Market review
The first quarter of 2016 proved to be extremely volatile for the South African equity market, as the JSE fell 9% within the first 21 days of January before rebounding between February and March, with lots of sharp up-and-down movements in between. On the domestic front, this volatility was perhaps not unexpected, given the overhang from the rand blowing out further towards the end of 2015, the continued impact of the drought affecting various sectors of the economy, a further interest rate hike and a rapidly evolving political backdrop. The international backdrop offered little respite as global markets also proved volatile and turbulent in the first quarter of this year, with many international markets experiencing sharp sell-offs. Another feature of this past quarter was the intense outperformance of resource shares, where we saw a significant rebound after a few years of negative returns leading up to this period. The commodity complex rallied across the board in the first quarter and we saw exceptional performances in gold and platinum stocks and various diversified miners. The degree of oversupply in major commodities and weak demand globally does leave one questioning the sustainability of this rally.

The FTSE/JSE All Share Index generated a total return of 3.9% (including dividends) for the first quarter of 2016. The FTSE/JSE Resource Index generated a total return of 13.2% and was the major driver behind the positive returns of the market. In contrast, financials and industrial shares lagged. The FTSE/JSE Industrial Index generated a total return (including dividends) of -0.7% for the quarter, while the FTSE/JSE Financial Index generated a total return of 5.4%.

From a size perspective, this past quarter was all about small and mid caps, where we saw significant index outperformance relative to the rest of the market. However, on closer inspection and analysis, it was certainly not a broad-based rally, but rather derived from a significant "sector" rally in small and mid-cap commodity shares. The FTSE/JSE Mid Cap Index generated a total return of 18.8% for the first quarter of 2016, with the major drivers of this return being the exceptional performance of the gold and platinum stocks. Due to their weight in the index and their exceptional performance, four shares contributed just under 11% (or close to 60%) of the 18.8% return of the mid cap index in this past quarter: Anglogold Ashanti (+93% for the quarter), Sibanye Gold (+152%), Impala Platinum (+88%) and Goldfields (+39%). This incredible run in gold and platinum shares also played out in the small cap end of the market, where we saw the FTSE/JSE Small Cap Index generating a total return of 11.4% for the first quarter of 2016. The magnified impact of the gold rally was felt even more acutely in this index, where Harmony Gold essentially contributed 8% (or 72%) of the 11% Index return, with that share alone generating a total return for the quarter of 240%!

The performance of industrial and financial shares within the small and mid cap area of the market was considerably muted and lagged in comparison to the performance of resource shares, perhaps more accurately reflecting the broader market's volatility and interpretation of a tough economic environment, a depreciating rand and increasing interest rates, all factors that can weigh on domestic non-rand hedge equity market performance.

Portfolio review
The SIM Small Cap Fund experienced a difficult quarter and generated a return of -3% in the first quarter of 2016 (three months ending 31 March 2016). This is compared to the peer median return for the ASISA small and mid cap fund category of 2%.

Considering performance attribution, taking into account total return (share price movement and dividend received) and the size of each share within the portfolio, when analysing this past quarter (ending 31 March 2016), shares held within the SIM Small Cap Fund that added the most to performance included: Sygnia (generating a 47% total return for the first quarter of 2016), Coronation (+39%), The Foschini Group (+19% total return including dividends), Bowler Metcalf (+7%) and Illovo (+22%).
For the past quarter, detractors were: Curro (lost 25% in the three months ending 31 March 2016), Net-1 (-35% for the quarter), Advanced Health (-12%), Spur (-14%) and Choppies (-17%).

When analyzing this past quarter, it is important to note that the SIM Small Cap Fund did not have material direct exposure to resource shares and that this would have influenced the relative return profile of the fund, when comparing it to the significant rally seen in the small and mid cap indices for the past quarter (as explained above). At the same time, the underperformance of shares discussed above does not in any way reflect on the long-term fundamentals of these investment ideas and there has been no subsequent exit of any of these positions that have underperformed. In our experience of the equity market, the measurement of a quarter of equity performance can result in volatility in share prices that is disconnected from the fundamentals of a particular investment and unless we see any long-term structural risk or a need to re-assess a particular investment case, share price drops will not affect how we manage the portfolio. We generally take longer-term views that look through these quarterly movements.

From a trading perspective, new positions added to the portfolio in the first quarter of 2016 included EOH, Afrox, Omnia, Grindrod, Impala Platinum and Northam Platinum. Risks and opportunities As an outlook we reiterate our focus on the two most important elements of our investment process: rigorous research and risk management. We've completed the first quarter of reported financial earnings from the December 2015 and January 2016 financial period-ends and despite the subdued performance of industrial and financial shares, so far, barring a few exceptions, we've been pleasantly surprised at the resilient financial performance of many small and mid cap companies that have reported pleasing financial results. However, this is history and our emphasis is on understanding what is happening in the future and what the risks are to our existing investments, while at the same time constantly seeking new ideas that can yield the type of longterm returns that we are targeting for our clients in the SIM Small Cap Fund.

The risks remain the same as when we previously communicated with our clients. The macroeconomic backdrop remains precarious, with little to no economic growth expected this year. The rand remains weak and significantly under-valued relative to historical averages, inflation concerns abound and interest rates will likely continue to increase. Over and above these headwinds, the South African political backdrop and recent developments have been concerning on the one hand, while on the other hand, the level of discourse reflects the vibrant young democracy that characterizes our country. The risk of a rating downgrade remains very real at this point and will likely have a further negative impact on the investment environment that we are currently navigating. To manage these risks, we believe we've positioned our portfolio to be as resilient as possible in the face of some of these headwinds by selecting investments that we believe will demonstrate some unique aspects that will potentially be "less affected" by the circumstances described above. We cannot promise perfect insulation or protection, but we have selected our investment ideas with this backdrop in mind, so we remain vigilant of the risks that are apparent to us.

Opportunity abounds in this type of volatile investment environment and we are constantly searching for new ideas. Our research process continues to identify new investment ideas and as we said in the past quarter, equity market corrections or areas of underperformance provide us with the opportunity to have a bite at some "cherries" where we haven't been able to justify investment in the past when these shares were over-priced and over-valued according to our analysis. This process is ongoing and dynamic and we believe will generate many opportunities for us to identify new investment ideas for our clients in the SIM Small Cap Fund.