Most resources stocks experienced losses over the quarter. The Nedgroup Investments Mining and Resources loss was buffered by the relatively smaller exposure to the gold and platinum sectors that suffered the biggest losses. The relatively large weighting towards Sappi and Mondi also benefited the Fund over the quarter. The biggest detractor to the Fund's return was the large exposure to BHP Billiton, with this stock losing 7.0% for the period.

Following the strong performance for the JSE resources sector in the year to July, the third quarter performance was weak. Despite the resolution of the extended platinum sector strike, the broader sector was buffeted by weak commodity prices. A theme of US dollar strength does appear to be in full swing, and this is a natural headwind to dollar denominated commodity prices, only partially offset by a weaker rand. Iron ore prices retreated to multi-year lows as the rate of growth of supply continues to rise relative to demand. Whilst improving capital discipline remains a positive underpin, weaker commodity prices have undermined the ability to translate declining capex into improving shareholder returns; in particular the market was disappointed by a lack of share buybacks from BHP Billiton at its 2014 year-end results. Corporate activity is increasing as a theme, indicative of inflection points in the cycle. In the pipeline are BHP Billiton's planned listing of its non-core assets and Anglo American Platinum selling or unbundling several high cost or non-core assets. Other indicated deals (that are currently not going ahead) were Glencore's stated interest in Rio Tinto, and AngloGold's proposed partial unbundling of its non-South African assets.

Looking ahead, we expect to see continued headwinds from declining earnings expectations. Cuts to commodity price forecasts across gold, platinum group metals, iron ore and oil, are reflecting both marking-to-market of current spot commodity prices and downgrades to global economic growth. Balanced against this is the weakness already seen in the share prices which have to some extent pre-empted the negative earnings revisions. The conflicting messages make for a volatile environment, exacerbated by the enhanced potential for corporate action. We continue to favour non-mining resources (paper/packaging and oil) over mining, and a balance of low operating gearing and low financial gearing (defensive position). During the quarter we added to positions in Royal Bafokeng Platinum, Merafe Resources, Gold Fields, Exxaro Resources, Glencore, Anglo American plc and Northam, and reduced positions in Sibanye Gold, BHP Billiton, Anglo American Platinum Ltd, African Rainbow Minerals, New Gold ETF, Raubex Group and Sasol.

The biggest contributors to the Fund's return over the quarter were Sasol, BHP Billiton and Sibanye Gold - contributing in excess of 2.8% for the period. The worst performing stocks over the past quarter were Anglo American, Lonmin and African Rainbow Minerals. These stocks detracted more than 1.5% of the Fund's return over the period. From a South African resources perspective, the second quarter of 2014 was dominated by the 5-month platinum sector strike, the longest in South African history. Winners are hard to find.

The cost on labour for a relatively small additional increment to pay comes in the impact on financial and physical health. The platinum price may be expected to be a beneficiary given the lost production; and while up 8% year-to-date, it ended the quarter still 3% and 14% below 1- and 2-year highs, with rising estimates of the looseness of supply and demand and amount of inventory available. Of concern is the likely focusing of consumers to thrift, substitute and recycle to offset the unreliability of supply from South Africa - this is seen particularly in Rhodium, the most South African dependent of the major platinum group metals - down 90% from 2008 highs.

From the companies perspective the race is now on to ramp up to normal production levels as quickly as possible, however the question is what is normal in terms of labour relations and health, as well as balance sheet damage. It is likely that we will see downgrades to production for the big three platinum producers into 2015 and beyond, as high cost production is now uneconomic and replacement projects unaffordable.

The impact on share prices from the resolution of the strike is telling. Lonmin was most impacted by the strike, due to its concentrated footprint in the Rustenburg region, and expected to be the biggest beneficiary of resolution but was languishing within a few percent of its year-to-date low at quarter end. The platinum equities continue to discount a materially higher metal price (or weaker rand). In the near-term ramp-up efficiency and stemming of cash burn is paramount; in the longer-term diversification away from labour intensive deep mining is likely to be entrenched as an investment theme. We remain underweight the platinum sector, and during the past quarter have reduced exposure to strike afflicted Impala Platinum, Anglo American Platinum and Lonmin; adding exposure to Northam Platinum as well as the platinum and palladium ETFs.

Spot commodity prices threaten downside risk to 2015 earnings expectations across the general mining as well as precious metals sectors, and we view this as a headwind to equity performance. The overweight commodity positions in the Fund remain oil and paper/packaging due to earnings resilience, and underweight gold, platinum and iron ore. Outside of the platinum sector, we reduced exposure to iron ore (trimming African Rainbow and Kumba Iron Ore) and added to Glencore and Omnia Holdings.

The Fund’s larger holdings were the biggest contributors to performance over the quarter, with the top returns coming from Anglo American plc, Anglo American Platinum Ltd, Sasol Ltd and Sappi, gaining in excess of 13%. The weakest performance came from some of the smaller holdings - Arcelormittal SA, Kumba Iron Ore, Sibanye Gold and Gold Fields - that suffered losses in excess of 11%.

Within South African resource stocks the first quarter of 2014 has been characterised by outperformance from 2013’s laggards and underperformance from 2013’s leaders. The gold sector was the noticeable beneficiary while some of the defensive stalwarts of 2013 (for example Mondi, BHP Billiton) lagged relative to their more operationally geared peers.

While the Fund delivered a healthy return for the three months, this belies the tough environment for resource companies. Domestically, the platinum industry has been impacted by major industrial action. At the global level, we saw economic growth concerns emerge in the US and China, geopolitical risk related to Ukraine and financial systemic risk related to Chinese shadow banking. While weighing on industrial commodities, these macro concerns enhanced the safe-haven case for gold. Despite these risks, gold equities were not the only 2013 laggards that outperformed in the first quarter, thanks to the rand continuing its sequence of eight consecutive weakening quarters and weakening on average another 5% over the quarter. This rand tailwind may be showing signs of fatigue.

