Market review
The first quarter of 2016 was a volatile one with January's stock exchange performance in particular being one of the worst since 2008 from both a local and a global perspective. Some recovery was, however, evident during the remainder of the quarter although volatility prevailed. Global economic conditions remain fragile. The ongoing slowdown in growth was evident in China and while the US continues to show some growth, this remains tepid at best. This was confirmed somewhat by Janet Yellen's comments with regard to US interest rates, which now look to be on hold after initially increasing last year. Europe's recovery remains cautious with the focus on the growing immigration problems. An attack in Brussels again heightened concerns in Europe and more stringent cross-border controls are likely.

Despite modest improvements in conditions globally there was some recovery in emerging markets, assisted somewhat by rising commodity prices after a protracted period of weak performance, particularly in 2015. The gold price, however, rose significantly in the quarter and greatly assisted the performance of gold shares even though the rand strengthened slightly against most developed currencies. The rebound in commodity prices, oil and emerging market currencies was off a depressed base and a further recovery off the now modestly recovered base is less assured. The recovery signals are uneven. In developed markets bond yields declined as growth remains a concern and a number of countries implemented negative interest rates for holding cash. Globally the MSCI World Index was down slightly for the quarter, assisted by a particularly weak Japanese market, whereas the MSCI Emerging Market Index was up over 5% for the quarter. Surprisingly, the euro remained relatively strong after a weak 2015. The pound was one of the weakest currencies in the quarter amongst developed economies as concern remains of a pending exit from the EU. In this regard the UK has set a date in June to vote on this controversial issue. This could have significant implications for global companies operating in the UK.

In South Africa political news dominated the headlines. Any recovery in the economy looks some time off and the implications of the political ructions late in 2015 still continue to play out in the real economy. The weakness in the rand in 2015 is starting to filter through with rising inflation despite the fact that the rand strengthened slightly against the dollar in the quarter to March 2016. In this weak and fragile environment the Reserve Bank governor increased the repo rate by a combined 75 bps during the quarter. With the increased risk of SA being downgraded to junk status by some of the credit rating agencies, it was therefore surprising that bond yields in fact strengthened in the quarter. Perhaps this is an indication that the recently appointed finance minister is doing the right things but it could also be linked to the broader recovery in commodities and emerging markets. In this volatile environment the JSE managed to perform reasonably well for the quarter.

In summary, for the quarter the FTSE/JSE All Share Index was up 3.1%. Resources were the best performing sector with the RESI20 up 12.7%, assisted by a very strong run in gold shares but also recovering off a depressed base. The industrials performed worst with the INDI25 down 1.3%, which was reasonable in the circumstances, considering the volatility and the fact that the rand strengthened against the dollar. (All returns exclude the additional return from dividends)

SIM action
The fund was not very active in the quarter. We added to Advanced Health at attractive levels and re-introduced SABMiller to the portfolio. SAB is considered convertible into ABI shares once the deal with ABI is concluded and in the meantime represents quasi-cash, with the probability of the deal being concluded being very high. A separate holding in ABI was introduced on the listing of the share on the JSE. In time ABI will be included in the industrial index and is considered defensive and reasonably valued in what we expect to remain a difficult and volatile market. On the selling side we sold the fund's holding in Truworths and Aspen and trimmed our exposure to MTN, Choppies and Curro Holdings.

Performance attribution
The fund had a poor quarter underperforming its peers and the industrial benchmark. The weak quarter from a performance point of view should be seen against a particularly strong performance in 2015 and some retracement was inevitable. The weak performance was compounded by some retracement of the international shares in the portfolio. We remain convicted on our views within the portfolio and expect some recovery in the medium term. Investors should always have a long-term perspective when investing. It is encouraging that the market weakness is creating some good long-term opportunities in the industrial area of the market.

SIM strategy
The industrial sector as represented by the JSE is composed of a significant number of diverse investment choices that have both varied geographic and industry exposure. Within this choice there are areas that look expensive and those that offer value. As always, it is our job to uncover the best opportunities within this universe using our extensive experience and broad research capability centered on our pragmatic value philosophy. It is within this framework that we aim to deliver the best performance we are able to. As always we would encourage investors to diversify their investments.

