Market Review
Developed world economic growth appears to have stalled after two years, with credit growth dipping and unemployment remaining stubbornly high. The anxiety regarding a potential Greek exit from the Euro-zone in June, and the potential spill over effects to Spain and Portugal, pushed US borrowing costs to March 1946 levels of around 1.6% and to all-time lows for Germany and the UK. Investors are in effect paying sovereigns (in real terms) to safeguard their money, with two-year German yields hitting zero per cent. Some calm in global markets was restored when Greece elected a new pro-Europe government and Spain finally received a €100bn bailout for its bank rescue fund. At the end of June, negotiations at the EU summit finally resulted in an agreement to support Spanish and Italian banks further. But bankers remained out of favour, with JP Morgan recording large credit derivatives losses and Barclays fined for manipulating the Libor rate. The JSE SWIX index delivered a total return of 1.7% this quarter. In dollar terms, the JSE was in line with global equities (-5%) and outperformed emerging market equities (-9%). Financials continued to lead the pack this quarter, delivering a 5% return. Financial and industrial stocks continue to perform well, up 3% and easily outperforming resources, which were down 4%. There was no place to hide within the resources universe, with the Platinum index down 12%, Sasol down 6% and Anglo American off almost 5% during the quarter as concerns of a global slowdown impacted global cyclical stocks more severely.

What SIM did last quarter?
The Top Choice Fund was down a disappointing 2.4% this quarter. The largest position in the fund is now Anglo American, which fell by close to 5% during the second quarter, after ratcheting up 18% at the beginning of the year. We upped our holding to more than 9% of the Fund because it is trading on an attractive forward PE of 7x and a price-to-book of 1.1x, a level last seen in the midst of the global financial crisis in 2008. The CRB commodity price index fell almost 8%, driven by the Brent oil price falling close to 19% and copper falling just less than 9%. We curtailed our investment in Sasol to 5.7% of the Fund as we found better value in Anglos. Nampak is one of our top 10 holdings, accounting for 4.9% of the fund. The stock underperformed the SWIX Index during the first quarter but outperformed the index by 7% during the second as the market became more defensive. Nampak delivered 8% earnings growth for its interim period and is expanding its footprint on the fast-growing African continent, which now contributes more than 15% of operating profits. It is one of the cheapest defensive stocks in our universe, on a forward dividend yield of 5%.

What added to - and detracted from - performance
The resource sector continued to suffer under severe pressure as concerns about Chinese growth prospects lingered, compounded by the inability of the European authorities to take decisive action regarding its debt problems. Most commodity stocks were sold off severely, with Sasol down 6% and Anglo American off 5%, impacting the fund the most. Naspers was up only 1% despite reporting results that were above expectations as it guided that earnings would not grow over the capital investment hump. Also stocks exposed to Europe were hit particular hard, with our large holding in Steinhoff international and Investec Plc impacted. On the positive side, the fund benefitted from the payment of the anticipated special dividend from Old Mutual, which delivered a total return of 14% in the quarter. The second largest position in the fund, MTN, was increased further to 9.3%. MTN had been adversely impacted by the allegations of fraud relating to its Iranian operations. The stock was up 4% in the quarter with the company reporting solid final results with adjusted earnings up over 40%. The stock trades on an attractive forward PE of 10x and a forward dividend yield of 7%. As risk was taken off by market participants, defensive stocks were once again in favour. Our 5.3% holding in British American Tobacco delivered a solid 9% total return in the past quarter. The stock is on a forward dividend yield of 4% in sterling, which is attractive.

SIM's Strategy
Valuations on the JSE are clearly diverging. We have identified a number of Blue Chip resource shares which have underperformed sharply over the past year, in which we hold sizeable positions in the fund. We also keep trimming our positions which have outperformed sharply and have reached our intrinsic value; and reinvest the capital into neglected areas of the market Valuation of stocks which are seen to be exposed to Europe or a potential global hard landing are increasingly being discounted. . At this point of the cycle, momentum seems to be driving the valuation of certain stocks - especially in the industrial space - to stratospheric levels. The 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 are made up of companies which are leaders in their respective sectors but where valuations are below our estimate of fair value.

Market Review
The JSE SWIX index delivered a total return of over 7% during the quarter. In dollar terms, the JSE lagged global equities (+12%) and emerging market equities (+14%). Financials led the pack this quarter with a 13% return; banks (16%) outperformed life insurers (14%) but the real star was the short term insurance sector with a 22% return. SA industrials continued to perform well (+10,5%) with construction (21%) and industrial transport (24%) leading the way. Resources stocks, down 3%, were heavily hit by negative news around Chinese growth and fears about contagion of the sovereign debt issue in Europe. Gold miners suffered a 15% slump while Forestry and Paper stocks were up close to 24%.

What SIM did last quarter?
The Top Choice fund was up 6.9% in the first quarter of the year. The largest position in the fund is now Old Mutual. We still see value in the stock, which trades at a discount of close to 25% to embedded value while the rest of the sector trades at only 10% discount. We upped our stake in MTN to over 8% of the Fund as the stock fell by almost 3% this quarter. We have been adding to our position into weakness with the stock trading on a forward PE of under 11x and a prospective dividend yield of over 6%. We reduced our stake in British American tobacco, which delivered a 49% return in 2011 and has been a great investment for the fund. However as the stock approached our fair value, we felt it prudent to lighten some of our position as the stock is now on an historic PE of 20x with the dividend yield at just under 4%. Steinhoff International is now part of our top 10. The stock was down 6% in 2011 but delivered a 20% return this quarter, with the potential of value unlock from the listing of its international business in the foreseeable future.

