Sector Review
The second quarter was probably one of the most concerning periods over the last few years as the Euro-zone crisis morphed into the very real possibility of Greece exiting the union (Grexit). From all the commentary, it was evident that no one really understood the potential consequences should Greece default in a disorderly fashion. Where they could, some of the smaller banks moved to balance assets and liabilities within the peripheral countries to offset some of the risk of contagion but the big banks hold too much of this debt to take similar measures. With no capital controls between countries in the Euro-zone, citizens can freely move capital around with the result that deposits in Greek banks have fallen by one third since the beginning of 2010. Sovereign bond spreads opened up for Spain, Italy and Greece in spite of European Central Bank (ECB) purchases. Investment banks continued to feel the heat, with Moody's downgrading 15 European banks that have exposure to capital markets. This effectively means that counterparties will be looking for more collateral from these banks and the funding costs will go up. The latest debacle at Barclays regarding manipulation of the Libor rate and the subsequent resignation of its chairman and CEO would seem to support these actions. At the EU summit towards the end of the quarter, there was a call for greater banking union across the region, with a suggestion that the ECB should supervise the banks and that the ESM (European Stability Mechanism) should be used to recapitalise banks. There was also a suggestion that the Euro-zone should back Eurozone debt but this is not something that Germany will support. There is a lot of talk about the need for growth in the region but a great deal of uncertainty on exactly what should be done to achieve this. At the G20 meeting in June, it was broadly acknowledged that borrowing costs for the debt-burdened peripheral countries are too high and that the region should move towards a more integrated financial architecture but solutions are not forthcoming. In US dollar terms, the JSE SWIX performed roughly in line with the S&P, with resources losing ground materially to financials and industrials. Financials were the clear winner for the quarter, led by the banks (+9% in rand terms). Life insurers also put in a creditable performance (+7%), strongly outperforming the broader market, as Old Mutual surged in excess of 20% during the quarter, followed by Sanlam (11%). Within the banking sector, FirstRand was the best performer (+17%), followed by Nedbank (9%) and Standard Bank (6%). FirstRand's interim results to December, announced in quarter one, surprised the market on the upside and the counter continued to rerate through the second quarter - solid growth in net interest income and customer acquisition, with the added advantage of being the major player in the buoyant vehicle asset financing market, bodes well for a strong full year result. Absa was a material underperformer, announcing that it had experienced a deteriorating home loans legal book and expected earnings to be down for the six months to June. Within the life insurance sector, Old Mutual reported positive developments in most of its operations during the first quarter of 2012, with sales in SA stronger in the higher margin entry level market and positive cash inflows at group level and in US asset management for the first time since 2009. Its Financial Groups Directive (FGD) surplus has grown to £2.7m from £2.2m at December, and it is well positioned to meet its debt reduction targets. Sanlam reported strong sales numbers for the first four months of the year, with total sales up 28%, ahead of its peers in an overall sense due to strong single premium sales but behind the peer group on recurring premium sales. Emerging market sales were up 30%. Its excess capital position has improved to R3bn, but the R2bn for the excess capital position has improved to R3bn, but the R2bn for the Shriram deal has not yet been expended. These two counters were standout performers within the life sector. PSG and Brait were the top performing financial counters. PSG reported a solid 28% growth in recurring earnings for the year to February on the back of another solid performance from Capitec. Brait also reported a solid set of results for the year to March - and its acquisition of a 19% stake in Iceland Foods in the UK was done at a reasonable multiple, giving it a stake in the niche frozen and chilled market in the UK. Other notable performers during the quarter were the two UK property counters, CCO and CSO, Peregrine, Reinet and Zeder. Abil was the poorest performer during the period.

