Performance & Reason
The fund had a positive September both in absolute and relative terms ending the month in position 1/6. For the year to date the fund is in position 2/6. The main reason for the fund’s sound relative performance came from the under weight position in equities and having no exposure to nominal bonds. The inflation linked bonds had an excellent month. Equities had a mixed month with Resources showing a positive return of 3.5%, while Financials and Industrials were down 4.2% and 7.3% respectively

Outlook
Fear conclusively overcame greed during September, with markets reflecting extreme risk aversion. The geographical, macroeconomic and earnings risks outweigh the potential rewards of a bounce and investors remain cautious on global equities. Oil and gold prices rose 6.0% and 2.3% respectively, while on the futures market non-commercial long positions increased in both commodities.

Money moved out of equities into bonds, with global bond yields hitting their lowest levels for decades and US treasury indexed bond yields moved below 2%. Both emerging market bond spreads (+133bp) and corporate bond spreads rose. Markets are clearly concerned about an invasion of Iraq, but it is unclear how much is priced in. Greenspan views the oil price as the biggest macro risk – the last seven US recessions have been preceded by an oil price shock. There appears to be more risk of Europe returning to recession than the US, but the global recovery is fragile, and we continue to see risks to growth expectations globally.

South Africa does not suffer the same macroeconomic or earnings risk, which is why the JSE outperformed strongly: in $ terms, the JSE All Share was down 2.0%, MSCI World was down 11.1%, with the Dow down 12.4%. The domestic indicators remain robust and the structural factors of a competitive currency, low household and business gearing, and a sound fiscus linked to an expansionary budget should ensure we weather the storm.

However, we believe there is further downside risk to equities through earnings downgrades rather than multiple contractions.

Resources once again contributed most to the fund's performance. The fund continue to carry an overweight equity, slightly overweight bonds and underweight cash position.

The fund managers think SA is appealing for foreign investors because of the strong rand, positive fundamentals and increased MSCI weights. Financials, platinum and chemicals remain our favoured equity sectors for 2001, whilst they are less optimistic about Financial services, IT, media and telecommunications.

The fund managers envisage maintaining the funds current asset allocation during the near future and would continue to attempt to add value by superior stock selection.

The fund’s tilt towards large-cap shares was a major detractor from the performance, especially during September when small and mid caps held up well in the midst of the reaction on the US attacks. During the quarter large caps were down 13% compared to the negative 4%, and 1% of mid and small caps respectively. Another detractor from performance was our large exposure to financial companies, which was one of the worst-performing sectors over the quarter and our relative under-exposure to resources, which benefited from the weaker rand. Our cash allocation was also relatively low particularly at the start of the quarter.

Specific equities that performed badly include DiData (-70%), Naspers (-53%) and Investec (-32%). On the positive side the move towards the more defensive property unit trusts contributed together with good performances from Goldfields (+12%), Steinhoff (+10%), Grayprop (+4%) and Aveng (+3%).

Towards the end of the quarter the fund manager substantially increased the cash component with some sales across the larger holdings in the fund, such as Sasol, Amplats, Remgro, Anglos and Billiton. Purchases were made on a much smaller scale and focused on the smaller to mid-cap shares and also those of a defensive nature such as Santam, Aspen, Altech, Delta, Aphitec. The fund manager also increased the holding in Barlows marginally, as well as Goldfields.