What added to - and detracted from - performance
On the positive side, Barloworld delivered close to 35% return this quarter, which is benefitting from record demand of yellow equipment from mining clients. The Fund has more than 5% holding in Barloworld. Naspers, which made up over 5.8% of the fund, delivered a 22% total return this quarter. Naspers' stake in Chinese internet gaming company Tencent has grown to such an extent that it now accounts for over 80% of the market cap of Naspers (if we translate the investment at the traded market value of Tencent in Hong Kong). While it is difficult to value such a technology business, where there is always a risk that a new invention will render the business model obsolete, we feel that even by valuing the investment very conservatively, there is a sufficient value in the Pay TV and other businesses of Naspers to make the counter very attractive. The resources sector came under severe pressure once again this quarter, ending the quarter down 3%. Diversified miners came under renewed pressure after China revised its economic growth forecast for 2012. This led to concerns that demand for commodities may weaken considerably, especially as it would appear that the EU is not yet out of the woods. Anglo American was especially hard hit, down 4% this quarter (after ratcheting up close to 18% at the beginning of the year), while BHP Billiton was up only 1% during the quarter. Base metals had a very strong start to the year but peaked in February before experiencing a pullback in March, ending the quarter up over 8%. Sasol was pullback in March, ending the quarter up over 8%. Sasol was down 4%, weighed down by disappointing operational results and the likely disposal of its Iranian operations at NAV in order to be allowed to continue expanding its shale gas footprint in the US.

SIM Strategy
Valuations on the JSE are clearly diverging. We have identified a number of blue-chip resource shares in which we hold sizeable positions and which have underperformed sharply over the past year. We also keep trimming our positions that outperform sharply and reach our intrinsic value, and reinvest the capital into neglected areas of the market. At this point of the cycle, momentum seems to be driving the valuation of certain stocks - especially in the industrial space - to stratospheric levels. We continue to avoid these overvalued pockets of the market, which are increasingly being held by foreign investors. We believe that 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 are trading at valuations that are below our estimate of fair value.

Market Review
2011 was a tough year for equity investors with the MSCI World Index down over 9% in US dollars. In SA, the JSE SWIX delivered a lackluster total return of 4% in 2011 in rands. While resource counters lost ground, defensive domestic Findi stocks helped buoy the local bourse somewhat. The JSE, which lost 17% in dollar terms, still handsomely outperformed the other BRIC countries (Brazil, Russia, India, China), which lost more than 20% in US dollar terms.

What SIM did last quarter?
The Top Choice Fund gained 10.4% during the final quarter of the year, which aggregates to a 4.9% performance for the year. The Fund's largest holding, Sasol, increased 15% on the back of a Brent oil price that closed the year above the $110/barrel mark on fears of supply disruptions in the Middle East. The Fund's second largest position in British American Tobacco delivered a solid 12% return during the final quarter (49% over the past year). 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. Many of our core investments in the Fund have benefitted from companies degearing and shrinking in size. What added to - and detracted from - performance The resource sector was the worst performing sector last year. Concerns about the possible onset of a global recession saw a massive sell off in the diversified miners like Anglo American (- 14%) and BHP Billiton (-11%). This can be explained by a 25% decline in the Copper price, one of the key industrial metals, from its February peaks. On the other hand, a strong oil price, driven by strong Asian demand and instability in oil producing countries, meant that Sasol (+16%) outpaced the Gold Index, up only 7% despite the rand gold price moving up 33%.

Old Mutual, the largest financial stock in the fund, soared 31% in the final quarter of the year on the news that it had disposed of its Nordic assets for a €2.1bn in cash, enabling it to pay down its offshore debt and declare a special dividend this year. During the past year, industrials, which gained 10% on a total return basis, were the best performing sector. Within the sector, defensive stocks were strong performers, with British American Tobacco increasing 56% in the wake of its inclusion in the Top 40 Index in December, which saw local investors treat it as a locally listed stock. The mid caps, which are dominated by domestic industrials, were the best performing stocks over the past year. Barloworld also ended the year on a strong note, delivering 24% during the final quarter. This company produced stellar results as a result of excellent performance from Caterpillar and has the potential to further cement its position in the yellow goods market after the acquisition of rival miner Bucyrus, which produces a complementary range of underground mining equipment.

SIM strategy
According to the Mayan calendar, 2012 will mark the end of the world as we know it. Some investors may not be as fatalistic but nonetheless believe that some sort of financial apocalypse will beset the world. There is no doubt, that the macroeconomic beset the world. There is no doubt, that the macroeconomic concerns that have arisen in 2011 will not be sorted out easily and quickly. However, what 2011 taught us is that panic selling should be exploited because you can pick up high quality assets at bargain basement prices. Panic and fear also tend to drive investors into safe haven assets that are unlikely to deliver reasonable real returns over the long term. Our strategy, therefore, is to continue to add undervalued and unloved quality assets to our portfolio in a disciplined manner. The fund, which reflects the best views of the equity unit trust portfolio managers at SIM, holds a maximum of twenty stocks. We believe that this portfolio provides the best of both worlds because it represents our strongest investment ideas, while providing adequate diversification. The largest holdings of the fund are companies that are leaders in their respective sectors but where valuations are below our estimate of fair value.