Market review

The third quarter was characterised by modest upgrades to economic growth primarily in emerging markets, while economic growth in developed markets remained relatively lacklustre. This coupled with ample liquidity and lower bond yields both locally and internationally resulted in significant capital flows into emerging equity markets - of which SA was also a recipient. The MSCI Emerging Market Index gained more than 17% in dollars in the third quarter. Capital flows were not only restricted to portfolio flows but also potential foreign direct investment, with Walmart announcing its intention to buy Massmart towards the end of the quarter.

Industrial shares were buoyed by the more than 100-basis point decline in bond yields, a surprise cut in interest rates and strong capital inflows. The rand also remained relatively strong against the weaker dollar and pound during the quarter. Against this backdrop, the INDI25 was up 18.5% for the quarter and ahead a respectable 15.7% year to date excluding the impact of dividends.

SIM action
We were fairly active during the quarter. We introduced Nampak and Bidvest to the fund and added to BAT, Barloworld and Rembrandt. We sold Didata after receiving a favorable buyout offer and trimmed our exposure to Mondi, Richemont, Shoprite, Naspers, SAB, Woolworths and Mr Price after their prices appreciated significantly during the quarter.

Performance attribution
The fund performed well relative to the Industrial Index; benefiting from certain mid-cap shares that performed particularly well during the quarter. The fund's exposure to paper, retail, media and luxury goods also assisted performance, while buyouts in the IT sector had a favorable impact. The Fund is underweight in some of the larger industrial shares, which underperformed the index.

SIM strategy
We expect some consolidation in the equity market in the short term after its strong performance over the past 18 months. We construct the portfolio by investing where we see the best value, as measured by the discount industrial shares trade at relative to their intrinsic value. This is the primary determinant of expected future performance and the basis on which we construct the portfolio. We are more cautious on future expected performance given current valuation levels and, as always, investors should look to diversify their investments.

Market review
In the second quarter of the year, the strong global and economic rebound off 2009's low base began to moderate. As a result, uncertainty about the sustainability of the growth rebound grew, with growth prospects for Europe in particular weakening on the back of government debt and economic concerns. In SA, while the World Cup boosted sentiment around the World Cup, growth also showed signs slowing. After firming steadily over the past 15 months, the rally in commodity prices and the rand appeared to be running out of steam during the second quarter. In recognition of the still fragile economic situation and benign short-term inflation, the SA Reserve Bank kept the Repo rate flat at 10%, although long-term government bond yields did increase slightly over the quarter. Equity markets retreated from their earlier gains both globally and locally. Industrial shares joined the general stock market selloff, with the INDI25 falling 5.5% during the quarter, leaving it 2.3% year-to-date excluding dividends.

What SIM did
We were not very active during the quarter, with no new holdings introduced during the quarter. We did add to the Fund's MTN and British American Tobacco holdings and sold the Fund's entire exposure to Massmart. We also trimmed holdings in Value group, Naspers and Dimension Data after the strong recent performance of these counters.

What added to - and detracted from - performance
The Fund put in a reasonable performance for the period although certain shares that performed well during the first quarter retraced somewhat in the second quarter. We still see value in these shares and are thus comfortable with our positioning. The Fund's broad exposure to the retail sector added to performance, as well as its holdings in certain selected small cap shares. The Fund's IT exposure contributed positively and its small offshore exposure also benefited from some weakness in the currency towards the end of the period.

SIM strategy
After the strong performance of the equity market over the past 15 months, some form of correction was inevitable and a more cautious tone is settling over the market. However, our investment decisions are based on where we see the best value in the market, as measured by the discount industrial shares trade at relative to their intrinsic value. This is the primary determinant of expected future performance and the basis on which we construct the portfolio. We are starting to see some value emerge in selected shares but, as always, investors should continue to diversify their investments.

Market review

During the first quarter, conditions continued to improve both locally and globally, with the market pricing in a significant economic recovery after a weak first half of 2009. We now await confirmation of a similar rebound at an individual company level.

Commodity prices rose during the period and the rand was fairly stable against the dollar, although some further strengthening against the pound and the Euro was evident.

Inflation continued to moderate and contributed to the SA Reserve Bank's decision to cut the repo rate by a surprise further 50 basis points to 6.5%. Inflation expectations continue to be reasonably well contained, with the key bond yields declining slightly during the quarter, notwithstanding some significant utility price increases on the horizon. Within this supportive framework, industrial shares performed reasonably well, with the INDI25 excluding dividends rising 3.3% during the quarter.

SIM action

We did not actively change holdings in the fund during the first quarter. We introduced one new holding to the fund - Massmart Holdings. We added to SA Breweries at share price's lows during the quarter. Meanwhile we trimmed our exposure to MTN, the Value Group and Basil Read. Cash holdings were maintained at low levels throughout the quarter.

What added to - and detracted from - performance:

The fund performed well for the quarter. The paper, luxury good and IT sectors performed particularly well - as well as selected mid cap and retail shares locally. The fund's international holdings also delivered strong performance notwithstanding fairly stable currencies and modest index returns. The JSE Industrial Index is skewed towards some large industrial shares, which tracked sideways assisting the fund's relative performance.

SIM strategy

The fund selects shares based primarily on value - with weightings skewed towards the shares with the greatest discount to intrinsic value. No specific theme exists within the fund although there are certain industries that look inherently attractive - notably the paper, IT and transport sectors and chicken producers. Certain locally diversified industrial companies also look attractive. After the strong recovery we experienced in 2009, we will focus on stock picking and expect returns to be more modest going forward. Investors, of course, should always look to diversify their investments.

Market review
Equity markets recovered in the fourth quarter on the back of a stabilisation in financial market conditions and some recovery economically. The market is pricing in a recovery in business conditions after a particularly weak period, particularly internationally. The SA market appears to be six to nine months behind international markets, with local conditions remaining tough. Arguably our economy was not as severely impacted in the downturn and therefore our recovery was always going to be more modest. The quarter was generally characterised as a period of consolidation. The SA Reserve Bank remained on hold, with interest rates and the currency trading within a tight band and bond rates remaining fairly stable. Inflation continued to moderate and should continue doing so during the first half of 2010, creating a stable foundation for the investment environment in the short term. Against this background, the industrial shares performed well, with the INDI25index rallying during the period and also putting in a strong performance for the year.

What SIM did
The fund was fairly active during the quarter. New holdings were introduced to the fund, such as investments in SAB, BTI and Famous Brands, because they were attractively priced. We added to Steinhoff, MTN, Naspers and Sovereign Foods. Meanwhile, we reduced our exposure to Basil Read, Imperial, Richemont, Pick n Pay, Shoprite, Mr Price, Sun International and Didata and sold our complete holding of Sappi shares. Cash holdings were maintained at low levels throughout the quarter.

Performance attribution
The fund performed reasonably well in the short-term, although a couple of shares detracted from performance. Shares that were geared to improving international conditions performed best. These included luxury goods, media, furniture, healthcare and IT. Performance was reasonably broad-based across these shares. Shares that had exposure to local industries performed modestly, although we expect a recovery going in to 2010.

SIM strategy
The fund has a mixture of defensive and cyclical shares. But value is the overriding consideration when investing. The fund remains fully invested and will benefit from any recovery in the market as this takes place. With the market having rallied and corporate results generally remaining weak in the short-term, more modest returns going in to 2010 are probably likely and thus it would be advisable for investors to diversify their investments.