Performance
During October the fund experienced a very good month with first quartile performance. Year to date the fund manager's are maintaining the funds top half relative performance.

Although resources outperformed the All Share, the funds underweight this sector added to performance through the fund manager's superior sector positioning, ie, overweight mining houses and platinum and underweight gold and mining finance. The funds overweight life assurance relative to banks also enhanced performance.

View on the quarter ahead
Local shares have had an excellent start to the quarter driven by global markets, lower interest rates, a cyclical recovery and also higher commodity prices. Given the expected strength of the US recovery, the fund manager's are attracted to resource counters, other than gold mines. The fund manager's much prefer platinum to gold and continue to prefer Sappi to Sasol. They also prefer mining houses to Iscor and Kumba.

The introduction of AC133 has caused some uncertainty about the level and volatility of bank earnings. However, banks should continue to show steady earnings growth albeit at lower levels due to lower inflation and interest rates. The banks remain at attractive valuation levels and the downside risk appears reasonably low. Lower interest rates and the positive signs of global growth accelerating should be good for the South African domestic markets, which should benefit for life companies. They are at present being considered as cheap.

The fund manager's continue to believe that the industrial sector is cheap on a forward PE ratio of about 9 times. If the fund manager's strip out the dual listeds the one year forward falls to about 8 times. The fund manager's still favour those sectors that are geared to the local economy.

Performance
We have experienced one of our worst quarterly performances for quite some time. The main reason for this was our underweight gold, Iscor, Kumba and our strong underweight small caps in general.

View on the quarter ahead
Global growth expectations have improved in recent months - periods of rising global growth expectations have typically been very positive for South African equities. After a slowdown in 2003 the domestic growth performance should be much better in 2004, support coming from lower interest rates, higher global growth and hopefully a weaker rand.

We expect the macro drivers for resources to be more supportive thus closing our underweight to a more neutral position. We will stay overweight mining houses and platinum and underweight gold.

Our stance on financials is derived from an underweight banks and a strong overweight life assurance.

Including small caps we have a neutral weighting on industrials with our strongest bets through SAB, Imperial, Barlows, Naspers and MTN.

Performance
From a sector perspective we remained underweight in resources and overweight in financials and industrials. While this position worked against us in May, it added value again in June.

Individual equities that enhanced our fund's performance were JD Group, Edcon, Pepkor and AVI, while no exposure to Steinhoff, Naspers, Metcash and Transhex detracted from the value.

During June we made use of the strong rand to increase our forex exposure.


View on the quarter ahead
The rand is one of the best-performing currencies on a year-on-year basis. This strength is very negative for domestic corporate profits and real economic performance, particularly the external sector of the economy. The rand hedge profile of the domestic equity market is averse to the strong rand/USD.

Against this backdrop it is difficult to see resources and basic industrials post decent returns in the short term. Currency strength, domestic cost inflation and depressed volumes have already triggered profit warnings from Sappi, Sasol and most recently from Amplats. We remain underweight in these sectors.

The best earnings are likely to come from consumer industrials. We remain overweight in retail telecoms and selective shares such as Nampak, JD Group, AVI and Pepkor. Although there is some uncertainty about fixed investment spending, it is our view that there is very little risk in building and construction shares. We have maintained our overweight in financials.

We are in the process of taking profits on some of the banks and redirecting that money to insurance shares.

It goes without saying that the more protracted the war in Iraq turns out to be, the worse the potential impact on global growth expectations and, probably, equity market earnings. The unusual feature of the current global picture is not so much the depth of the recession but, rather, the absence of a catalyst for a decent recovery.

The most important domestic marco-economic inputs as far as investment strategy formulation goes are the assumptions of a weakening rand over the next 12 months, sharply falling inflation and interest rate relief into the second half of 2003 and 2004.

Our earnings growth expectations have proved to be bullish. The most material sectoral downward revision has been in Resources. Despite the ALSI retreating 17% since the beginning of the year, forward PE's have only come down from 9,0x to 8,8x and the forward dividend yield has remained constant.

