Market review
The third quarter provided further confirmation of an economic recovery, driven primarily by China and less so by the developed world. The strong momentum in economic activity is a reflection of the low base established by the economic crisis and the subsequent unprecedented surge in liquidity and stimulus provided by governments. These transient forces obscure the true level of economic activity, which ultimately determines the rate at which excess capacity will be absorbed. In the shorter term, it remains to be seen whether a cyclical slowdown in China will be offset by a demand recovery in the developed world - even if only through restocking. Having played its part by engaging in large stimulus measures and record loan growth, China seems set to pause for breath. This is especially concerning for commodity markets, which are now almost entirely dependent on China. Also a worry is the increasing imbalance in the Chinese economy, which cannot be sustained in the absence of a recovery in the consumer nations to absorb its substantial production. Momentum in commodity prices has faded, with some retracement taking place more recently. Commodities are not expected to approach their precrisis peaks due to an overhang of inventory and production capacity; raising further downside risk. Gold and oil underperformed industrial metals during the third quarter, although the trend in gold prices is resilient, driven by investment demand. Anglo American has been a weak performer in the sector as suitor Xstrata appears unable and unwilling to better its opening bid. Sasol has also underperformed for both external and internal reasons.

What SIM did
The defensive stance of the fund was reinforced during the past quarter. The rally in Anglo Platinum has not been reflected in the share price of parent Anglo American Plc. In fact the rump of Anglo American (base metals, coal and diamonds) has been sold down to quite attractive levels relative to the sector. We have exploited this opportunity by switching some of our exposure in Anglo Platinum into Anglo American. The reduction in Mvelaphanda Resources' discount to net asset value (NAV) also created an opportunity to trade out of the counter, further reducing our platinum bet to underweight. The underperformance in Sasol has improved its relative attractiveness and we used the opportunity to reduce our underweight further. Its earnings are quickly normalising on the back of a lower rand oil price and lower downstream margins compounded by poor operational performance. On the international front, the strong rally in basic material stocks eliminated many value opportunities. We bought into Bayer for the first time; complementing our existing position in Syngenta. We are generally positive on the secular outlook for pharmaceuticals and specialty chemicals, but have struggled to find value in the sector. At below €40/share, Bayer offered an attractive entry point, with life sciences accounting for a significant part of its sales and profits. Bayer also offers interesting exposure to emerging markets, with BRIC countries contributing about 13% to group sales in 2008.

What added to - and detracted from - performance
The fund outperformed its benchmark during the third quarter and on a rolling 12-month basis. This was mainly a result of the outperformance of AECI, Mondi and Sappi, in which we have overweight positions. Our underweight position in the bulk and steel sectors was a drag on performance. However, the investment case has not changed significantly and we believe negative expectations built into these counters are excessive.

SIM strategy
The funds principal objective is capital growth and preservation and alpha generation. The fund is guided by its value-based investment philosophy, preferring to invest in shares that are cheap relative to intrinsic value. The coming year is expected to provide opportunities to rebalance the fund from its current defensive stance towards high-beta plays, capitalising on unprecedented volatility. An improvement in macro-economic data would provide important signals to invest, particularly in the US. A key indicator would be a bottoming in housing markets and a recovery in consumer confidence and spending.

Market review
The global economic outlook has stabilised for the first time since the start of the crisis. This was inevitable given base effects, extraordinary monetary and fiscal stimulus and some level of restocking in the developing world. However, asset price deflation and the associated negative wealth effects dampen the outlook for trend growth post the current downturn. Commodity prices have been a good leading indicator of this global recovery, but the price rally speaks to more than prevailing supply-demand dynamics. The first factor is a lack of confidence in the US's fiscal position and a challenge to the dollar's reserve currency status, resulting in a hunger for " hard assets ". This is evident in the recent weakening of the dollar and the sell-off in US treasuries, albeit to more normal levels. The second factor has been China's aggressive accumulation of commodity stocks, well in excess of underlying demand. This stock overhang threatens to dampen prices in the second half 2009. Lastly, markets have recovered from extreme levels of risk aversion as systemic risk in the financial system has receded. "Risk assets", such as commodities, have been the beneficiaries since the peak of the crisis at the end of October 2008.

