Performance
Although the fund slightly under performed the median return of its peers during the last quarter it continued to outperform on a year to date basis.

It was again thin pickings for South African equity investors during the third quarter. On a relative basis Resources experienced a fair return. Within this asset class gold shares were the star performers. With hindsight our neutral stance towards this sector was too conservative, but fortunately we were overweight the better performers namely Goldfields and Harmony. Amongst the large cap Resource counters our overweight Sasol and Billiton added value while our exposure to Anglo's and Kumba negatively affected the portfolio's return.

Financials, although perceived by many to be cheap, yet again under performed. Fortunately Banks, where we had an overweight exposure, outperformed Life Assurance on a relative basis. We also favoured ABSA and Stanbic, which outperformed the banking sector. Our stock selection amongst Assurers, however, which favoured Sanlam over Liberty Group, destroyed value.

Where we lost some basis points, were through our Industrial equity holdings. Although underweight Richemont (down 31,7%), the optimal position should have been no exposure. Our positions in Imperial and Bidvest also detracted from the fund's performance. Positive contributions came from TigerBrands and Nampak. Our underweight TMT again added value especially taking into consideration that we had no exposure to Didata and M-Cell, which under performed considerably.

Outlook
Going forward we still prefer companies that will benefit from high inflation, but we are also becoming more concerned about the risk of further interest rate hikes and the negative affect that might have on spending in the real economy. With the huge volatility in equity markets it is our belief that quality companies with superior management and visible income streams would be the better performers.

Buys & Sells

The fund managers sold some single commodity companies such as Amplats, Sappi and Illovo in favour of Mining Holdings i.e. Anglo's. Some of this money was also reinvested into Kumba, Sasol and Goldfields. On a nett basis the fund managers sold some financials, only after the strong performance during April, and bought some smaller caps such as Ceramic, Pepkor and Truworths. After a period of extreme weakness the fund managers bought some Datatec shares purely from a valuation perspective. The risk and volatility of this sector, however, remains extremely high.

Performance and Reason

The fund managers managed to outperform the average return of the general equity category. This was mainly due to the fund not taking extreme sector views. The bets were mainly concentrated on individual shares within neutral sub sector exposures. Individual equities that added value were the overweight BOE, Pick 'n Pay, Imperial, ABSA and Investec. The underweight Didata, Amplats, M-Cell and Old Mutual further enhanced the performance. The overweight Billiton, Sasol and Richemont unfortunately negated some of the good performance mentioned above.

Outlook

With valuations in developed markets ahead of earnings expectations, the fund managers expect these highly valued equity markets to take a breather, until the fund managers see a favourable earnings reporting environment. In this environment, investor sentiment will continue to favour the more defensive sectors i.e. Beverages and Tobacco. The strong performance year to date of global cyclicals will again be put on hold after a poor month in June, and the fund managers do not expect the Resources sector to outperform in the near term, other than perhaps Gold, where continued structural changes in the nature of this precious metal are apparent. The fund managers do not envisage any weakness in oil prices, given strong underlying global macro news flow, i.e. positive for Sasol.

The globally priced Basic Industries is also not expected to outperform in the short term given the global nature of its commodity pricing, other than the steel sector, where fundamentals and pricing are surging ahead. The fund managers believe the focus is likely to be on the local industrials, given the strength in the macro economic numbers released recently. We see no reason why the current strength in the underlying local economy is NOT sustainable, and therefore the focus on local industrials. Sustainability should also be underpinned by increasing government expenditure, which should be favourable for the Construction and Building materials sub sector over the longer term.

The fund managers believe those counters with local cyclical exposure should continue to outperform and only as their poor liquidity starts to affect / drive up valuations, will buying switch to the incredible value in the Financial sector, especially as foreigners become frustrated with local industrial choices and liquidity.

The South African market had a strong quarter gaining 5,6%. From a sector performance perspective it was all about resources again. Gold was the real story of the quarter as bullion broke the $300 on two occasions. Fortunately this fund was overweight in the best performer namely Goldfields, which actually doubled in price. The surging oil price also helped our cause through our overweight in Sasol. Another feature was the strong performance of Richemont, mainly on the back of positive signs from the global recovery front. Fortunately this fund was well exposed to this counter.

Looking ahead, the fundmanager sees a subdued backdrop to equity performance in the very near term, at least until a new catalyst emerge to drive a certain category of the market again. From a macro perspective he believes to stay overweight financials, due to their robust bottom up valuation; slightly overweight resources; and underweight Industrials, except those with global platforms. This fund, being a general equity fund, will always offer investors a well-diversified portfolio covering all the major sectors of the JSE. The fund currently has a total of 40 counters in the portfolio.