Market Review

Global markets shrugged off fears of a double-dip recession in the past quarter. Emerging market equities remained the star performers, rising more than 18% in dollar terms over the past quarter. The Dow climbed more than 10% during the period, spurred by the strongest September for US equities since 1939. The JSE advanced some 13% (24% in dollars) during the quarter and the rand strengthened by more than 9% against the dollar. The best performing local stock market sectors were Consumer Discretionary (+30%) and IT (+24%). The worst performing sector remained the resource sector, with gold declining 1% during the quarter.

What SIM did

The Top Choice Fund gained 12% during the quarter. Anglo American remains our largest holding but we have increased our position in Sasol to almost 6% on a higher than $80 oil price and a more progressive dividend policy. We again upped our British American Tobacco holding; now our second largest holding (9% of fund). Our large financial exposure is now more evenly spread between ABSA, Old Mutual, Metropolitan and Standard Bank. These quality counters are expected to deliver better operating performance over the next year. We reduced our Pick n Pay holding from 6% to 4.5% as the share approached our fair value.

What added to, detracted from, performance

Old Mutual (6% holding) was one of our best performers delivering a 30% return on a combination of excellent operating performance; an agreement to sell the problematic loss-making US life business; the forthcoming listing of their US asset management operations and the HSBC bid for a 70% stake in Nedbank. Our position in Mondi also paid off handsomely, with the share price up more than 26% during the quarter. Finally, MTN (6.7% holding) delivered a 25% return on solid 21% interim earnings growth and its first ever interim dividend. On the downside, Pick n Pay was flat after performing well the previous quarter. Anglo American also delivered a disappointing 5% return on nationalisation rumours.

SIM Strategy

The Fund holds twenty stocks at most and offers concentrated exposure to our best ideas while still providing adequate diversification. The Fund's largest holdings are companies that are leaders in their respective sectors but are priced below our estimate of fair value. We hold over 9% in Anglo American, which owns some of the best mining properties around the world, including a controlling stake in Anglo Platinum. We also have a large holding in British American Tobacco, which is trading at a forward PE of 11x and a very attractive dividend yield of over 5%. The Fund is most heavily exposed to financial and industrial stocks where we feel that there is more upside to intrinsic value. After a strong quarter, it appears the local market is being driven up by over-exuberance after the recent M&A activity. As value investors, we prefer to buy stocks that trade at attractive valuations rather than over pay for businesses that may or may not be acquisition targets.

Market Review
As the governments of highly-indebted developed nations outlined fiscal austerity measures to reduce their budget deficits, there were concerns about a sovereign debt default. Stock markets in the developed economies were hard hit, falling 12.5% in dollars during the quarter, with European markets losing close to 15%. Emerging markets declined a milder 8%. In South Africa, the JSE fell 9% during the quarter, surrendering its modest gains racked up in the previous quarter.

Mining shares were the worst performers during the quarter, with the news that Australia was introducing a mining tax on super profits weighing heavily on diversified miners, especially BHP Billiton. Defensive sectors were the best performers during the quarter, with gold miners, food retailers and telcos leading the way.

What SIM did
The SIM Top Choice Fund lost more than 6% after putting in a solid performance the previous quarter. Anglo American and ABSA remain the largest holdings in the fund and we increased our exposure to British American Tobacco - an undervalued, defensive share that also provides some protection against the weaker currency.

The fund benefited from its more than 8% holding in ABSA, with the group experiencing a solid start to the year as reflected in its first quarter earnings growth of 15%. Despite limited growth in their volumes, banks should benefit from the unwinding of impairments this year. We sold our stake in RMB Holdings after the stock rerated post the announced restructuring of its banking and insurance operations. We have therefore increased our exposure to Metropolitan given its planned merger with Momentum. We also sold our stake in Imperial as the stock approached fair value.

During the quarter we upped our exposure to Nampak, which now has new management and is being restructured. Thus we expect the company to deliver better returns in future.

What added to - and detracted from - performance
Pick 'n Pay was the main contributor to the Fund's performance during the quarter as defensive shares returned to favour. We view the disposal of its Australian operations as positive, with proceeds potentially yielding higher returns by being reinvested in a better distribution system locally. Nampak also delivered a solid 7% return during the quarter as management restructured the business.