Fund developments
The Fund had a poor quarter, materially underperforming the financial index. The stellar performance from our significant holdings in Old Mutual and FirstRand were not enough to offset the underperformance of other positions and stocks the Fund did not hold at all. The Fund does not hold PSG, CCO, Reinet or ZED and is underexposed to Sanlam but has significant exposure to Investec and Absa, which underperformed. Exposure to other European financial counters that were adversely impacted by the macro events also detracted from performance. Liberty Holdings, MMI and JSE were all underperformers for the quarter too. We are still significant holders of counters that are exposed to the events unfolding in the Euro-zone (Old Mutual, Investec, HSBC, Aviva and Barclays) as we believe these counters are materially undervalued. During the period, we added to HSBC, Aviva and Barclays. We also reduced our position in Liberty Holdings in favour of MMI, which offers more value in our view. We also added to Absa, Standard Bank and FirstRand during the quarter. While the banks performed well during the period, we still see some value here and remain holders.

Outlook
Our outlook for the rest of 2012 remains subdued, with our economists expecting GDP growth of between 2.5% to 3%, with risk still skewed to the downside. Credit extension has picked up slightly, but it is still being driven predominantly by unsecured lending. Asset prices remain subdued and even though debt servicing costs are now down at pre-crisis levels, we are unlikely to see significant appetite from the banks or consumers of credit. Given growth concerns and unemployment, we believe interest rates will remain on hold locally for the remainder of the year, but acknowledge there is a chance that a rate cut may be discussed at the next MPC meeting. We expect regulatory rhetoric to continue weighing on the sector for a while. As we have stated previously, we believe the value in the sector lies in the counters exposed to areas of greatest uncertainty. Old Mutual, Investec and the offshore financial counters are such counters and offer the best value in our view. The uncertainty around the Euro-zone crisis will likely continue to weigh on these counters for a while, but we believe that these shares will deliver good returns in the medium-term.

Sector Review
It was a risk-on environment for the better part of the first quarter as markets looked through the protracted negotiations around the Greek bailout package and a somewhat muddle-through attempt at rewriting the Euro-zone treaty. In US dollar terms, the JSE SWIX matched the S&P gains in a mixed performance that saw financials and industrials strongly outperform resources, with financials the top performer for the quarter. Advances growth remains constrained in the developed world, with most of the earnings recovery in this region still coming from lower bad debt write offs. Investment banking remains under pressure globally. The SA consumer remains overindebted and the little growth we have seen in retail advances has been in the unsecured credit market, primarily benefiting the new age banks: Capitec and African Bank. We have seen increased appetite for advances growth from the local banks but most of the growth is still in the unsecured space.

Fund developments
The fund had a reasonable quarter, performing in line with the Financial Index as banks came through strongly on solid results and RMH, Nedbank, Standard Bank and First Rand putting in the best performance for the quarter. The laggard in the banking sector was Absa, probably on concerns about its lack of appetite for advances growth as well as weak sentiment around the number of management changes that took place during the quarter. The fund has a substantial exposure to the banking sector, holding material positions in all the banks apart from RMH. We still see value in the sector despite its recent outperformance. Life insurance performed strongly, driven by RMI, Old Mutual, Liberty and Sanlam. The Fund does not hold RMI and has a small position in Sanlam, but holds a significant position in Old Mutual and a material position in Liberty. We still see value in Old Mutual and less so in Liberty. Our significant position in Investec detracted from performance. The bank is materially exposed to Euro-zone sentiment and published a softer than expected trading update during the period. Some of the small-cap positions in the fund performed well, with Brait and Peregrine putting in strong performance for the quarter. On a rolling 12-month basis, the fund has underperformed relative to the Financial Index and has significantly outperformed the broader market. We remain significant holders of counters that are exposed to events unfolding in the Euro-zone region, (Old Mutual and Investec) and have introduced Barclays Plc, HSBC Holdings Plc and Aviva Plc as new positions in the fund, thereby increasing our exposure to this region. We consider all three of the newly introduced counters to be materially undervalued. These positions were funded by reducing our Old Mutual position slightly. During the period, we also reduced our holdings in Brait and JSE because we believe Brait and JSE are trading around fair value. We also trimmed our Firstrand position slightly following the counter's strong recent performance. Local banks still offer value, as do some of the smaller counters like Sasfin and Peregrine. We also added to Sanlam during the quarter at price levels that offered some value.

