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 favouring 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 fell 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 had a solid start to the year, gaining more than 4% during the period. We took some profit in the largest position in the Fund MTN, after the stock had a strong run in the second half of 2012.We added to our position in Sasol after the counter moved sideways in 2012 despite a very supportive rand oil price. The stock rebounded by 12% in the first quarter and is now the second largest position in the Fund. Old Mutual PLC is the third largest holding in the Fund. It treaded water at the end of last year but rebounded strongly in the first quarter of the year on the back of strong results; a relatively large discount to Embedded Value (when the rest of the insurance sector is trading at a premium) and the potential for higher dividend payouts. What added to, and detracted from, performance The best performing stock in the portfolio was Mondi PLC, which gained more than 36% during the quarter. It is one of the largest integrated paper and packaging companies in the world and last year it acquired Nordenia, a consumer packaging business that has exposure to fast growing emerging markets. The Fund also benefitted from its positions in British American Tobacco (up 25%), Old Mutual (up 15%) and, as already mentioned, Sasol (up 12%). Picking up gems in the small cap sector can have massive payoffs, as demonstrated by our investment in Spur, which gained almost 29% during the quarter. On the downside, our largest holding, MTN, declined more than On the downside, our largest holding, MTN, declined more than 6% during the quarter on the back of disappointing results. We still believe there is value in the stock, with the potential for higher dividends. The diversified miners, BHP Billiton and Anglo American PLC, also disappointed, shedding 6% during the quarter. They were both impacted by concerns about a lackluster recovery in China due to a sharp slowdown in the property market and further disruption in the EU.

SIM strategy
The Fund reflects the best views of the equity unit trust portfolio managers at SIM and holds a maximum of 20 stocks. It is not benchmark cognizant. 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 whose valuations are below our estimate of their fair value. As value investors, our Fund consists of companies trading at a lower PE (11x) than the market and with a higher forward dividend yield (3.2%).