Market Review
This was the quarter where the raft of negative macro news finally led to capitulation by equity investors worldwide. As a result, the SWIX declined 4% this quarter, with the worst of the selloff occurring in September. SA equities underperformed bonds, which initially experienced a strong rally with 10 year yields peaking at close to 7.5% before weakening towards the end of the quarter. In dollar terms, the JSE was hurt by the weaker rand. Resources (down 10%) once again bore the brunt of the sell off with global growth concerns impacting on global cyclical stocks. The CRB Commodities index slid 12%, with copper, a key indicator of global economic activity, declining 26% and crude oil prices down 17%. Industrials (-3%) were the best performers helped by SABMiller (+8%), Healthcare (+2%) and Food Producers (+3%). Financials (-3%) also lost ground as the market started fearing a repeat of the financial crisis and interbank liquidity in Europe dried up.

What SIM did last quarter?
This was a difficult quarter for the fund, with the performance year to date down by 4%. Anglo American remains our largest holding, making up close to 9% of the fund, and we used the weakness to top up our holding. Overall, we increased our exposure to resources into weakness and reduced our exposure to the small caps, which have held up relatively well. We believe that the diversified miners are discounting a lot of the bad economic news flow already. Anglos and Billiton have underperformed the SWIX by 13% and 15% respectively in the third quarter, a move that mirrors the 15% decline in the commodity basket. We also added to our position in Naspers, with the stock declining by 9% during the quarter and its major Chinese internet asset, Tencent, falling by 22% in Hong Kong. These are all high quality stocks run by premier management teams and should benefit from currency weakness.

What detracted from and added to performance?
The resource sector was again the worst performing sector. Concerns over global growth possibly tipping into recession saw a massive sell off in the diversified miners like Anglo American (- 17%) and BHP Billiton (-18%). Copper, often seen as a key indicator of the health of the global economy, fell 26% during the quarter. There are fears that demand could deteriorate in the developed world and thus act as a handbrake on Chinese growth, the world's leading consumer of base metals. On the positive side, the third largest holding in the fund, British American Tobacco delivered a solid 7.4% return this quarter. This company has grown dividends in sterling at 15% annually over the last decade. In the future, we expect its margins to continue to expand and its payout ratio to increase, which should support dividend growth. British American Tobacco has outperformed the SWIX by 42% year to date but still trades below our fair value. At the beginning of July, we also had news that Bidvest had received and rejected unsolicited offers for its international food services distribution business. Bidvest has been a core holding in your fund because we felt that the international business was not properly valued by the market. The international food services businesses have critical mass in Europe and the Asia-Pacific regions. Bidvest has substantial businesses in the UK and Eastern Europe, together with large operations in Australia and New Zealand. The offers received by Bidvest valued the food services business at R30bn compared to the current market cap services business at R30bn compared to the current market cap of about R47bn. This proves that there is much hidden value in the company.

SIM Strategy
We apply our pragmatic value philosophy when valuing all counters, which enables us to compare stocks across industries on a consistent basis. The indiscriminate sell-off witnessed this quarter has provided us with an opportunity to pick up blue chip stocks at attractive valuations. The macro news flow at this point in time appears to be very negative and, until policy makers get their act together, equity markets are, in all likelihood, going to continue to be subject to considerable volatility. However, at SIM, we avoid making panicked decisions by following a strict investment process and we believe this is what gives us the edge in the long term.

Market Review
It was another very volatile quarter for equity markets, with some potential tail risk events causing wild swings in sentiment globally. But June seemed to support the adage "sell in May and go away". However, the quarter experienced a strong close after Greece passed an €28bn austerity package, ensuring that they avoid sovereign default by accessing bail-out packages. This boosted the JSE, which rallied by 4% at the end of the quarter to end it flat. From a sector perspective, the financial and industrial sectors were positive during the quarter, while the global turmoil impacted resource shares adversely and the sector closed down almost 6% for the quarter. The Gold sector (-13%) was the worst performing sector, as speculative investors headed for the exit as soon as the gold price broke the psychological barrier of $1500 an ounce.