Outlook
With a relatively highly geared consumer, a soft housing market, weak employment growth and banks' caution around the uncertainty of regulation, we expect credit extension to remain subdued for a while and for SARB to keep rates on hold in 2012. We reiterate our view that the value in the financial sector lies in the areas of greater uncertainty, with the local and offshore banks, Investec and Old Mutual, offering the best value in our view. We are aware that we will need to be patient as there is no obvious catalyst to realise this value in the short term. But we are convinced that these sectors will deliver good returns for the fund in the medium term.

Sector Review
Following a tough third quarter for equities, the recovery in the fourth was a welcome one. In most cases this was insufficient to offset earlier declines, with all the major European indices ending the year down. But it was the same issues that played on sentiment, with sovereign debt again taking centre stage. Poor sentiment continued to exacerbate conditions for the banks in the Euro-zone region, in particular funding and liquidity and uncertainty over banking regulation continues to plague the sector. Our local market also recovered somewhat in the fourth quarter. The broader market, as represented by the SWIX Index, ended the period up 7.5%, more than recovering its losses in the third quarter and finishing the year marginally higher. The Financial Index performed in line with the broader market during the quarter, outperforming the broader market for the year.

What added to - and detracted from - performance
The Fund had a good fourth quarter, outperforming the Financial Index as our Old Mutual position performed well and banks put in a reasonable performance. Life insurance outperformed during the quarter, driven by Old Mutual, which announced the sale of two of its Nordic businesses. The Fund has a very significant position in Old Mutual. Liberty, where the fund has a material holding, underperformed its peers. Our significant position in Investec did not perform well as it is materially exposed to negative Euro-zone sentiment. Some of our small cap positions performed well, with Brait putting in a strong performance for the quarter. It was also Old Mutual's spectacular finish (up 31% in the final quarter) that gave the life insurance sector the top performance for the year, followed by non-life insurers (Santam), with the banks performing in line with the broader market. Nedbank was the top performing bank for the year, followed by Firsrand and Absa. Standard Bank put in a very soft performance for the year, losing 8% of its value in absolute terms. But Investec was the poorest of the large cap counter performers for the year, losing more than 20% of its value during the year as poor results weighed on the counter. For the year the Fund maintained its outperformance relative to the Financial Index and the broader market.

What SIM did
We have started to reduce our holdings in Brait as the counter now exceeds our estimate of fair value. We also started to cut our JSE holding as the share price rose agressively in the quarter, exceeding our fair value. We continued to reduce our position in Santam and African Bank as the prices moved above our intrinsic values. Following the weakening of the rand, we repatriated all our foreign currency. We remain significant holders of counters that are exposed to events unfolding in the Euro-zone region, (Old Mutual and Investec) as well as local banks as these counters offer value in our view.

SIM strategy
Our outlook for 2012 is fairly subdued with our economists Our outlook for 2012 is fairly subdued with our economists looking for economic growth of around 3%, with risk skewed to the downside. Our economy is closely tied to the fortunes of the global economy and we continue to highlight the risk that the indecisive European policymakers pose for local growth. We expect credit extension will remain subdued for a while, given a relatively highly geared consumer, a soft housing market, weak employment growth and banks' caution around the uncertainty of regulation. With the current lacklustre growth rate and fairly benign inflation outlook, we believe the SARB will keep rates on hold in 2012. Regulatory rhetoric is also likely to continue and weigh on the sector in the near term. Thus locally, activity in the financial sector might remain subdued for a while. We reiterate our view that the value in the financial sector lies in the areas of greatest uncertainty, with the local banks, Investec and Old Mutual offering the best value in our view. But we are aware that we will need to be patient as there is no obvious catalyst to realise this value in the short term but will pay off in the longer term.