Equities had a very good quarter with gains across all the sectors. Resource shares were the most impressive with a 23% gain. Financials followed with 15% and industrials 13%. The equity run was sparked by a surprise 50 basis points rate cut. This led to initial rand weakness, spurring resources into action. To add fuel to the fire, after initially looking to weaken, commodity prices started firming again, further supporting resource prices.

The Fund was not ideally positioned to gain the maximum benefit, especially owing to our underweight in resources. On a relative basis our overweight in Sappi and underweight in Sasol and Billiton explain the major part of our underperformance over the past three months.

Our financial and industrial overweight managed to claim back some of this underperformance through our overweight exposures to Imperial, Bidvest, Barlows and Sanlam. Our overweight in Nampak detracted the most value.

The market has run very hard and is probably due for a breather. However, we believe that the local market still offers selective value. Given the level of the commodity cycle and indications of lower global growth we remain very cautions on resources. We expect commodity prices to roll over and therefore favour companies outside the resource sector geared to local economic growth with rand hedge qualities.

Diversified industrials such as Imperial and Bidvest should outperform. In addition to strong forecast local earnings growth, foreign earnings should be boosted by some rand weakness (on the back of weakening commodity prices).

We believe that our portfolio is well positioned to take advantage of such a scenario.

Equities fell by 5,5% over the quarter, ending the bull run that began in April 2003.

Resources led the fall, while financials and industrials managed to realize a positive return.

Resources weakened because dollar commodity prices peaked in April and the rand remained strong. We extended our underweight position in resources by reducing Anglos, Impala and GoldFields. The proceeds were switched into financials and industrials.

We increased our overweight in industrials by buying Telkom, Nampak, TigerBrands and SAB Miller. Conditions for domestic consumption remain relatively favourable and manufacturers are adjusting to the strong rand.

The other beneficiary of resource selling was financials, which continue to be a stable portion of the portfolio. We expect insurers to outperform banks given cheap valuation levels, and added to Metlife as well as Alexander Forbes.

The rand continues to confound global currency trends by being one of the handful of currencies that have appreciated against the dollar in 2004 to date. This is going to be the most important call going forward. At present our portfolio is structured for a relatively strong rand and the local economy being fairly buoyant. From a style perspective we favour value ahead of growth, thus the portfolio is more defensive by nature.

The South African results season is drawing to a close with most of the major companies having produced either final or interim results. The impact of the rand was material, with the entire earnings base of the market down 17,2% year on year and 6,2% lower than at the start of the year. However, the market has largely ignored earnings, taking its lead rather from global markets.

The main contribution to good performance for the quarter came from our overweight exposures to Omnia, Massmart, Johnnic and Edcon. Our strong underweight in gold shares further enhanced performance.

Shares that had a negative impact on our performance were mainly those companies to which we had no exposure, namely Iscor, Abil, RMH and Astral. Our overweight position in Amplats also detracted from performance.

The major imponderable for 2004 is the sustainability of the current surge in commodity prices. Our view is that while the longer-term outlook is generally positive, we see no real difference in the normal cycle pattern. Producers are expanding capacity, and demand from the main commodity consumer, China, is too strong. Inevitably China will curb its growth and the additional capacity will be placed in a softer market at much lower prices. In line with our pragmatic value approach, we are underweight in most of the resources stocks except Anglos, Billiton and Sappi.

Among financials we are currently overweight in banks and local life companies. It is our view that insurers should outperform given their cheap valuations and our expectation that equities will continue their bull run. Our largest overweights are Standard Bank, ABSA and Sanlam.

Industrials continue to do well. Conditions for domestic consumption remain favourable, although manufacturers are battling to adjust to the strong rand. As our view is for the rand to weaken during 2004 to approximately R7,10 : $ at year-end, we are upweighting certain manufacturers such as Tiger Brands and AVI. Our major overweights are Telkom, Imperial, Didata, Supergroup and Astrapak. We also continue to favour large caps over small caps.

