Market review
The second quarter was dominated by the record setting platinum sector strike. The industrial action finally came to an end on 23 June after five months. The market was surprised by the relatively benign impact of such a prolonged strike on the spot price of platinum group metals. Platinum rose only 4% during the quarter. The miners had, however, flagged their excess inventory positions. A surplus market post the financial crisis has also resulted in a large amount of metal available to meet demand. From here, mines will take around three months to ramp up to normal levels of production (if all goes well) and they will need to rebuild their inventory to more normal levels. Taking all of this into consideration, we will ultimately see a reduction in above-ground stocks. Meanwhile, supply and demand fundamentals continue to improve pointing towards a positive medium-term outlook. In other commodity markets, gold, having been the star performer of the first quarter, was relatively subdued. The gold price and the JSE gold index were flat quarter-on-quarter. Following initial weakness in gold prices through April and May, given the improving US economic outlook and expectations of rising US interest rates, a downward revision in Q1 US GDP growth resulted in gold bouncing back to the $1,300/oz level. Copper recovered some of its losses from the previous period, rising 6%. Concerns around copper stocks in China moderated and towards the end of the quarter Chinese economic data showed signs of improvement with the June PMI print being at the highest level for the year at 50.8. The decimation of the iron ore price continued, falling a further 20% as Chinese demand remained weak. It does however appear that the price has found a floor around the $90/t level reached in mid-June and has steadily risen from this level.

What added to - and detracted from - performance
The fund marginally underperformed the peer group during the quarter. An overweight position in platinum stocks, particularly Anglo American Platinum and Impala, as well as a position in Rio Tinto, were the main contributors to the underperformance. The fund did, however, benefit from its position in the Anglo ETF rump product (Anglo American excluding Kumba Iron Ore), as well as exposure to copper through First Quantum Minerals. Petra Diamonds and Glencore also contributed positively to performance.

What we did
While maintaining our overweight in platinum equities, we reduced our positions in Northam and Lonmin in favour of Anglo Platinumand Impala. We trimmed our position in Sasol so that we are now slightly underweight the counter. We remain underweight the gold sector as we do not see any value here. We added to our position in First Quantum Minerals to take advantage of the recovery in the copper price.

Our strategy
The fund is guided by its value-based investment philosophy, preferring shares that are undervalued relative to our estimate of intrinsic value. The fund's principal objective is capital growth by generating returns in excess of the peers invested in the resource sector. We remain overweight the platinum counters and the Anglo American excluding Kumba Iron ore ETF product. We remain underweight the SA listed iron ore miners, offset by a position in Rio Tinto that offers value. In gold, we have an underweight, defensive position, with exposure to the gold ETF and better quality counters. Other overweight positions include Paper, Diamonds and AECI.

Market Review

Throughout the strong recovery since 2010, in the wake of the global financial crisis, the JSE Resources Index has experienced high levels of volatility, with four instances of significant price decline and subsequent recovery. Each time, the Index fell about 20% and then enjoyed a recovery of similar magnitude. That has translated in a disappointing 8% decline in the Resources Index since January 2010. The last material slump occurred in the second quarter of 2013, leaving the Index down 22% by July. What followed was a strong recovery of 19% over a period of five weeks over the third quarter.

The volatile price behaviour is a symptom of a nervous market. Investor sentiment swung wildly on macro-economic issues, such as the European debt problems; the risk of a Euro common currency zone break-up; speculation around the commencement and tapering of quantitative easing in the US and, finally, the step -down in Chinese economic growth, with associated change in leadership and fears about debt growth. The labour unrest in SA added to this.

Another reason for the volatility lies in the weakness experienced in most dollar commodity prices during the period. The likes of platinum, copper, iron ore and gold are down between 10% and 25% since 2011. Of the major commodity prices, it is only oil that has bucked the trend, ending up 15% since 2011 in dollar terms.

The longer term picture ahead for commodity prices is less than rosy. Further downside is likely for the iron ore price, a major contributor to profits of the JSE Resources Index, as supply catches up amid slowing demand growth from China. The same is expected of copper. Oil is likely to be buoyed by the global political risk premium but easing fundamentals will cap any upside.

A number of commodities, namely platinum, thermal coal, nickel and aluminium, are already in oversupply, with high cost producers needing to curtail capacity to restore price and profitability. In the medium term, volume growth will slow down as capital spending is curtailed. Management teams are now focused on reducing costs, increasing capital efficiency and restructuring to focus on core business only.

With the more positive Chinese PMI numbers and fears about aggressive quantitative easing in the US calmed early in the quarter, most commodity prices, including oil, platinum group metals, copper, gold and steel making raw materials, increased, reversing their first half declines. The iron ore price, a major contributor to resource sector earnings, also surprised positively. The rand was fairly stable during the quarter, weakening 2%, bringing year-to-date rand weakness to 19%. The gold price, having suffered a significant decline early in the year, continued to languish, with increased investor buying from the likes of China providing support but not being able to move the price much higher.