On the negative side, with investors still concerned about its exposure to Spain and Portugal, Barloworld declined 17%. More recently, the news that it had disposed of its AVIS Scandinavia business was seen as positive as the cash will allow the group to strengthen its balance sheet by reducing debt. Anglo American Plc - our largest holding at over 9% of the fund - came under the same pressure (losing 16% during the quarter) as other diversified miners even though it has a much smaller exposure to Australia where a hefty mining tax was initially proposed. Sasol also came under pressure as the oil price declined by some 10%. But the company's third quarter trading update guided to lower costs and higher volumes.

SIM Strategy
This fund reflects the best views of the equity unit trust portfolio managers at SIM. The fund holds a maximum of twenty stocks and provides the best of both worlds: the aggressive implementation of our investment ideas along with diversification.

After the recent pullback in equity markets, pockets of value have started to emerge once again and the fund is positioned to benefit from a rebound in equity markets.

Market Review

Globally, investors initially climbed a wall of worry during the first quarter but this was followed by a relief rally after seeming resolution of the Greek sovereign credit issue. Towards the end of quarter, a raft of good economic releases, especially from US, such as the non-manufacturing ISM and the best increase in nonfarm payrolls in two years, served to improve sentiment that the global recovery remained on track. This fuelled further advances in global equity markets, with emerging markets up 8% in March. However, developed markets have outperformed emerging markets so far this year.

Within the emerging market universe, investors became more comfortable that monetary tightening in China would not hurt its double-digit growth rate, while Australia led the way within the OECD having hiked rates five times to 4.25%. These developments are a clear sign that economies aligned to the BRIC economies, like China, are pulling out of recession faster. Risk appetite continued to improve during the quarter, with volatility declining to the lowest level since June 2007.

In SA, equities rebounded strongly in March to end the quarter up 4%, with the rand the strongest performing currency in the world that month. SA unexpectedly cut interest rates by 50 basis points in March to lows last seen in 1981 after remaining on hold at its last four meetings. SA growth also expanded at a rapid pace of over 3% in the fourth quarter of last year, buoying 2010 growth expectations.

Strong foreign net inflows in SA equities contributed to the rally in the JSE during the quarter. Retail and financial shares led the charge (+10%) as consumer spending rose for the first time since mid-2008 and expenditure on durables was buoyed by lower interest rates. On the downside, the Telecoms sector continued to lag the rest of the market as regulatory and competition concerns weighed on these shares. Gold shares (-8%) were knocked by a rally in the dollar, which improved from $1.43 to $1.35 against the Euro during the quarter.

Increasing signs of corporate action on the JSE served as confirmation that confidence is returning to the corporate sector. These included the listing of Optimum Coal the proposed merger of Momentum and Metropolitan. Resource shares were initially in the doldrums over concerns that Chinese growth may slow on the back of monetary tightening. Arcelor Mittal declined on its failure to apply for the conversion of its rights to the Sishen iron ore mine, fuelling some uncertainty with regards to potential changes in the regulatory framework for mining companies. However, in March there was a strong rebound in commodity prices, with the oil price gaining over 5% as OPEC revised its demand forecasts (74% more year-on-year) and the replacement of the annual benchmark system for pricing iron ore by a spot pricing system.

What SIM did

The fund gained more than 5.5% after also performing well the previous quarter. The fund has delivered some 57% performance off its lowest a year ago. Anglo American remains our largest holding, with ABSA now our second largest holding. We exited our position in Liberty International as we may not be able to hold both of the shares following the proposed split in the company. We also introduced Metropolitan to the portfolio during the quarter.

What detracted from and added to performance

Mondi was the main contributor to performance during the quarter, with strong results driving the share up 28% during the quarter. Nampak also delivered a solid 20% return for the period.

On the negative side, MTN declined by 5% despite posting decent interim results. The negative quarter was a result of the prospect of increased competition on the continent after Bharti purchased Zain's African assets and regulatory concerns. JD Group also disappointed during the quarter, declining 11% after the news that their financial director was resigning from the group .

SIM Strategy

This fund reflects the best views of the equity unit trust portfolio managers at SIM. The fund holds a maximum of twenty stocks. We believe that this portfolio provides the best of both worlds in terms of representing our investment ideas aggressively, while providing adequate diversification. The largest holdings of the fund comprise companies that are leaders in their respective sectors but valuations are below our estimate of fair value. We hold close to 10% in Anglo American, which owns some of the best mining properties around the world, including a controlling stake in Anglo Platinum. We also have a large holding in ABSA, which is the leading retail bank in SA and the one most likely to benefit from a consumer recovery. Following its strong run in 2009, the resource sector is trading above fair value, while pockets of value still exist within the financial and industrial universe. However, it has become difficult to find undervalued stocks and investors should expect more modest returns from equities in the future.