Returns below the sector average have been a feature of Sanlam General Equity Fund (SGI) for longer than investors care to remember. But the appointment of Sanlam Investment Management's (SIM) chief investment officer, George Howard, as SGI's manager points to a determination to restore the 37-year-old flagship fund's image.

When Howard left Old Mutual to join SIM in September 2002, he left behind two funds with impeccable track records, Old Mutual's Value and High Yield Opportunity funds. A similar approach is to be followed in SGI. "The portfolio will have a value bias; this is the basis of our investment philosophy," says Howard.

SGI's strategy will follow the house view set by a committee headed by Howard, who says: "We are aiming to achieve consistent performance over time." SIM's strategy favours big-cap stocks that now form the bulk of SGI's portfolio. "Small caps may still do well but we believe they have lost their valuation advantage," Howard says.

On broad portfolio balance, SGI is overweight in financial shares, with a 32% exposure compared with a 27% sector average. Here market favourite Standard Bank is overweight and has been moved up from 9th to first position in the portfolio over the past few weeks, says Howard. SGI is also overweight in life assurance, where SIM believes valuations are cheap, given their expectation of a continuing bull market.

SGI's industrials exposure at 50% is in line with the sector average, while resource exposure, at 18%, is below the 20% norm. "We are more negative on resources than the market in general ," says Howard.

But as investment strategies now diverge widely, sector averages can be misleading. This is seen, for instance, in resource exposures that range from 9% in RMB Equity to 31% in Metropolitan General. Both can't be right and, almost certainly, the sector is set up for widely diverging returns too. As SGI is now structured, it appears to offer a compromise between extremes.

Performance
After a very good January our fund slipped somewhat during the month of February.

Main contributors to this underperformance were our overweight in Amplats, Didata and Telkom, but even worse was the fact that we had no exposure to AECI, Iscor and Abil.

Some of our overweights that added value were Omnia, Sanlam and Liberty International. Our underweight positions in Metcash and Woolworths also negated some of our underperformance.

View on the months ahead
We expect global growth to rise moderately above trend this year, led by the US and Asia. This should support "normal" peak-cycle metal prices. Periods of rising global growth expectations have typically been positive for South African equities. Better global and
domestic conditions should support accelerating South African growth momentum in 2004.
We expect moderate rand weakness during 2004 - the rand should underpin earnings growth comparisons from now on. A high-rising inflation trend could induce the SARB to increase rates later in 2004. Our main strategy is to be overweight in mining houses and Sappi, on weight in platinum and underweight in the gold shares, which we perceive to be very expensive relative to the current and our expected gold price.

Financial valuations are seen to be the most attractive in the South African market. We are currently overweight in both life assurance and banks. With the prospect of a relatively strong rand, financial shares should perform well.

On the Industrial side we started with some profit taking in household goods and beverages. We also moved some money away from clothing retailers into the more defensive food retailers. We also upped our exposure to food manufacturers.

Our portfolio also has a positive bias towards large cap shares.

Effective from 1 Apr 04, the Sanlam General Trust changed its name to the Sanlam General Fund.

The fund experienced a very good last quarter, achieving first-quartile performance. The main contributor to this performance was mainly mid-cap shares such as Edcon, Pepkor, Didata, Astrapak and JD Group.

Main detractors from this return were our underweight positions in shares such as Sasol, Anglogold, Bidvest, Massmart and MTN group.

Looking forward, we take the view that the rand is unlikely to strengthen much further and will probably weaken over 2004. Recent actions by the Reserve Bank also appear to be aimed at moderating the volatility of the currency, which would be a very healthy development for business management. The large disparity in fortunes between the retail and manufacturing sides of the economy is likely to unwind, which should favour the currently unloved manufacturing sector in due course.

In line with our view, we added to local manufacturers such as Tiger Brands and Nampak. We also continued to add to SAB where we remain positive on both its international and local growth prospects. Conversely, we tactically reduced our overweight exposures to Old Mutual and Richemont into earlier strength.

We also maintained our net resources underweight position as we continue to be cautious of gold shares and shares such as Sasol and Iscor, where the underlying commodity prices are already at high levels.