Market review
The first quarter of 2013 got off to a choppy start, with the market slowing down considerably towards the latter part of the quarter. The JSE All Share Index returned 2.5% (including dividends), as a similar theme to last year continued to play out - resource shares remained out of favour, while industrial and financial stocks maintained their momentum. Property equities continued their sterling performance, as the JSE Property Index generated another 9% for investors in the asset class. From a size perspective, we saw a clear dichotomy in returns, as the small-cap universe, in contrast to the broader market, enjoyed a significant and welcome rally during the first quarter of 2013. The JSE Small Cap Index generated a total return of 8%, significantly outperforming the JSE Mid-cap Index, which generated a total return of 2.7% for the period. Top 40 large-cap shares lagged the most due to the dominance of resource shares in the index - the JSE Top 40 Index delivered 2% for the quarter. This contrasting movement between small- and mid-cap shares reflects a theme we discussed during the course of last year, when we highlighted the risks around the mid-cap area of the market, which had run materially ahead of the small-cap universe. Some of the pressure seen in the mid-cap space has been attributable to the sell-off in consumer-related shares, as concerns about consumer demand and levels of debt; slowing retail sales and a potential pull-back in unsecured lending momentum by the major players in that industry affected the performance of these shares, after a protracted period of significant outperformance during the preceding few years.

Portfolio analysis
The SIM Small Cap Fund returned 5% during the first quarter of 2013. This was ahead of the Fund's benchmark (Market-cap weighted Index, using FTSE/JSE Mid Cap and FTSE/JSE Small Cap Indices), which returned 4% for the quarter. During the quarter, it was pleasing to note that some of our largest bets in the portfolio delivered strong returns. The shares that contributed most to performance included Trencor (generating a 34% total return for the quarter), Spur (+31%), Zeder (+18%), Advtech (+13%) and Raubex (+16%). The largest detractors that underperformed were B&W Electrical and Instrumentation (lost 38% for the quarter), Cashbuild (-19%), Argent (-18%) and Hudaco (-15%).

Outlook
While the small-cap area of the market generated good returns during the quarter, I have cautioned in the past that small-cap shares, by their very nature, are ultimately linked to the broader economic growth trends within the SA economy. This remains fairly clouded at this point, with some particular areas of concern, such as the potential slowing down of consumption trends domestically. The weaker rand could provide some support for currency-sensitive manufacturing and mining companies. However, global economic strength is the key driver for such companies and we are not out of the woods yet with respect to European economic woes and somewhat more moderated growth from key emerging markets. Nevertheless, we are finding new opportunities in the small-cap 'hunting ground', where we continue to search for mispriced opportunities through our dedicated research process. The SIM opportunities through our dedicated research process. The SIM Small Cap Fund remains overweight pure small-cap counters versus mid-cap shares and this is as a result of our bottom-up research process, where we continue to find more value in that area of the market. The top 10 counters in the Fund are defensive and should both protect and grow the returns of our clients, reflecting our choice to position the portfolio primarily in higher quality, cash-generative businesses that have strong competitive advantages and business models that generate superior returns on capital. At the same time, in line with our value-based investment philosophy, we have blended in ideas where we are invested in a number of 'out-of-favour' smaller counters that we believe offer significant value unlock potential over time, as their respective investment cases are catalysed.