During the quarter we did some tactical intra-subsector switching, between Anglogold Ashanti and Goldfields, from Impala Platinum to Anglo American, from Exxaro Resources to Kumba Iron Ore and we created a small position in Sibanye Gold from Lonmin – and electing to increase our gold equity exposure slightly from platinum sector exposure. Strategically though, we remain resolute in preferring defensive equity exposure – higher margin opportunities, low or declining debt, visible cash flow and dividend/shareholder return focus. Sasol fits these criteria, as does BHP Billiton.

The Nedgroup Investments Mining & Resource Fund's larger holdings performed very well over the last quarter of the year, with the top performance coming from Sappi, Sasol and BHP Billiton. These stocks enjoyed gains in excess of 10%. The weaker performances came from the smaller positions in the Fund within the platinum, gold and construction sector.

Following a strong third quarter for the JSE resources sector, the fourth quarter saw a return to volatile range trading. Furthermore, we have noted increasing correlation between the constituents, somewhat undermining the ability to differentiate the Fund's performance, but nevertheless performing favourably relative to the 2.0% return of the JSE Resources Index.

Our interpretation of this phenomenon is the increasing concentration of quality stocks in the benchmark, as the so-called value stocks have continued to underperform. This represents one of our dilemmas with regard to portfolio construction going forward; specifically, we have to consider for how long the high margin peak cycle stocks can continue to outperform against the trough cycle laggards. While stocks like Sasol, BHP Billiton and Mondi continue to hold near relative and absolute highs, the laggards like Sappi and Arcelormittal have appreciated off their lows during the second half of 2013, and are perhaps early signals that the inflection is underway.

While the inflection from peak to trough cycle opportunities will inevitably be unpredictable, we continue to rate cash flow visibility highly in our portfolio construction. The gold and platinum sectors are weak dividend payers in general and balance sheets have deteriorated so we maintain an underweight position. Recently we did increase our position in the NewPlat platinum Exchange Traded Fund. It has substantially underperformed the platinum equities since its launch in the first half of 2013 and at current levels offers a better investment given some tentative signs of improving end-user demand, together with the weakening rand. The recovery in share prices has more specific risk from the still fragile labour and operating environment and re-rated valuations.

Besides the platinum ETF, another substantial new listing in 2013 on the JSE was Glencore, which listed in November. It is a globally diversified mining and commodity trading company offering some differentiation from its iron ore dominated general mining peers, as well as exposure to a sophisticated third party logistics and marketing network. It is currently relatively highly geared operationally and financially, with low free cash flow yield. On the balance of near-term risk and medium-term opportunities we have taken a small position in the Fund.

Anglo American continues as a resource sector laggard. In December the company presented a turn-around strategy, reflecting high quality but poorly managed assets. Like many of the recovery opportunities in the sector, cash flow visibility is poor on a 12-month view so we remain reticent to add to our position despite share price weakness.

The Nedgroup Investments Mining & Resource Fund's holdings performed exceptionally well over the quarter, with the top performance coming from the gold stock, Pan African Resources, which returned 41.6%. The platinum holdings (Impala Platinum, Anglo American Platinum and Lonmin) as well as the forestry holdings (Mondi Ltd and Mondi plc) performed exceptionally well. These stocks enjoyed gains in excess of 30%. The weakest performance came from Sappi (3.6%) and some of the smaller holdings in the fund (Trencor and Newplat ETF) which delivered negative returns.

To put some context on the strong third quarter performance: we have observed four such rallies (20% or more) in the JSE resource sector over the past three years, in a declining trend. The investment concept of a "wall of worry" may provide some insight. Investopedia explains "wall of worry" as: The financial markets' periodic tendency to surmount a host of negative factors and keep ascending; referring to the stock market's resilience when running into a temporary stumbling block. While a "wall of worry" may sometimes consist of a single economic, political or geopolitical issue significant enough to affect consumer and investor sentiment, it more commonly comprises concerns on numerous fronts. The markets' ability to climb a wall of worry reflects investor confidence that these issues will be resolved at some point. However, market direction once the wall of worry has been surmounted is impossible to ascertain, and depends on the stage of the economic cycle at which it occurs.

This concept rings true in the microcosm of the current South African resource sector strength, with third quarter "worries" transgressing geo-political (Middle East, as well as South African specific labour relations fragility), macro-economic (Chinese growth, US fiscal cliff) and financial (US monetary stimulus and emerging markets debt and currencies) issues. All of which the JSE resource sector has apparently looked through in its Q3 performance.

While the commodity market, generally speaking, appears remarkably benign currently, we view the case for South African resource equities to be one of relative value (relative to the rest of the JSE, and relative to historic norms), rather than one of imminent earnings recovery. The earnings recovery theme is further muddied by upgrade risk appearing greater in the top-of-the-cycle commodities (particularly those with exposure to iron ore and oil) vs downgrade risk to stocks exposed to the cyclically weak commodities (e.g. platinum group metals).

Tactically, this is keeping us invested in the longevity of the top of the cycle opportunities (e.g. BHP-Billiton and Sasol), and cautious against switching into the cycle laggards - i.e. a bias towards near-term value metrics (PE, DY, cash flow) and away from long-term normalised value metrics and recovery themes.

Nevertheless, the strong Q3 performance is a reminder that when the outlook appears poor, as it did earlier in the year, opportunities emerge. While we prefer a defensive bias in the Fund positioning, we remain vigilant to commodity cyclical opportunities, consistent with our investor mandate. Thus we seek to balance downside protection with upside exposure. September 2013