Suffice to say that the month and quarter ending September 2011 were ruled by fearful investors fleeing to "safety" (forgetting that the US$ is only safe as long as the herd thinks it is). This had a big negative impact on illiquid shares and most currencies, but especially the emerging market currencies in September (even the extremely safe Norwegian krone depreciated 9% relative to the US$).

South African financials seem to have fared well, but when measured in US$, the JSE had a terrible month and quarter (the rand declined 14% and 20% during the month and quarter, respectively). The worst performers in the portfolio were Sasfin (which reported very disappointing results, but more importantly, decided to not maintain its dividend while having sufficient capital to do so), and Investec (to which the portfolio has only a 3% exposure at the moment). The share prices of Standard Bank (for long a favourite of international investors), and Old Mutual also keep disappointing. Old Mutual (like Investec) represents good value, but their share prices remain depressed due comparable shares like Barclays and Allianz being considerably cheaper.

The sell-down in global markets affected the banks in our investment in the Sanlam Global Financial Fund, but thanks to the weak rand, it contributed positively. Despite the short-term risk, we are of the opinion that collectively, global banks offer considerably better value than South African banks, and hence have increased our exposure to global financials as well as Discovery Life.

June continued May’s trend with most financial stocks down by between 2% and 7%, the banks (notably Firstrand and RMBH) being the worst.

The “best” shares this month were Sasfin (+1%) and Paladin (+2%). The investment in the Sanlam Global Financial Fund helped as it declined by only 1%.

Taking into account the very negative global environment, the portfolio performed well for the quarter mainly helped by the strong positive moves of PSG, Paladin and Capitec.
We made a few minor changes during the quarter. We continue to stick to our view that the immediate prospects for South African banks are poor and they remain overvalued. Hence, we prefer alternatives like the PSG Group, Sasfin and the exposure to global banks.
June 2011

Despite relatively poor results and a bleakish short-term outlook, the large South African banks re-rated this month, not because of an improving South African outlook, but because capital flowing back to emerging markets. This pushed up inter-alia India and Indonesia, but also the South African banks.

Nedbank and African Bank were the largest gainers, with Standard Bank and Absa also gaining about 5% during the month. Coronation had a good month, but Libhold and Discovery were weak. We used this weakness to initiate a position in Libhold, but also continued increasing our exposure to Firstrand (now at maximum) at the expense of Standard Bank. Our opinion is that the change in Standard Bank's strategy will take longer to implement than thought, while Firstrand took their medicine in 2009. The

Sanlam Global Financial Fund had a good month and contributed positively despite the stronger (3% vs the US$) rand.

The big detractor this month was the PSG Group (bear in mind that it gained 13% last month), and its subsidiaries Zeder and Paladin. These shares did well for the portfolio in 2010 and continued to do well operationally. We did reduce our exposure a bit during Q1, but feel the price falls are now overdone and will retain the position as it is.

The Nedgroup Investments Financials Fund did well in December and indeed for the full year. A significant part of the performance was driven by our large investments in Capitec, PSG and its subsidiaries Paladin and Zeder.
We only invested in Coronation during June, but that was early enough to capture most of the performance. With hindsight, we should not have limited our investment to 2.5%!
But Abil (African Bank) also did very well (and it paid a very good dividend) as did our investment in the Sanlam Global Financial Fund.
2011 will be a difficult year. We remain of the opinion that the large four banks are still not undervalued enough (another difficult year facing the South African economy). However, should the rand depreciate the investment in the Sanlam Global Financial Fund will generate a few extra percentage points in performance as will our holding in Old Mutual. On the other hand, should the rand remain strong, interest rates are unlikely to go up. This will help stimulate the economy, which in turn will be good for the South African banking shares.