What SIM did
The recent rally has allowed the Fund to reinforce its defensive stance during the past quarter, taking profits on our recent high-beta trades - stocks that move closely in line with the market. We sold down Arcelor Mittal SA completely given the strong rally in the price, which we see as unjustified given low trend operating capacity in the global steel industry. We switched some of these proceeds into Highveld Steel, which is a cheaper entry into the space. We consider Anglo American, the Fund's largest holding, as one of the most attractive entry points into the sector. However, near-term operational and financial risks do still exist and the stock's rally on the back of commodity prices and mergers and acquisition activity has given us an opportunity to reduce our large overweight position slightly. Locally we lightened our exposure to Sasol and added to Afrox. We used the recent pullback in the Sasol share price to partly reduce our underweight. Sasol has disappointed the market recently by issuing a poor trading statement that indicates operational weakness, particularly in its downstream businesses. The Fund's underweight in Sasol is mitigated by an overweight stance in energy through our global exposure. Afrox has derated against the market recently, with its poor trading statement undermining its perceived defensiveness. This is probably due to the extreme nature of the current downswing, which has exposed some overinvestment by Afrox. We view the recent pullback as a good opportunity to accumulate stock because we believe the Fund would benefit from a demand recovery and expected rerating in the share to our fair value. Internationally, the Fund has followed its rights on the recent Rio Tinto equity raising. While the offer was deeply discounted, as is the norm currently, we feel comfortable adding at current levels, given estimated dilution of around 15%. The recently announced iron-ore tie-up with BHP Billiton in Western Australia is positive for both companies if regulators allow the deal to proceed.
Performance review
The Fund outperformed the benchmark by 9.6% in the second quarter and by 14.4% over a rolling 12-month period. This strong performance is a result of the rally in high-beta plays and the recent underperformance of gold equities, which we largely sold out of the Fund in the first quarter. The Fund's exposure to the paper sector, mainly through Mondi, has been a drag on performance so far. However, we believe the investment case has not changed significantly and consider the share to be very attractively priced as it is currently trading near net working capital levels.

SIM strategy
The Fund's principal objective is capital growth, preservation and the generation of excess returns. We invest in accordance with our value-based investment philosophy, preferring shares that are cheap relative to intrinsic value. The coming year is expected to provide opportunities to rebalance the Fund from its current defensive stance towards high-beta plays, capitalising on unprecedented volatility. An improvement in macroeconomic data would provide important signals that the world economy is turning around, particularly in the US. A key indicator would be a bottoming in housing markets and a recovery in consumer confidence and spending.

The global economic outlook continues to deteriorate, with downward revisions to OECD growth continuing and cracks appearing in many major emerging markets. Some slowdown in emerging markets, which have driven the commodities boom in recent years, was inevitable given their trade and capital dependency on developed countries. Policy responses thus far have focused on restoring demand by increasing liquidity. While we sympathise with this response given the current depressed level of demand, the fundamental issue is that demand fuelled by loose credit was not sustainable to begin with. Policy makers will do well to withdraw this liquidity at the appropriate time to reduce inflation risks. Addressing inefficient capacity is not a politically expedient solution, even though the fundamental problem is overcapacity. Overcapacity combined with cost deflation due to lower inputs and weak producer currencies is a poor recipe for commodity performance. Future profitability is likely to be depressed relative to the levels of the past when most industries operated at capacity.

Given the gloomy outlook, the market has displayed extreme levels of risk aversion, increasing the cost of capital. This is evident in the relative performance of companies with strong balance sheets and low financial risk.

The defensive position of the fund has been reduced during the quarter in light of the opportunities the above environment has produced. The positioning in gold equities, both locally and internationally, has benefitted the fund. The gold price has been fuelled by a significant growth in investment demand at the expense of fabrication demand, resulting in a speculative fever reminiscent of the recent speculation in oil and industrial metals that we recently witnessed. Gold now appears to be expensively priced relative to other commodities, and is an inherently weak commodity in terms of its fundamentals, large above-ground stock and a significant portion of demand and supply that is price elastic. Positions in Anglogold Ashanti and Barrick Gold have been reduced on the back of this view.

During the quarter the fund bought into Freeport-McMoran, the largest listed copper producer, which had fallen significantly below its intrinsic value in sympathy with the copper price. The subsequent rally in the copper price and markets generally led to a doubling in the share price within a few months, which we used to take profits. In the local market, Impala platinum has been a strong performer of late, given the recovery in the platinum price, its defensive cost position and its balance sheet strength. Our overweight has been reduced to fund purchases of Exxaro and Arcelor Mittal, shares we have avoided until now. While the outlook for bulk and steel commodities typically lag the industrial metals, we were attracted by the relative value in these counters at the time. The sharp pullback in the price of Sappi, on the back of speculation about its financial position, has been used to reduce our underweight.

