The third quarter of the year was a good quarter for equities and industrial shares in particular. A key features of the quarter was a further weakening of the currency from 7.16 to 7.77 to the $ for the quarter, bringing the movement in the $/R to 22.5% for the year to date. The INDI 25 Index was up 10.5% for the quarter, resulting in a very respectable 16.5% accumulated return for the year to date (a return that excludes the additional return from dividends). The more interest rate sensitive shares continue to remain under pressure as the outlook for interest rates is on the up following a series of negative surprises on the inflation side. Whether this is a short-term or more prolonged cycle still remains uncertain, with bond yields remaining fairly stable during the quarter. Shares that performed relatively well during the quarter were broad based and included Basil Read (+33%), Bytes Technology (+26%), Bidvest (+26%), Massmart (+21%), MTN (+19%) and others.

Your fund has a balance of both growth and value as neither style is currently excessively priced. The fund remains exposed to IT shares where we continue to see value - particularly with a weakening currency. Other parts of the portfolio benefiting from currency weakness include the large-cap offshore shares as well as the diversified industrials, Rembrandt, Sappi, Steinhoff, Naspers and MTN, the fund's small exposure to offshore shares, and other shares. Many industrial shares are also indirect beneficiaries of a weakening currency as it normally co-insides with rising inflation. Your fund remains broadly balanced between shares with an offshore element and locally under-priced investments. During the quarter the fund was relatively inactive, with AECI and Spar sold outright while Barloworld, Rembrandt and Busby were trimmed back. The main additions to the portfolio were new holdings in Oceana, the fishing group, and Altron preference shares, the diversified electrical and electronics firm. The Verimark and Imperial holdings were added to at the lows of the quarter.

Although the broad economic outlook is positive one should be realistic about further good returns in the short term given the performance to date and the strong performance generally in international and local equities. Your fund will continue to seek out miss-priced opportunities, but with the INDI 25 on a price earnings ratio of 15x or 12.8 one year forward the probability of a further re-rating in our market generally looks less likely. Performance will be driven more by earnings growth than by a re-rating of the market. Some of the recent performance was driven by rand movements, with a moderating in prospects for the locally dependent businesses. We will continue to seek new investment opportunities, but a more modest level of returns from the fund should be expected in future periods.

The second quarter was characterised by a significant amount of volatility following a long period of good performance, with the rand weakening somewhat and the outlook on the interest rate side deteriorating following the first interest rate increase in over 3 years. The equity market did not remain immune to these shifts, with the local shares being particularly impacted. The overall INDI 25 Index was down 4.9% for the quarter but is nevertheless up 5.4% YTD (figures exclude dividends). With the rand weakening it was the shares with offshore exposure that performed relatively well, with Richemont up 11%, Rembrandt (flat) and Datatec +2%. The fund had a small exposure to some international shares that performed reasonably.

The fund took a more defensive positioning during the quarter, adding to low-risk counters and trimming some of the star performers of the past while introducing 1 or 2 new counters. Shares sold outright include Aveng and Murray & Roberts, Tigerbrands, Netcare, Edcon, Famous Brands and BCX. Most of these shares have historically performed well and were sold as value was no longer seen in them. Shares where exposure was lightened include Imperial, Aspen, Enaleni, Ellerines and Lewis. While value nevertheless remains, holdings were reduced at the higher levels of the quarter. Shares where relatively more value was seen include Sappi, Barloworld, Steinhoff, Richemont, Shoprite, Massmart, Telkom and Verimark. Most of these increased weightings took place at the lows of the quarter. New holdings were introduced with Basil Read, the construction firm, and Nampak, the diversified packaging company.

Prospects remain reasonable although near-term risks remain. The biggest risks are the possible rise of interest rates above what the market is expecting. Interest rates will certainly rise further although the extent is uncertain. A cooling off of the market was inevitable after a long period of strong performance and investors should now look for more modest levels of performance. As always stock picking remains key. A more defensive positioning is warranted but we see good value in selected shares. Slightly higher levels of inflation are supportive of manufacturing and food retailers and a slightly weaker currency is positive indirectly for many of the industrial shares on the JSE. The overall INDI 25 is on a price-earnings ratio of 14.7x or 12.4x 1 year forward supported by many shares with dividend yields over 4%, indicating reasonable value to us in this market.

Originally, industrial funds were set up for investors who did not want mining exposure and also invested in financial shares. But demand has grown for pure industrial exposure, as fund of funds managers want to decide for themselves the allocation between financial and industrial shares.

Old Mutual has the last surviving financial & industrial fund, which is in the process of merging with its consumer fund to become a focused industrial fund.

Sanlam converted its fund - which is one of the oldest funds in SA, having been launched in August 1966 - to pure industrial in October 2003 and it has an impressive track record, first under Claude van Cuyck and since January this year under Andrew Kingston.

