September was a good month for equities globally, the rally driven by increasing certainty about both the case for continued low global interest rates and reduced risk of a double-dip recession in the US, Europe and UK. In that regard, we could have a subdued "Goldilocks" scenario where we have low, but positive growth, but interest rates remaining low as well. Emerging markets, however, are on a steroid Goldilocks version: very strong growth fuelled by the drug of low developed market interest rates. SA bank shares participated in this rally being up about 8%, Nedbank with a gain of only 6% being the "laggard". The value in the Sanlam Global Financial Fund increased by 9.6% in US$, but the strong rand (+6% during the month versus the dollar, but 2% versus the euro and 3% versus the pound) took a lot of this gain away. The insurance sector also helped this month. Sanlam and Discovery gaining 12% and old Mutual 8%, but the real winners this month were PSG and Paladin (+22%) and Coronation (+16%). We made only two changes to the portfolio. We've started reducing our holding in Capitec (a great company with excellent growth prospects, but getting quite overvalued) and increased our holding in Firstrand (where we had a zero exposure for a long time). The South African market feels a bit "steamy" especially in the light of our still subdued economic growth outlook. However, our financial shares while being above fair value, are not overly expensive, but will continue to be pulled up by the gains in other emerging markets. We have difficulty in foreseeing what could derail this scenario, the possible villains of sudden currency weakness and / or unexpected large interest rate increases, seem very unlikely.

The portfolio did well in a difficult market. The main reason for doing well was our holdings in Capitec (+20%) and PSG (+4%) and to a lesser extent, Reinet and Coronation. The investment in the Sanlam Global Financial Fund also performed well (flat in US$) especially when measured against the Global Banks Index, which declined by 8%.

The portfolio has a low exposure to South African banks. This helped as on average, the large banks declined by 5% (Firstrand being worst with -7% and Standard Bank best with -3%).

We maintain our view that South African banks and insurers are too expensive (if measured on a medium term view) and that our offshore exposure and the local small-cap non-banking shares (African Bank, Sasfin, Coronation, Cadiz, Paladin, Zeder, Capitec and PSG) will not only do well relatively, but should continue to generate positive performance.

Against market consensus we kept saying that African Bank and Capitec have excellent managements and understand the industry in which they operate. Besides, they were undervalued and the current economic environment suited them. Hence their strong price moves are very pleasing!

Similarly, Investec was just too cheap, especially when one took managements' long track record into account. Again, investors in the portfolio were amply rewarded for our large holding in this low risk undervalued counter.

Unfortunately, we sold our Firstrand and RMB shares too early - but we weren't to know that they were working on the Momentum / Metlife transaction. While this is a very good transaction, it does not create any additional value in the medium term, and we feel that Firstrand is just too expensive in the medium term.

That generally now holds true for most financial companies in South Africa, and we expect the investment in the Sanlam Global Financial Fund to outperform over the next few months.

Except for Old Mutual and Investec, December was a good month for financials. Some of the decisions we made during the year paid off handsomely in the last quarter.

Standard Bank outperformed the other banks while it seems like the market suddenly woke up to Capitec's growth potential.

Our investment in the Sanlam Global Financial Fund also paid off, both in December and in fact the full year (this fund being up 95% in 2009 in US dollars).

The major change during the month was to increase our holding in the Sanlam Global Financial Fund to 14%. We believe that the SA market has been pushed too high and that valuations are only "fair".

While we do think an investment in SA banks will outperform cash or bonds, returns from selected overseas markets will, however, generate significantly higher returns. This is largely due to their higher margins as well as growth rates, but most importantly, their very attractive valuations.

The largest (and dominant) positions in the fund are Standard Bank (well positioned for growth in emerging markets), the already mentioned Sanlam Global Financial Fund and then Investec.

Investec remains undervalued. We believe the London listing is counting against them as its valuation is being compared to those of Barclays, Lloyds and Royal Bank of Scotland and not to their South African peers. This is despite their much higher earnings growth potential. We believe that the market will eventually realise its mistake and re-rate Investec.