The fund has outperformed the RESI over three years but has underperformed its benchmark during the quarter and over the past 12 months. A key reason has been that our more aggressive stance has not been sufficient to benefit from the recent rally. However, we do expect the stance of the fund to change as future opportunities present themselves and we don't believe the sector will quickly return to levels reached in the first half of 2008, given the changed investment climate. Our position in the paper sector, mainly Mondi, has been a drag on performance thus far. However, we believe the investment case has not changed significantly and consider it to be very attractively priced, currently trading near net working capital levels!

The funds principal objective is capital growth, preservation and alpha-generation. The fund's long-only constraint and synchronized demand downswing have unfortunately impacted all equities. The fund is guided by its value-based investment philosophy, preferring shares that are cheap relative to intrinsic value. The coming year is expected to provide opportunities to rebalance the fund from its current defensive stance towards high-beta plays, capitalising on unprecedented volatility. An improvement in macro-economic data would provide important signals, particularly in the US. A key indicator would be a bottoming in housing markets and a recovery in consumer confidence and spending.

Market review
The year 2008 was a bad year for equities generally and resource equities specifically, which returned 27.5% for the year, and -15% in the fourth quarter. The key driver behind this poor performance was the weakness in global growth and the resultant fallout for commodity demand and prices. While the moderation in growth in the developed world has been well documented, the pace of deceleration and the impact thereof on emerging markets have been worse than expected. The economic contraction in 2009 is likely to be the most severe recession since the second oil crisis at the end of the 1970s.
The growth slowdown has been exacerbated by the financial crisis, which has led to deleveraging, heightened risk aversion and a reversal of sentiment. The gold price is an obvious beneficiary in this environment. It remained flat for the year, outperforming industrial metals and oil, which lost more than half of their value. The worstperforming stocks locally have been the platinum producers, Anglo American, Arcelor Mittal and Kumba Iron Ore. Gold equities have held up in line with the commodity trend. Despite the sell-off in oil, energy stocks have remained quite resilient and have outperformed mining shares. This reflects the structurally bullish outlook on energy, reflected in the extreme contango in the oil forward curve.

What SIM did
The fund has retained a defensive position, evidenced by its outperformance when markets turned negative, with the fund exceeding its benchmark by 0.8% in 2008. Key pillars of this defensive strategy have been our sector preferences: precious metal equities, integrated energy producers and paper producers.
Our preference for quality companies with lower operational and financial risk has also helped in an environment of lower commodity prices and tight credit. In the fourth quarter we added to Rio Tinto and Gazprom internationally. These purchases indicate an intention to reduce our defensiveness when compelling opportunities arise.
Locally we have switched our position in Anglogold into the major platinum producers and Anglo American. This reflects a view on relative value, as well as relative earnings, given the expectations for their respective commodity baskets from current levels.
In the platinum sector, we retain a preference for quality names, building on existing positions in Anglo Platinum and Impala Platinum. Our position in Sappi has also increased as a result of the M-Real transaction, which was partly funded by means of an attractive rights issue. Positions in gold equities, both locally and internationally, together with integrated energy producers, have added to performance. Selected chemical names have also been relative outperformers despite the looming oversupply in the industry. Paper companies have not provided the expected defensiveness, primarily due to continuing demand weakness. Platinum producers have not provided an effective hedge against our short positions in industrial metals.

SIM strategy
The fund is guided by its value-based investment philosophy, preferring shares that are cheap relative to intrinsic value. The coming year is expected to provide opportunities to rebalance the fund from its current defensive stance towards high-beta plays, capitalising on unprecedented volatility. An improvement in macroeconomic data would provide important signals, particularly in the US. A key indicator would be a bottoming in housing markets and a recovery in consumer confidence and spending.
The extensive monetary and fiscal easing that most governments have provided will cushion some of the private sector contraction, but will ultimately only serve to cushion the deterioration in output. Earnings are unlikely to rebound to levels of the past few years, if one considers the significant reduction in capacity utilisation, and with it pricing power. Equity performance is likely to remain muted as these poor economic conditions start to reflect in reported earnings, which will only become apparent in the current half and beyond.