Market Review
Equities had a solid start to the year, with the All Share up 2.5% and easily outperforming bonds and cash. Globally, equities did well too, with developed markets outperforming emerging market equities. However, things are far from normal around the world: we saw a pope resigning for the first time in 600 years and the near collapse of the banking system in Cyprus, which was narrowly averted thanks to a €10bn bail out. But as we have previously pointed out, investors should be wary of being swayed by such headlines. The S&P 500, for instance, closed at a record high at the end of the quarter and it was even more surprising to see the Japanese Nikkei up over 20% in yen during the quarter on the back of the promise of a more aggressive stance from policymakers. Value investing has also had a bad rap in the recent past, with the liquidity printed around the world seemingly favoring momentum investing. Even the value investing guru, Warren Buffet, has had a tough time. He has underperformed his benchmark in three of the four previous calendar years. Bear in mind that the Oracle of Omaha has only underperformed in nine years of a 48-year career …hence a third of his underperforming years were in the past four! One clear sign that investors are waking up to the fact that there is value in the equity market is the rise in mergers and acquisition (M&A) activity. With corporates sitting with low gearing levels, the cost of debt at record lows and organic growth difficult to come by, the ingredients are there for corporates to make valueenhancing acquisitions. Towards the end of the quarter, we saw Bidvest launch a bid to acquire 60% of Adcock Ingram shortly after bidding for another listed company, Amalgamated Appliances.

What SIM did last quarter?
The Fund has a very good start to the year, gaining 5,2% during the first quarter. The largest position in the Fund is now Sasol, with the stock gaining 12% on the back of a weaker rand oil price. At over 6% of the Fund, we still retain a large position in MTN as the stock offers an attractive forward dividend yield of 7%. We added to our position in Naspers, which increased by 5.5% during the quarter. Its investment in Chinese internet giant Tencent alone is worth close to 80% of its market cap at market prices. Hence the rump of Naspers, which includes the valuable Pay TV assets in Africa, is trading at attractive valuations. What added to, and detracted from, performance Many of our positions in our top 10 holdings added value this quarter. SAB Miller was up close to 25%, British American Tobacco advanced more than 18%, Old Mutual more than 15%, Bidvest 14% and Sasol more than 12%. Most of them have a rand hedge component and thus benefited from the rand weakening close to 10% against the US dollar during the quarter. On the downside, the diversified miners, Anglo American and BHP Billiton, came under renewed pressure, with both losing some 6% during the quarter. The market remains uncertain as to which policy direction the new Chinese leadership is likely to follow. The Central Government is implementing severe measures to cool the property market and this could temper China's insatiable demand for commodities.

SIM Strategy
After a very strong run in 2012 and during the first quarter, we believe the stock market is now trading above its fair intrinsic value. Despite the general retail index pulling back by more than 10% during the period, we remain wary of industrial stocks, which are trading on price-to-earnings ratios (PEs) of 20-30x historic earnings on peak margins. We find that globally exposed stocks are not highly rated by investors, e.g. the diversified miners, Naspers, Old Mutual, British American Tobacco and SAB, and are thus less likely to lead to capital losses if the hot money exits the JSE. We estimate that only 20% of the companies in the portfolio will be hindered by a weaker rand and, on a selected basis, have also been accumulating some blue-chip names in developed markets that are trading at valuation discounts to their equivalents on the JSE.