The process of converting to a global fund was completed during the quarter, resulting in 78.5% of the fund's capital being invested offshore. By quarter- end approximately 90% of the offshore capital had already been invested in a diverse range of equities listed on several international exchanges. This process was the primary driver of purchases during the quarter, although several sales were executed to capitalise on price appreciation. Approximately 8% of the fund is held in cash offshore. We anticipate the bulk of this cash to be invested in the near future.

We remain of the view that commodities are trading at or near historical highs and have manifested in very strong dollar share-price returns. Several warning signs are, however, beginning to appear. We are particularly concerned about the impact of high oil prices on the global growth environment coinciding with strong supply growth across the commodity complex. This is most evident in the steel market, which has already corrected materially, while nickel and aluminium are starting to display similar trends. We therefore maintain a defensive investment strategy and are positioning the fund accordingly.

The fund has low exposure to single-commodity metal producers, opting instead for the relative defensiveness of the large diversified counters (Rio Tinto, Anglo American and BHP Billiton). The fund has no direct exposure to either steel or aluminum, which we believe to have the weakest fundamentals.

A significant portion of the fund is invested in consumer-related chemical companies, which have undemanding ratings and attractive earnings growth prospects. We expect the margins of these companies to widen as feedstock costs fall along with the oil price over the next few years.

Weak industry fundamentals support the large underweight position in pulp and paper. Surplus capacity has eroded pricing power, while soaring energy, chemical and transport costs have squeezed profitability. The near-term outlook shows little sign of improvement.
Positions have also been taken in geographically diversified cement and container-packaging companies. These companies offer relatively stable earnings growth prospects and should perform well in the event of a cyclical downturn.

The fund increased its exposure to gold during the quarter. We believe that the dollar gold price is supported by the prospect of rising global inflation. In this environment, gold companies should prove more defensive than their base-metal counterparts.

The process of converting to a global fund necessitated the liquidation of a large portion of the portfolio. This process is virtually complete, with 78% of the fund's capital now resident in offshore markets. By quarter-end, approximately two-thirds of the offshore capital had already been invested in a diverse range of equities listed on several international exchanges. Barring any unforeseen circumstances, the offshore capital should be fully invested shortly.

Most commodities are trading at or near historical highs and have manifested in very strong dollar share-price returns. However, several warning signs are beginning to appear. We are particularly concerned about the slowing global growth environment coinciding with strong supply growth across the commodity complex. This is most evident in the steel market, which has already corrected materially, while nickel and aluminium are starting to display similar trends. Falling global freight rates add to these concerns. For these reasons we have adopted a defensive investment strategy and are positioning the fund accordingly.

The fund has low exposure to single-commodity metal producers, opting instead for the relative defensiveness of the large diversified counters (Rio Tinto, Anglo American and BHP Billiton). The fund has no direct exposure to either steel or aluminium, which we believe to have the weakest fundamentals.

A significant portion of the fund has been invested in consumer-related chemical companies, which have undemanding ratings and attractive earnings growth prospects. We expect the margins of these companies to widen as feedstock costs fall along with the oil price over the next few years.

Weak industry fundamentals support the large underweight position in pulp and paper. Surplus capacity has eroded pricing power, while soaring energy, chemical and transport costs have squeezed profitability. The near-term outlook shows little sign of improvement.

Positions have also been taken in geographically diversified cement and container packaging companies. These companies offer relatively stable earnings growth prospects and should perform well in the event of a cyclical downturn.

The fund is being converted to a worldwide fund, which will significantly increase the investible universe and the ability to gain exposure to a broader range of commodities than what is available in the limited and consolidated South African resources sector. As a consequence, the trades have been unusually large in value in order to bring the active bets more in line with the new global benchmark, and naturally have been bigger in the stocks that dominate the local index, like Billiton, Anglo American, etc. As the conversion into hard currency and the setting up of offshore accounts took some time, the offshore proceeds are still in the process of being invested and will be covered in the next fund focus. In future, the fund will be at least 30% invested in offshore equities, in accordance with the rules governing the new class.

The fund's non-mining bets, which worked well for it in the last quarter of last year, ran into a strong headwind in the past quarter as investors rotated back into the resources sector on the back of rand jitters and potential upgrades to the outlook for global growth following increases in the shorter-term momentum in some leading indicators. Shares like Afrox, AECI, Omnia, PPC, etc. moved sideways to down, losing quite a bit of ground to the rallying resources shares. We believe this is short-lived and that the valuations of the resources counters do not justify the recent (or any new) strong price increases.

As mentioned in last quarter's outlook, with low inventory levels and volatile currency movements such as we've had recently and are likely still to have in the near future, most commodities are likely to range trade for a while - spiking up when inventory surprises occur or the US$ depreciates and spiking down when inventories seems like they might turn and start heading up, or when there is any doubt over the sustainability of China's growth. However, all in all the balance of risk in commodity prices over the medium term has moved to the downside.

The Sanlam Resources Fund moved from the Domestic Resources and Basic Industries Sector to the Worldwide Equity Varied Specialist Sector effective from 01/03/05. The fund also lost its history prior to 01/03/05. This sector change and "performance history lost" was approved by the ACI.

The Sanlam Resources Fund was classified in terms of the Code of Practise Relating to Fund Classification under Domestic-Equity-Resources and Basic Industries Sector Fund. These collective investment scheme portfolios must have at least 70% of their assets invested in South African markets at all times. Due to the significant changes in the resources sector in recent years (as motivated below), the fund was moved to the Worldwide Equity Varied Specialist Sector.

1. After significant rationalization in recent years, the international resources sector has become truly global and is dominated by a few extremely large multinational companies.
2. This rationalization process impacted the local South African resources sector enormously, and there are only some 50 companies that remain listed on local resources board, and only a handful of these have a sizeable free float sufficient for investment.
3. Furthermore, whereas previously there were numerous direct entries into the different commodities, only gold and platinum remain as effective direct plays in the local market. Base metal exposure can now only be gained in diversified form through Anglo American and Billiton. Direct entries into diamonds, coal, copper, and tin are no longer available in any significance to the local investor, while direct entries into aluminium, nickel and other base metals have only been available in other stock markets. Also the local choices available in oil, chemicals, steel, iron ore and pulp & paper are extremely limited.

The new classification will afford the fund manager the ability to optimise the portfolio with a much wider array of international choice. This fund will also become more diversified and therefore less risky, and all these factors will benefit investors. The fund manager is backed by a large resources research team who already cover a number of international stocks.