The 3rd quarter was a very exciting time for equity markets. The rally gained momentum as global confidence continued to improve and risk taking increased in a low interest rate environment. The wall of money waiting on the side climbed the wall of worry associated with the lack of delivery on earnings. International investors in the US suffering a weaker dollar quickly sought out opportunities in the various risky asset markets, including developed and emerging market equities. Net capital flows into the SA equity market surged past R60bn for the year to date and this drove the All Share higher by 18.6% ytd and also helped the Rand to its strongest level in around 18 months. Within our product range, the STANLIB Multi-Manager All Stars Equity Fund of Funds was a primary beneficiary of the surge in equity prices during the quarter. Over the past 12 months the Fund has produced a return of 10% and was ranked 31/76 in its sector, around 2% ahead of the peers.

The portfolio has been relatively defensively positioned over the past year or so and for the quarter this resulted in underperformance relative to the peer group. The manager names in the portfolio would all be well known to you and more recently you will notice that we have reintroduced Allan Gray into the portfolio. Not only has their portfolio significantly lagged the peer group year to date, but it is likely to be a beneficiary of the higher gold price. Rand strength is a headwind and a bout of risk aversion resulting in equity weakness and rand currency weakness would certainly vindicate their inclusion. The Investec Equity Fund failed our quantitative screens and our sell discipline was activated resulting in their removal during the quarter. These adjustments need to be seen in the context of more extensive changes to the overall portfolio, particularly the division of our Coronation exposure between the Coronation Top 20 Fund and the house view Coronation Equity Fund. Other changes associated with this move are planned for early in the 4th quarter and will be communicated post implementation.

Star performers during the quarter were Foord and Coronation Top 20. Coronation has been the stand out manager over the past year, benefiting from great stock picks and sector rotation, and their current alpha cycle is benefiting the Portfolio significantly.

During the 2nd quarter, global equity markets continued to rally from their oversold levels registered in March. A deluge of "lessworse" economic data together with mounting evidence that the US banking system had stabilised were the primary drivers of the market. Expecting the worst, research analysts had also significantly downgraded company earnings prospects, and the market rallied when results came out better than expected. There is a significant amount of money waiting on the sidelines which could further support markets, as we have seen in the early part of July. Sentiment flowed through to the SA Equity market where the ALSI was up 8.6% and the Rand strengthened 19.4% relative to the Dollar during the quarter. Pleasingly the Portfolio outperformed the ALSI during this period but, being more defensively, positioned marginally underperformed the peers. Over the past year the Portfolio has outperformed its peers by over 5% where it was ranked 18170.


There were no manager changes during the quarter however we did tweak the weightings to the STAR managers in an attempt to get more beta from the Portfolio as the market rose. This was particularly evident with the increased exposure to the Coronation Top 20 Fund and the Rainmaker portfolio and the reduced exposure to the lower beta Prudential Equity Fund. We also reduced the cash at the centre to have greater overall exposure to the rising equity market.


Being higher beta, Coronation and Foord were the best performing managers for the quarter whilst unsurprisingly Investec Equity struggled in a market that was not favourable to the resources sector and the momentum style. The overall combination of current managers in the Portfolio has served it well over time. Going forward, we may look to make some manager changes as the market environment adjusts, but the philosophy and process of the Portfolio will stay the same. Whilst we are pleased with the improvement in market sentiment and the upward trend in the market we feel it may have gone too far too fast and would expect a small pull back before moving higher again.

The year started on a poor note for equities as the US Treasury muddled through various alternative approaches to solving the global financial crisis. This was exacerbated by more bad news and negative data on the real economy unfolding, all of which were negative for corporate earnings and share valuations.

Sentiment shifted dramatically in March following the US Treasury announcing its program to purchase toxic assets off the bank balance sheets as well as its intention to implement more quantitative easing strategies. This was further supported by the positive trading update by Citibank, indicating that banks were starting to have stronger business activity in the first two months of the year. Consequently March was a far better month for equities. The South African All Share Index was up a significant 11% in March, but still ended the quarter down 4.2%. The All Stars Fund marginally outperformed the market but significantly outperformed peers by 6.5% resulting in an excellent ranking of 10/70.

The keys contributors to this strong relative performance over the past year were exposures to the Coronation Top 20 Fund and the Prudential Equity Fund, which demonstrates superior downside protection from June 2008 to February 2009. Over the quarter however, increased exposure to the Investec Equity Fund and our long held position in the Polaris Rainmaker yielded the best results. The overall combination of all these managers has served the Portfolio well over time. Should market conditions improve materially, we will look to the position the Portfolio for stronger markets, in which case some changes may be effected to the Portfolio, all of which would be in keeping to its philosophy and process.

In this regard it was interesting to note the shift in sentiment in March, which resulted in a bear market rally that could easily be perceived to be the bottom. While market timing may be near impossible to call we suspect that a nice base is forming that could make for exceptional returns over the next 2 to 3 years. Markets typically start to rise 6 to 9 months before economic data turns and as such those waiting for more confirmation of the turn may miss the boat. The important thing is to have a plan and to invest when others are fearful. It may feel uncomfortable for the next year or so but we believe that long term equity investors will be rewarded.

In spite of a slightly better December (+1.5%) the final quarter of 2008 produce a negative return (-9.2%) as the financial crisis rapidly converted into an economic and earnings crisis. Naturally there was a significant increase in volatility over this time with 15% swings up and down becoming common place. Defensive stocks and sectors did better in this environment with Gold, Healthcare, Food Producers, Food and Drug Retailers, Telecoms and Beverages producing positive returns. The popular economic sensitive themes of Construction, Industrial Metals, Oil and General Mining got hammered as the economic news deteriorated, investors de-risked and commodity prices (particularly oil) came under pressure. In the context of this the Fund performed extremely well on a relative basis, ranking 16/73 over the quarter. For the full year the Fund ranked just outside of the top quartile of its peers (19 / 71), outperforming the average by over 3%.

Much of the outperformance for the year can be attributed to manager selection, where of the managers we had for the full year both Coronation and Prudential ranked in the top 10 domestic equity funds, with Rainmaker and Foord also ranking in the top 3rd. As such Coronation (-9.9%), Prudential (-15.1%), Rainmaker (-19.4%) and Foord (-19.9%) all outperformed the peers (-22.9%) significantly, whilst the STANLIB Capital Growth Fund (-39.4%) was the only disappointment, but fortunately had been down weighted significantly during the year. Style positing also contribute to outperformance where we were overweight value versus growth type managers, which naturally performed better in a market that favoured defensive themes.

Going forward we believe that three important vectors will drive the performance of the equity markets in 2009: deflation versus inflation, economic sensitive themes versus interest rate sensitive themes and fiscal stimulus packages versus deteriorating economic fundamentals. We suspect that volatility will result as these opposing forces continuously re-assert themselves and would suggest that we may finish the year at the same point we started, with a lot of money being made and lost along the way. We remain slightly cautious, but suspect that a more bullish tone may emerge in the 2nd half of 2009.