Market Review
2009 will be remembered as a year policy makers healed the global economy and the Great Recession of 2008-09 ended. The 27% global equity rally was led by a record 75% gain in emerging market equities. BRIC countries were the star performers, with Brazil up 121%, Russia 99%, India 98% and China 55%. The JSE All Share Index was up 29% for the year, but in dollar terms this translated in more than 53% performance - well ahead of most developed markets. While the credit crunch induced a collapse in equity markets in 2008 that was the largest on record since the Great Depression, the subsequent swift rebound in markets was extraordinary both in terms of speed and magnitude. The appetite for risk was stimulated by the start of a global recovery and massive policy stimulus globally. Valuations have benefited from a rerating in anticipation of a recovery in earnings. A good indicator of the improvement in risk appetite is the decline in emerging market bond spreads from highs of over 700 basis points (bps) to below 300bps. Even where countries have started hiking rates - as in Australia, Norway and Israel - the market has taken it in its stride, which is encouraging since many believe that any removal in policy stimulus would have been negative for the markets. The SA economy turned the corner in the third quarter, with positive growth following three negative quarters. However, household consumption and private sector capital expenditure have remained under pressure, with private sector credit demand turning negative and slumping to its lowest growth rate in 43 years. Despite a countercyclical fiscal stance that is projected to result in a budget deficit of 7,6% of GDP and monetary policy stimulus of 500 bps in interest rate declines, the economy continues to shed jobs at an alarming rate. That said, foreigners returned to the JSE en masse last year, buying a net $9bn of our equities. This buying spree was accompanied by a 27% strengthening in the rand versus the US dollar over the past year. The JSE mirrored the global cyclical recovery theme, with resources leading the charge last year followed by industrial and financial stocks. The resource stocks were driven up by a strong rebound in commodity prices, which almost doubled last year . The copper price, up more than 150%, was spurred higher by Chinese infrastructure spend, with floor space under construction growing at over 50% a year. The oil price also increased by close to 90% to end the year close to the $80/ barrel mark, while gold was the laggard, only increasing by 26%, with the strong currency offsetting any benefits the local producers may have reaped. Given the dominant global recovery theme, stocks with an international footprint also experienced the strongest rebound during the year. Kumba Iron Ore and Lonmin were some of the strongest performing resource shares advancing by over 80%. In the financial space, Old Mutual was one of the top performers, advancing 73%. And finally, within the industrial space Naspers +80% and Steinhoff + 72% were among the best performers. On the downside, gold stocks and Sasol lagged, while MTN and Telkom were plagued by regulatory issues. Banks were also relatively subdued, up only 20%, as record bad debts impacted their financial performance.

What SIM did last Quarter
The fund was up about 5% during the quarter, lagging the strong recovery in the previous two quarters. Anglo American remains our largest holding, with Pick 'n Pay now our second largest holding. We introduced AECI into the portfolio,as one of the cheaper resource plays in our investment universe. We also upped our exposure to ABSA, as we see the potential for a strong earnings recovery in 2010.

What detracted from and added to performance
Anglo American was the main contributor to performance in the last quarter, advancing by some 34%. The stock continues to benefit from a strong rebound in base metals and platinum group metal prices and the group has also bolstered its balance sheet. On the negative side, our large exposure to MTN detracted from performance as the end of protracted merger talks with Bharti Airtel of India was followed by news of the regulation of mobile termination rates in SA and perhaps Nigeria.

SIM Strategy
This fund reflects the best views of the SIM equity unit trust portfolio managers and holds a maximum of 20 stocks. We believe this portfolio provides the best of both worlds in terms of representing our investment ideas aggressively, while providing adequate diversification. The fund's largest holdings are companies that are leaders in their respective sectors but where valuation may have been impaired by shortterm factors. We hold close to 10% in Anglo American, which owns some of the best mining properties around the world, including a controlling stake in Anglo Platinum. We have a large holding in Pick 'n Pay, which is one of the leading food retailers in SA and had the opportunity to unlock efficiencies in the business by centralising its distribution centres. We also upped our exposure to ABSA, as we believe that banking stocks, having underperformed in 2009, are likely to post strong earnings growth as their retail bad debts unwind in 2010.