What added to - and detracted from - performance

The Fund enjoyed a strong quarter of relative performance, up 1% more than the benchmark, with the overweight in platinum shares adding a lot of value. Rallying from a depressed base the previous quarter, Anglo Platinum outperformed the benchmark by 30% as fears over QE tapering subsided. The Fund's overweight in the Anglo American ETF, providing exposure to Anglo American excluding Kumba Iron Ore, also added strongly to performance. Our underweight in Kumba Iron Ore added value as it underperformed by 15%. The outperformance was offset by our defensive overweight positions in Billiton, Sasol and Rio Tinto, defensive overweight positions in Billiton, Sasol and Rio Tinto, which underperformed. Our underweight in Mondi also detracted, as did the outperformance of the likes of African Rainbow Minerals and Assore.

What SIM did

Following the strong rally in both Amplats and the Anglo American excluding Kumba ETF, we reduced our overweight exposure here in favour of Rio Tinto, Sasol and Billiton, which all underperformed during the quarter. We switched more of our exposure in Northam Platinum into Lonmin Platinum. We switched some of our diversified mining exposure into Glencore Xstrata. It provides diversification benefits as it is not exposed to iron ore and its commodity trading businesses is less influenced by the commodity cycle.

SIM Strategy

The Fund is guided by its value-based investment philosophy, preferring shares that are undervalued relative to our estimate of intrinsic value. The Fund's principal objective is capital growth by generating returns in excess of the peers invested in the resource sector.

We remain overweight the platinum counters and the Anglo American excluding Kumba Iron Ore ETF. We are slightly overweight oil and gas (Sasol) and prefer the defensive nature of a quality business, such as Billiton. The further downside risk in iron ore prices, combined with the cash flow valuation of the iron ore miners, mean we are underweight the likes of Kumba, Assore and African Rainbow Minerals, offset by a position in Rio Tinto that offers value. In gold, we have adopted a defensive position, with exposure to a gold ETF and better quality counters.

Market Review

A number of events combined to weigh on commodities and, as a result, resource equities during the quarter. As the new Chinese administration tries to shift growth towards the consumer rather than investment, a succession of weak data points and a liquidity squeeze, fuelled concerns on GDP growth. With uncertainty surrounding China's use of commodities, prices dropped across the board, most notably iron ore, which was down 15% during the quarter. In stark contrast (albeit with the same result), it was positive news in the US that weighed on gold prices. Sequential improvements in the health of the US economy caused Ben Bernanke to signal that the Federal Reserve could begin to taper off its quantitative easing policy. Gold was one of the worst performing metals, down 24% during the quarter. Physical selling of the metal exacerbated the fall, with the world's largest ETF, the SPDR Gold Trust, falling to less than 1 000 tonnes, having lost 40% of its holdings this year.

SA miners did, however, have some respite from the weakening rand as the current account deficit, risk aversion and emerging market outflows, saw the currency average R9.97/ to the dollar for the quarter. This was, however, not enough to offset the weak commodity price environment and local resource counters declined 12% during the quarter. Excluding the impact of commodity prices, SA resource stocks have been out of favour given the current labour unrest and this contributed to the sector's underperformance. Geopolitical risks have continued to support the oil price, with the Egyptian "coup" the latest in a chain of events that has seen oil prices deviate from supply and demand fundamentals. As a result, oil counters have outperformed the resource sector.

We remain overweight oil and gas (Sasol) and prefer the defensive nature of a quality business such as Billiton. The further downside risk in iron ore prices, combined with the cash flow valuation of the iron ore miners, mean we are underweight the likes of Kumba, Assore and African Rainbow Minerals. In the platinum space, Northam remains our preference.

What added to - and detracted from - performance

The Fund benefitted from an overweight position in Sasol during the quarter, as well as an underweight position in the gold sector, which protected it from the gold price and hence the equities coming off quite strongly. Good share selection in the platinum space offset the underperformance of Impala Platinum during the period. The Fund was negatively impacted by an overweight position in Anglo American and underperformance of international diversified and gold miners.

What SIM did

We continued to trim exposure to the diversified miners (Anglo American and BHP Billiton) and Sasol, reducing our overweight position. In the platinum sector, we added to Impala following it underperformance. We reduced our position in Royal Bafokeng Platinum in favour of the newly listed platinum ETF and also added a position in Lonmin. We maintain a significant position in Northam platinum given expected production improvements as its Booysendal project begins its ramp up. We added exposure to the steel sector through both Evraz and ArcelorMittal. We closed our position in international diversified miner ENRC, while adding to our previously established position in Rio Tinto plc.

SIM Strategy

The Fund is guided by its value-based investment philosophy, preferring shares that are undervalued relative to our estimate of intrinsic value. The Fund's principal objective is capital growth by generating returns in excess of the peers invested in the resource sector.