares, which also performed extremely well. Examples include Sasfin, Capitec, PSG, Peregrine and Brait. The fund's slightly higher exposure to life insurance relative to the banks would have helped except that our stock choices where not optimal. Overall the fund outperformed its SA financials benchmark over the period.

Sim Strategy
We expect the operating environment for SA financials to remain very tough until the second half of 2010. However, the interest rate cuts should start to have a positive impact by the end of 2009. The main risks to this scenario are unemployment and stress in the corporate sector. Domestic financial companies have proved relatively well managed and well capitalised, which has set them apart from their global peers through this financial crisis. A normalisation of the credit cycle should lead to a strong recovery in earnings through to 2011.

Market Review
While credit markets remained uncertain in the second quarter, the worst case scenario appears to have receded. There were no further major bank failures and many of the US and UK banks raised enough new capital to allay immediate fears. Although there is a lot of talk about green shoots in the global economy, we have yet to see the full economic impacts of the financial crisis. In SA, financials performed better than in the first quarter, with banks outperforming life companies in general. Other emerging market financials made a dramatic recovery, significantly outperforming SA financials off a low base. Despite the improved sentiment towards SA banks, it is hard to escape the reality of the adjustment that is going to be required to absorb the hangover of a protracted credit boom. This has been borne out by the numerous negative trading updates emanating from the SA banks. Although this has confirmed that 2009 will remain difficult for SA banks, the market is already looking forward to an operational rebound in 2010 and an even better 2011.

Fund Developments during 1Q 2009
The fund tries to maintain a reasonably stable mix between banks, life companies, small cap financial shares and foreign equities. We prefer to try and pick the best performers within the subsectors. Having said that, the market continued to be exceptionally volatile during the period and we remain cautious of excessive trading. Over time it is evident that the larger SA financials are highly correlated and it often difficult to distinguish opportunities between them. However this quarter was the quarter of the underdog. The fund was reasonably exposed to Old Mutual and Nedbank, which were the best performers of the life companies and banks. Some of the fund's smaller financial services holdings, such as Brait and Capitec, also experienced exceptional performance. Overall the fund's exposure to the smaller financial services shares was a very positive contributor to performance. Our relative overweight in the life sector did not work as well because Liberty Holdings and Discovery shares were adversely impacted by negative news flow relating to lapse risk and the leaked National Health proposal. The fund's exposure to the Sanlam Global financial fund benefited from the significant outperformance in emerging market financials.

Outlook for 2009
We expect 2009 to remain a tough operational environment for South African financials. The interest rate cuts should start to have a positive impact by year end. The main risks to the sector are unemployment and stress in the corporate sector. Domestic financial companies have proven themselves as relatively well managed and well capitalised, which has set them apart from their global peers during this financial crisis. A normalisation in the credit cycle should lead to strong earnings recovery through to 2011.

Market Review
The environment for financial shares remained very uncertain during the first quarter of 2009. Despite numerous central bank interventions to stabilise financial markets, financial shares continued to lose value. The US continues to bear the brunt of the contagion amid fears that the real economic impact is yet to be fully felt. Emerging market financials, including those in SA, have fared much better than those in the developed markets. Despite a consensus view that SA interest rates are firmly on a downward path and that inflation will trend lower, it seems that this relief will be too late for a large number of overly indebted consumers. The global slowdown is also severely impacting demand and many SA companies are cutting back on investment and production. Job cuts are becoming the norm and unemployment poses a further threat to banks' credit costs and to a lesser extent to lapse rates for insurance companies. In summary, 2009 is shaping up to be at least as tough as 2008.

Fund Developments during 1Q 2009
The fund tries to maintain a reasonably stable mix between banks, life companies, small cap financial shares and foreign equities. We prefer to try and pick the best performers within the subsectors. Having said that, the market continued to be exceptionally volatile during the period and in such an environment excessive trading can be counter productive. The period coincides with the release of full year results for many of the large financial shares and provides an opportunity to compare their operational performance. By and large the larger SA financial companies are managing to navigate the difficult environment well. The only disappointment has been FirstRand, which continues to suffer more directly from the asset price volatility. Aside from this, company results were largely in line with our expectations and our fundamental long term views remained intact. Consequently we did not trade much during the quarter.

Our overweight to insurance shares relative to banks worked well on a relative basis, as did our position in the global financial fund. We remain cautious on the banks and would not be surprised if the March rally wanes as weak economic news-flow emerges over the next six months.

Performance
Unfortunately the fund continued to post negative absolute growth during the period but April saw a recovery to an almost breakeven position. Cash and life companies were the best places to be and although we were correctly positioned, it could always have been better.

Outlook for 2009
We expect 2009 to be another tough year for the markets. It will take some time for the financial crisis to work its way through and for consumers to stabilise their financial position. If current improving trends in inflation and interest rates continue, we could start to see an improvement in fundamentals towards the end of 2009. The risks to this are unemployment and increasing contagion from the global slowdown. While we remain cautious, we will continue to invest in shares that offer long-term fundamental value. Domestic financial companies have proved to be well-managed and well-capitalised, leading to good relative performance in a very tough environment. This should translate into good returns in the medium term. .

Market Review
The devastating impact of the US financial crisis severely impacted asset values during the course of 2008. South African financials did not escape the contagion but fared well on a relative basis. Probable reasons for this include exchange controls, conservative lending practices and good regulatory controls. Despite this relative outperformance, not a single share in the Financial Index was able to post a price increase over the year. High interest rates and high inflation eventually took their toll on the consumer, translating into a deterioration in credit quality at the banks. The decline in asset prices negatively impacted life company valuations, smaller financial services companies' revenues and investment banking profits. In short, 2008 was a very tough year for financial shares.

Fund developments during 2008
The fund aims to maintain a reasonably stable mix between banks, life companies, small-cap financial shares and foreign equities. We strive to pick the best performers within the subsectors. Having said that, last year we expected the consumer to be quite weak and therefore were cautious of the banks throughout the year and held proportionally more life insurers than banks. Within banks, we reduced the Standard Bank holding in favour of ABSA and traded FirstRand quite aggressively. Within the life sector, we substantially increased the fund's holding in Discovery and added to the position in Old Mutual as it continued to be priced for liquidation. In a declining market, small-cap financials tend to be sold off unduly due to a lack of liquidity, so we took the opportunity to gradually increase the holding in selected small-cap financials. We also used the relative underperformance of global financials as an opportunity to increase the holding in the SIM Global Financial fund.

Performance
The fund's performance in 2008 was disappointing. The maximum 10% holdings in each of the two top-performing domestic financial shares (ABSA and Discovery) significantly contributed to the fund's performance, but this was not able to offset the under-performance of our holdings in Old Mutual and in the Sanlam Global Financial Fund.

Outlook for 2009
We expect 2009 still to be a tough year for the markets. It will take some time for the financial crisis to work its way through and for consumers to stabilise their financial position.
If current improving trends in inflation and interest rates continue, we could start to see an improvement in fundamentals towards the end of 2009. The risks to this outlook are that unemployment could rise further and there could be increasing contagion from the global slowdown. While we remain cautious, we will continue to invest in shares that offer long-term fundamental value. Domestic financial companies have proven to be well managed and well capitalised, leading to good relative performance in a very tough environment. This should translate into good returns when fundamentals improve.