What SIM did last quarter?
The Fund gained almost 0.5% in the quarter, which aggregates into a solid 24% return over the past year. Anglo American remains our largest holding, making up more than 8% of the fund. We used sector weakness to top up this holding. Overall, we increased our exposure to financial stocks and reduced our exposure to the industrials sector, which was the best performing sector. We strategically increased exposure to specific shares where we saw more upside. For instance, we further increased our exposure to Anglo American, while we slightly reduced our stake in BHP Billiton. On a valuation basis, Anglo American trades on a forward multiple of 8x while Billiton is on 10x. We believe that the rump of Anglo American, stripping out listed entities Anglo Plats and Kumba Iron Ore, is much undervalued despite its excellent growth profile. We also topped up our exposure to MTN, which is trading at an attractive forward price-to-earnings (PE) ratio of 11x and a forward dividend yield 4%.

What detracted from and added to performance
The resource sector was the worst performing sector this quarter, with gold shares experiencing the heaviest declines. We continue to have an exposure to Gold Fields, the cheapest gold stock in our investment universe. Our second largest holding, Sasol, pulled back 8% this quarter, underperforming global oil stocks because the market is not pricing in its superior growth prospects. Our analysis shows the Sasol share price has been discounting an oil price of under $70/barrel when the spot price is trading above $110/barrel - a satisfactory margin of safety in our view. In future, Sasol will be gaining increasing exposure to natural gas at potentially attractive margins and this is not priced in the share price.

On the positive side, the third largest holding in the fund, British American Tobacco, delivered a solid 7.4% return this quarter. This company has grown dividends in sterling at 15% annually over the last decade. In the future, we expect its margins to continue to expand and its pay-out ratio to increase, which should support dividend growth. If we combine this positive outlook, with our expectation for the rand to depreciate against sterling over the long term, this investment should deliver superior returns for our investors in future. Thus we have topped up our holding in the stock during the quarter. At the beginning of July, Bidvest received unsolicited offers for its international food services distribution business. Bidvest has been a core holding in our fund as we have felt that the international business has not been properly valued by the market. The international food services business has substantial critical mass in Europe and the Asia-Pacific regions. In Europe, Bidvest has substantial businesses in the UK and Eastern Europe, together with large operations in Australia and New Zealand. In fact, CEO Brian Joffe and his team have built the largest international food services distribution business outside the US and we believe that a deal must be done at a substantial premium for us to agree to dispose of our investment.

SIM Strategy
There is no doubt that we have to dig deeper to find cheap stocks after the JSE's 87% rebound since March 2009. Two years ago the mean historic PE of stocks in our investment universe was less than 10x. The market has now rerated to such an extent that the historic PE of the market is a hefty 13x. Nonetheless, we expect earnings growth of 21% over the next year which would allow the price-earnings ratio of the market to unwind towards its long term average. Hence, we believe that the market is close to fair value and expected returns from this point onwards are likely to be muted.

Market Review
We had a very turbulent start to the year with unrest in North Africa leading to fears that contagion into the world's main oil producing countries could lead to serious disruptions in oil supply. Fears that the rising oil price would slow global growth saw gold rise to a record high in March at $1444/oz. Also in March, Japan was hit by its biggest ever earthquake-tsunami with a severe human and economic cost. Global markets pulled back as fear gripped investors, with the Japanese equity markets plunging almost 20 per cent shortly after the tragedy. These events should translate into lower global growth estimates for 2011, but we estimate that the impact on the South African economy is likely to be minimal. South African equities underperformed global markets during the quarter with developed markets outperforming emerging markets on the back of solid economic data. The JSE delivered a total return of over 1% shrugging off the bad news with the Top 40 stocks outperforming the rest of the market, led by resource related shares. Financials also posted a positive return while industrials ended the quarter strongly negative.

What SIM did
The fund was up over 1% in the first quarter which aggregates to a solid 15.5% over the past year. Anglo American remains our largest holding at over 8% of the fund and we have increased our position in Sasol to close to 8% as the oil price advanced to over $100/barrel. Management has purchased North American shale gas resources at relatively low prices in order to leverage their Gas to Liquids technology. This gas acquisition presents Sasol with an attractive growth opportunity, which is not yet discounted in the share price.

The fund upped its exposure to quality resources stocks during the quarter. We have reviewed our long term commodity prices and have come to the conclusion that long term commodity prices are likely to be higher than previously anticipated. There are substantial cost pressures impacting the mining industry - for instance, bulk commodity costs have increased close to 40% over the past three years. The Chinese producers have also become a considerable force in mining and they tend to operate at the upper end of the cost curve.We also have had to revise the margin that producers would need to earn to achieve their required returns on investments. This has firmed up our view of the valuation of the diversified miners and therefore we have increased our exposure during the quarter.

