With the rand being fairly stable, most of the Resource movements were driven by strong performances in commodities, with the best gains in Oil and bulk commodities. BHP Billiton is the most exposed to this situation and returned 27.5% for the quarter and is currently just less than 20% of the portfolio. Kumba (18.8%) and Sasol (25.3%) also benefited from these commodity rises.
Gold performed well, which helped lift AngloGold by 23.7% and Goldfields by 33.7%. The portfolio has quite a small exposure to Gold as we find the valuation of the sector excessive when compared with other commodity shares and rand hedge equivalents. The PE of the Gold sector is still above 20 on a 12-month basis. We believe that too much focus is given to the daily movements of the Gold price, when other commodities have performed much better over the last year.
In the non-Mining sector, decent returns were received from PPC (15.6%), Astral Foods (18.8%) and Iscor (20.4%).
We do not think that the recent weakening of the rand (from R/$6.00 to R/$6.50) is going to save the marginal producers. By way of illustration, during the quarter consensus earnings estimates continued to decline for the Gold sector, which is one of the sectors where margins are under pressure from the rand. Thus, the weakening has done nothing to arrest the decline of the profitability of the Gold sector, especially bearing in mind that the 1st of July saw annual wage increases of some 7%. However, we continue to see upgrades in the companies, which have the bulk of their operating assets outside of South Africa. Surprisingly, the stocks with the best dividend yields and cheapest valuations have the highest quality of operations, assets and management. We believe that investors should pay a discount for lower quality assets.
Some non-Resource equities continue to benefit from a strong domestic economy. Although we have reduced our holdings in the non-Mining sector we will remain in the stocks that benefit from the increased volumes in the South African economy, such as PPC and Astral.

The rand weakening by 5.8%, which created a rebound in all the Mining stocks and more specifically the marginal producers such as the Gold companies and AngloPlatinum. Goldfields returned 25.1% for the month and AngloPlatinum 24.8%. Unfortunately, we do not see these gains being sustained, as the rand needs to weaken to beyond R7.00 to the dollar over the next six months for the earnings downgrades in the Gold sector to stop. We prefer to gain exposure to the precious metal complex via Impala. Our two biggest holdings also performed well, with Anlgo/American returning 14.1% and BHP Billiton 9.5%. BHP released its full results for the year to June 2004 and, if we were to annualize the last six months earnings, the stock trades on a PE of 12. Given that Oil and Steam Coal prices are higher, together with organic growth's announced expansions, we continue to think that BHP is the pick of the resource sector.
In the Non-Resource sector Ispat Iscor achieved good returns with 24.2%, and has signaled a large special dividend towards the end of the year. This, in conjunction with strong domestic demand and high global steel prices, means that the stock remains in value territory. The Food Producers also delivered good returns (with Astral at 8.8% and Oceana at 10.6%), and is one of the highest dividend yielding sectors on the JSE.

During June, the rand strengthened by 5% negatively affected the earnings prospects, and hence the performance of, the marginal rand-hedge producers. The fund's exposure to these counters has been substantially adjusted, by selling out JCI Debentures, Harmony, Mvelaphanda and African Rainbow. All four are dominated by South African gold operations, which are struggling in the strong rand, and high labour cost environment. The South African operation will also have to contend with an approximate 7% wage increase in July, which will add further strain to their cash flows. The price/earnings forecast of Harmony is near 20, which the fund manager's believe is expensive given the forecast risk. The other major sale has been out of Anglo American. The fund manager's prefer BHP Biliton, because of its low exposure to the strength of the South African rand and its larger exposure to Oil and bulk commodities (such as Iron ore and Coal).
The majority of purchases have been in the non-mining sector, notably Iscor, PPC Group 5 and Astral foods. All four of these stocks have price/earnings lower than 10, high dividend yields and, with the exception of PPC, will still benefit if the rand weakens.
The fund manager's will look to further increase the dividend yield of the portfolio; improve the quality by looking for higher margin operations, while continuing to keep exposure to the strong global commodity environment.

The rand again dominated headlines, displaying enormous volatility. Although the local currency strengthened by a further 4,9% against the US dollar, this was more than offset by rising dollar commodity prices - resulting in the resources index rising by 11%. Within resources, copper, steel, mining houses, diamonds and speciality chemicals performed best, while platinum, gold and paper lagged. Performance came through in December, characterised by rand weakness and rising dollar commodity prices.

Ashanti Goldfields, Billiton, AECI, Omnia and Transhex were the star performers. However, these contributors were to some extent offset by negative contributions from Gold Fields, Northam, Illovo and Mvela.

New holdings include Palamin, Sappi and Sasol. Palamin offers exposure to the buoyant global copper market, while Sappi and Sasol have underperformed substantially over the past year, thereby providing the opportunity to increase exposure. Exposure to Anglo American and Billiton were increased, which we consider to be more defensive - given their broader commodity focus and lower relative exposure to the rand.

Gold share exposure was dramatically reduced through sales of Gold Fields, Anglogold and Ashanti. Gold share prices continued to shrug off the impact of the much stronger rand on cash flows, earnings and valuations, which is pushing them into increasingly expensive territory. The fund manager's took advantage of the share price strength that followed Anglogold's premium offer to buy out the minorities of Ashanti, as an opportunity to lock in profits. Ashanti delivered excellent returns and had significantly outperformed other gold stocks since the deal was announced. Harmony is the fund manager's preferred gold stock. The fund also has indirect exposure to Harmony and Gold Fields through its holdings in Avmin and Mvela. Both counters are trading at discounts to their underlying value.

The global macroeconomic environment continued improving, resulting in strong upward trends in the dollar prices of most commodities. While the recent rand strength will continue to constrain margins in the short term, rising commodity prices driven by the improving macro environment should begin to overshadow the effect of the currency.

The fund manager's expect the rand to impact most negatively on the earnings of the single product commodity companies with large rand-denominated cost bases. As such, the strategy of the fund is to be more defensively positioned with large holdings in diamonds, speciality chemicals and diversified mining houses. Selected empowerment companies (Transhex, Mvela and Avmin) also form a core part of the strategy, as they have the ability to grow their net asset value substantially through deal flow.