Market review
The fourth quarter was a volatile one both locally and globally. Geopolitical events arose in several markets across Europe, the Middle East and Africa. A Russian plane was shot down over the Sinai province with IS claiming responsibility, followed by a number of attacks in Paris and then separately in Nigeria where Boko Haram claimed responsibility. Following the attacks retaliatory moves were instigated by several authorities.

Economically growth remained modest with ongoing weakness in emerging markets compounded by weakening though somewhat stabilizing currencies and a particularly weak commodity environment. The US continued to improve slightly economically as did the UK but elsewhere conditions remain fragile. Japan’s growth remains tepid and in China economic growth continues to moderate with manufacturing under significant pressure. Conditions in Europe are also fragile with recovery modest at best.

Locally there was considerable news. Following a protracted student strike the President eventually declared that there would be no increases in fees in 2016. Market watchers were surprised at the pace at which students were able to mobilise action, representing a force for change that could manifest itself elsewhere in future. Economically conditions remained fragile with economic growth modest. Interest rates were raised a further 25 bps in the period despite the lack of demand as a defensive measure aimed at curbing future inflation. The rand weakened by 11.6% vs. the dollar in the period and this was made worse by a series of compounding issues. Firstly SA’s credit rating was downgraded by most of the credit agencies. Secondly the political framework was thrown into disarray as the Minister of Finance was removed to be replaced by an unknown politician - and after considerable pressure - replaced by Pravin Gordhan, who at least has more market credibility and went some way to appease the market. The rand nevertheless weakened considerably and bond yields blew out. Ongoing interference in state owned enterprises by the Government and their deteriorating finances did little to provide confidence. Some rebuilding of political form will be necessary in the new year to restore confidence in what looks to be a particularly vulnerable 2016.

In an environment of weak economic growth which worsened in the period, rising interest rates, falling commodity prices and a rand weakening considerably against the dollar and the euro, it is perhaps surprising that the INDI25 index was up for the period despite broad weakness in emerging markets. This talks to the diversification evident among the different industrial shares on the JSE and particularly the extent of shares impacted less by the local economy but instead by global drivers.

In summary then for the quarter, the FTSE/JSE All Share Index was up 1.2%. Resources was the worst performing sector with the RESI20 down 19.7%. Industrials performed best with the INDI25 up 6.8%. For the year the FTSE/JSE All Share Index was up slightly at 1.9%. Resources were down sharply with the RESI20 down 39.4%, Financials were down slightly with the FINI15 down 2.6% while Industrials performed relatively better assisted by rand weakness, with the INDI25 up 15.1%. (All returns exclude the additional return from dividends.)

SIM action
The fund was not too active in the quarter notwithstanding the volatility we experienced as we take a long-term view on the positions in the portfolio and avoid the noise of the short term. In the quarter we added to Naspers, MTN and Datatec. All are attractively valued. Aspen was re-introduced into the fund after a protracted period of underperformance. We like the management and the strategy and while there are some currency headwinds in the short term, we expect the business will transition through these in time. On the selling side we trimmed our holding in Steinhoff and Curro Holdings and sold a small portion of Kap. All have done well but are approaching fair value with the proceeds used for more attractive opportunities. The fund’s holding in SAB was sold outright following the ABI offer to SAB shareholders, as we see limited upside to the offer price and, in addition, the pound has been particularly strong against the rand.

Performance attribution
The fund had a good quarter, outperforming its peers and the industrial benchmark. Performance was skewed towards the international shares as you would expect in a period where the rand weakened significantly. There were however some strong performances in small and mid-caps - particularly in IT and education. For the year the fund also performed well, outperforming peers and the industrial index. It’s important to view the fund over the long term and here the fund is consolidating on a number of years of good performance. In a period of considerable volatility and considerable weakness in the local economy, the extent to which the industrial shares have performed is again an indication of investment diversification amongst industrials.

SIM strategy
The industrial sector as represented by the JSE is composed of a significant number of diverse investment choices that have both varied geographic and industry exposure. Within this choice there are areas that look expensive and those that offer value. It is our job to uncover the best opportunities within this universe using our extensive experience and broad research capability, centered on our pragmatic value philosophy. It is within this framework that we aim to deliver the best performance we are able to. As always we would encourage investors to diversify their investments.