The fallout in sub-prime has ended up delivering a very positive performance for the commodity stocks, as firstly most commodity consuming countries have no exposure to credit problems in the developed world. In addition, the Organisation for Economic Cooperation & Development response to lower interest rates and increased liquidity is a big positive for developing countries, and commodities. Gold has also been a big beneficiary of the cut in interest rates and this is reflected in the record long positions on Comex gold as well as in many gold ETF's.

This very strong performance in resources over the quarter has come about without many material upgrades in commodities, with the exception of oil and iron ore. The returns have been generated more by investors' increasing confidence in the long-term prospects of commodities. Compared to a year ago, where the consensus view was that commodity prices would fall sharply, this is being replaced with the theory that any falls will be more muted, and that the long-term growth of China will keep prices high. This has made investing in these companies riskier.

The fund continues to prefer exposure to the large geographically diversified mining companies.

Graham Mason & Gary Quinn
Prudential Portfolio Managers

Within resources, the only positives came from industries associated with bulk commodities, namely Mittal and Kumba. Grindrod, which has exposure via freight rates also performed well. This performance in bulk commodities and freight rates does highlight the problem in terms of the logistic bottleneck that exists in transporting commodities from miner to customer. This bottleneck is another supply disruption that has been a driver of higher prices, in addition to project delays and a rising cost curve.

Another feature of April has been the strong performance of the junior mining companies, notably the Platinum counters. These stocks are very much in speculative mode with their valuations on a per PGM oz trading above Amplats. This makes no sense given that they have yet to reach full production levels. Buyers of these stocks are clearly hoping that a "new deal", merger or news flow will support the momentum in these stocks.

The New Year for 2007 started very different from 2006. Commodity prices are falling and in most cases are below consensus views.

Thus the degree of safety that investors had in resource stocks at the beginning of 2006 is not available for 2007. It does appear as if the commodity bull market peaked in first quarter of 2006. Given the current high earnings base, growing cost pressures as well as the prospect for the first time in many years that commodity prices could be flat to lower willmean much more muted returns from the sector.

Fortunately there are stocks where unique situations do appear such as Mittal (high dividend), Kumba (corporate take out) and Northam (large expansion accruing from recent Mvela deal).

Through the year the fund will have to identify these value opportunities.