What detracted from and added to performance
Our largest holding, Anglo American, continued to outperform the All Share Index during the quarter, advancing by over 2.5%. Sasol, our second largest investment, also did well advancing 13% during the quarter. British American Tobacco, which also outperformed, remains one of our key holdings, is trading well below fair value.

Old Mutual contributed positively to performance rebounding 15% during the quarter. The market is now gaining confidence that Old Mutual will achieve its G1,5bn debt reduction target for next year and re-rated the stock.

Standard Bank reported a decline in earnings, with profits in Africa falling by 38% and the international operations (outside of Africa) delivering almost no profits for the year. However, Standard Bank remains one of our largest holdings and we think that it is undervalued at current levels.

SIM Strategy
There is no doubt that we have to dig deeper to find stocks that offer attractive value. Two years ago the mean historic PE of stocks in our investment universe was less than 10x. The market has now rerated to such an extent that the historic PE of the market is a hefty 14x. Nonetheless, we expect earnings growth of 27% over the next year, which would allow the price-earnings ratio of the market to unwind towards its long term average. Hence, we believe that the market is close to fair value and expected returns from this point onwards are likely to be muted.

Merger of SIM Growth Fund with the SIM General Equity Fund, effective from 01/04/2011. The history of the SIM General Equity fund will remain.

Market review
The last two years of equity market performance are another keen reminder that investing at the point of maximum pessimism is a long-term winning strategy. There are few who would have thought the FTSE/JSE All Share Index would have generated a return of 32.1% in 2009 and another 19% in 2010. The equity market's performance last year was led by the industrial sector (up 24%), followed by financials (ahead 16.6%), with the resource sector lagging with 12.3%. Overall, the All Share Index gained 9.5% during the fourth quarter, while the SWIX delivered a strong 8.1% return during the period. There was a reshuffling of sector performance during the final quarter, with resources putting in the best performance (up 16.5%), industrials up 8.4% and financials declining 0.1%.

What added to - and detracted from - performance
A number of contrarian value investment decisions have paid off for us over the past year. These include the likes of Imperial, Mondi and Nampak. We continue to believe that further value will be unlocked for shareholders in both Mondi and Nampak over time. The Imperial share price, however, is now above our assessment of its intrinsic value; hence we have sold our entire shareholding in the fund. In the latter part of 2010, "price momentum" started to play a more significant role in driving share price performance. There are generally two types of price momentum - good price momentum (where cheap companies' share prices increase as they move closer to fair value e.g. Imperial) and bad price momentum (where expensive companies become even more expensive e.g. Clicks). As value managers, we clearly prefer the former to the latter! As mentioned in the last quarterly report, the retail sector, in general, has become overvalued. Accordingly, other than the furniture retailers and Pick 'n Pay, we do not have much exposure to the sector. To put this into perspective, the normalised PE ratio of the clothing retailers is almost 20 times the normalisedPE ratio of our banks of 9.5 times. Granted, the short-term outlook may be better for the retailers relative to the banks, but this is surely priced into the shares?

SIM strategy
Given the strength we have seen in the Industrial sector in 2010 relative to the other sectors, we believe there is more value in the financial sector and increasing value in the small-cap sector. In fact, for the first time in a long while, we also see better value emerging in resources relative to industrials. However, we prefer not to look at valuations at an aggregate sector level but rather from a bottom-up, stock specific perspective. In this regard, we continue to see value in the likes of Anglo, Sasol, Barloworld, Mondi, Nampak, BAT, Bidvest, Capital Shopping Centers, Old Mutual and some of our banks. We have also been increasing our exposure to select small cap shares. Earlier last year, we sold out of Imperial and Shoprite. Shoprite has performed well for us but is now trading above our measure of intrinsic value. We also sold out of the newly incorporated Metropolitan and Momentum (MMI Holdings) and increased our exposure to Old Mutual, which is trading at a 35% discount to embedded value. Given the phenomenal strength of the rand, as well as the increased value emerging in many international stocks, we are considering opportunities to increase the returns to our clients by investing a small portion of the assets in selected international opportunities.

Risks and opportunities
There is less value in the market currently after the strong run of the past two years. From a long-term, fair value perspective, we believe the stock market as a whole is now trading at approximately 5% above its fair intrinsic value. Given the 14% annualised return we require when assessing the market's intrinsic value, investors can expect upper single digit annualised returns from current levels. The risk/reward tradeoff is diminishing. Notwithstanding this, we still see opportunities in the market.