Though it is not called a consumer fund, there is a clear consumer bias to the portfolio, with 36% in consumer services and 13% in consumer goods. The fund has more than doubled its money in shares such as Shoprite, Mr Price and Famous Brands, and in media share Naspers.

Kingston says he is diversifying from the star performers of the past and looking to future performers. He has added new positions in Sappi, Edcon, Verimark and Busby and increased the bet on information technology by acquiring Dimension Data and adding to Datatec.

In common with other portfolios managed by Sanlam, the fund has an overweight holding in Imperial, which enjoyed a 20% appreciation in the March quarter.

To boost the modest rand hedge exposure in the portfolio, Kingston acquired a holding in Homestyle, a UK furniture group controlled by Steinhoff.

Kingston says that after the broad rerating in the market, investors should not look for the same pace of performance experienced over the past two to three years, but he argues that reasonable value exists and attractive dividend yields should continue to underpin industrials.

There is limited direct retail demand for the fund as it is primarily focused on multimanagers. It is described as suitable for use as a satellite fund rather than a core holding.

Financial Mail - 09June2006

The new year started out strongly with the INDI 25 Index up 13.1% for the quarter. The quarter was characterised by a further re-rating of our market in the expectation that interest rates will remain low for longer, and the generally buoyant economic environment, particularly in the consumer and construction universe. The fund's high exposure to furniture shares paid dividends, with Ellerines up 37% and Lewis Stores up 31%. These shares remain inexpensive in our view and were added to during the quarter. On the construction side, Murray&Roberts increased by 41% and Aveng by 31%. The fund’s overweight position in Imperial also continued to pay off, with the share up over 20% during the quarter.

With a view to diversifying away from star performers of the past and looking for future new performers, a selection of new counters was introduced into the fund. Notable additions include Sappi, Edcon, Verimark and Busby. In our view the IT sector also looked attractive and Didata was introduced to the portfolio and weighting increased in Datatec. Confirmation of this was signalled by Telkom’s intention to acquire Business Connection. The fund will continue to look for new opportunities, while diversifying out of the prior good performers where value dictates such a move. In view of the small exposure the fund has to international shares a holding was introduced in Homestyle, which is majority owned by the South African Steinhoff Group. The share will continue to benefit from the consolidation occurring in the UK furniture market.

A broad re-rating of our market has taken place and, although the outlook is reasonable, investors should not look for the same pace of performance experienced by the fund over the past 2 - 3 years. As always, diversification is key. Nevertheless, reasonable value exists and attractive dividend yields should continue to underpin industrials. Economic prospects remain good and will underpin reasonably good economic growth. The INDI 25 is trading on a historical price-earnings ratio of 16x or 13.1x forward, indicating that performance will be driven more by earnings growth than a significant further rerating of our market. As always, one should be cognisant of the long-term value of shares rather than be caught up in the hype of the market. In the long term the market looks fairly valued and, as always, picking the right shares is paramount. The outlook looks further supported in the short term by overseas shareholders who have become very active in our market.

This was another fantastic year for investors, with the FTSE/JSE Industrial Index rising by 32% in calendar 2005 off an already high base (the index rose 42.7% in 2004). The highlight for investors who were invested in the fund in the fourth quarter was the offer made by Vodafone to acquire the Venfin shares for a cash consideration of ZAR 47.25. The Venfin share price rose by 41.1% in the fourth quarter (90% for the year excluding dividends). Other shares that performed well over the year and which were represented in your fund, included amongst others, Datatec (107.25%), Aspen (83.5%), Mr Price (53.3%), Tigerbrands (50.2%), Naspers (49.3%), Netcare (48.9%), Steinhoff (48.8%), Richemont (46%) and MTN (42.9%).

As we've seen with investments such as Venfin, the patient investor that continues to identify value and mispriced assets will reap the rewards as the value is eventually realised. We've seen further evidence of this with shares such as Mr Price and Datatec paying off handsomely as investors realised the inherent value in these shares.

The outlook for 2006 remains optimistic in our opinion. It is likely that the SARB will be able to maintain the rate of inflation within the targeted range of 3% to 6%. The South African economy has been well managed. Inflation has been kept in check despite the strong oil price and although there is a risk that the SARB may consider raising interest rates in 2006, we believe that it is unlikely that rates will be raised by more than 1%. In fact, there is a strong argument for rates to remain flat for 2006. The government is increasing its focus on infrastructure spend. We believe that this is crucial in the light of the goverment's objective to grow GDP by 6%. Although we feel that this target is a "stretch target" we remain optimistic that growth in the local economy will remain buoyant. Our positive view regarding the health of domestic South Africa has been justified by the exceptional performance of the local economy and in particular the local consumer. Although we believe that much of this optimism has been incorporated in the current valuations of the sector (the Industrial Index is currently trading on a historical PE ratio and prospective PE ratio of 14.7 times and 12.4 times respectively), we remain of the view that the industrial sector is now trading close to its fair intrinsic value and real returns are still likely in 2006. Investors should, however, be more realistic with regard to their return expectations.