Our view at present is to be underweight Resources (overweight mining houses, underweight single commodity companies), overweight Financials (overweight Banks and Life Assurance) and neutral Industrials with a bias to start upweighting dual listeds.

Key stock overweights are Anglo's, Billiton, Sanlam, Standard Bank, Old Mutual and Imperial with Sasol, Gold, Richemont, Tigerbrands and Iscor/Kumba our underweights.

During December Resources were the best performers (+0,5%), followed by Industrials (-5,3%) and then Financials (-7,2%). Resources providing the most positive return is unusual given the continued strength of the Rand during the month. It is likely that market participants believed that the sector had either become oversold, or as we do, that the news flow about Global recovery has been increasingly improving.

Individual shares that added value to the funds performance during the quarter were our overweight Johnnic (+48,9%), Imperial (+12,6%) and First Rand (12,5%). Although our exposure to Durban Deep and Harmony was costly during December it enhanced performance for the quarter. Our underweight positions in SAB (-13, 4%), Amplats (-10,7%) and Kumba (-9,0%) were beneficial to our fund.

Our overweight Goldfields (-11,8%), Sasol (-11,6%) and Implats (-10, 3%) destroyed value.

The fact that we were slightly underweight mid cap (+10,0%) and more so in small cap companies (+9,4%), had the biggest impact on us under performing the peer group during the final quarter.

With the likelihood of war with Iraq still ever present, the US long bond looking expensive, and the weakness in the dollar, what do global investors buy? Alternative safe havens such as gold, and even possibly platinum, are likely to be the focus of attention in the first quarter of 2003. While the local Gold sector outperformed strongly in December 2002, Platinum under performed, as it did for the whole of 2002. Unfortunately the strong Rand, weak palladium prices may hinder strong out performance following on from Gold's strength.

In terms of the local economy, there is the prospect of interest rate cuts happening sooner rather than later. Given this, investors are likely to position themselves in those sectors that are likely to be beneficiaries of rate cuts, sooner rather than later. However, a word of caution in this regard: the rate hikes of 2002 are likely to start having a negative effect on the consumer in H1 2003, whilst any budgetary stimulus for 2003/4 is only likely to have a positive effect from H2 2003. At the same time, declining inflation is likely to have an adverse effect on retailers' margins.

As always the direction of the Rand will dominate sector selection, given the much stronger local currency recovery that has taken place in Q4 2002, and looks set to continue for a while, what with events like the upcoming Telkom listing and the World Cup Cricket. With the strong performance that we have already seen in the Retailers last year, it is the more diversified industrials/conglomerates that still have further upside given the favourable local environment. With similar earnings growth, but a lower rating, the Banks are also set for a period of out performance

Individual shares that added value to the funds performance were our overweight JD Group (26,9%), Johnnic (27,3%), ABSA (13%) and Sanlam (12,5%). The fact that we had no exposure to Harmony (-12,6%) Palamin (-5,3%) and Illovo (-2,9%) further enhanced performance. Our overweight Banks and local Assurance finally paid dividends.

Our no exposure to Mid cap shares like Woollies (15,6%), Massmart 10,9%) and Uniserv together with overweights in Goldfields (-13,2%) and Iscor (-9,1%) detracted from performance.

Outlook
The latest phase of Rand strength has caught many commentators by surprise and has been mainly driven by export repatriations.

We believe the Rand will average R9,75/US$ during the fourth quarter and R9/US$ for the first three months of 2003. We are thus maintaining our overweight in Financials and an underweight in Resources for the short term.

Our overweight in Retail are also still in place despite the very strong recent performance. General Retailers provided a return of 14,9% during November and Food and Drug Retailers 11,8%. The extent of earnings upgrades is such that the forward PER has dropped 5%.

On a sector basis, the one domestic sector which has lagged is Transport - up only 2,8% in November. This sector is a natural beneficiary of a stronger Rand.

We still keep to our general view that the better investment opportunities exist within our local listed companies.