For the second month in a row, the Nedgroup Investments Financials Fund performed relatively well during the month thanks to the positive performance of the investment in the Sanlam Global Financial Fund, which benefitted from the rerating of global banks as well as the weaker rand.

For the quarter ended 30 September, it was our holdings in Old Mutual (+19%), PSG (+15%), and Coronation (+10%) that made the biggest contributions to the strong performance - the Sanlam Global Financial Fund's +7% also being very satisfactory.

The banks were generally down, due to the deteriorating outlook for growth, Standard Bank being the worst (-4%) and African Bank declining 9%, most probably on fears of bad debts in their mining related clients.

However, both African Bank and Sasfin results were satisfactory in a difficult environment, Sasfin's in fact were excellent and we were rewarded with a strong price gain afterwards.

We made very few changes to the Fund during the quarter, adding a bit to African Bank, Investec and Standard Bank on days of price weakness and reducing our large PSG and Coronation exposure.

The Fund remains well positioned to benefit from further weakening of the rand because of its exposure to the Sanlam Global Financial Fund and its investments in Investec and Old Mutual

The big events during June were the Absa profit warning (the Nedgroup Investments Financials Fund has no exposure to Absa) and the strong rebound in international markets (where the Fund has an 18% exposure).

This, together with the low exposure to Libhold helped the Fund to perform positively in June as well as the first six months of this year (+15%). Periods of market weakness were used to add to our small holding in Investec, Standard Bank and the offshore fund.

We continue to have a very low exposure (30%) to the four large South African banks, as we believe them to be marginally overpriced for what could turn out to be a poor South African banking environment (poor loan growth with the possibility of increasing bad debts).

The Fund's largest exposures, besides Firstrand (strong growth) and Standard Bank (should rebound in H2), are Old Mutual, PSG, Discovery Health, Coronation and then the investment in the Sanlam Global Financial Fund.

The Fund is not dependent on strong South African growth, but relying more on unlock of valuations and predictable solid returns on capital of the companies it is invested in and individual growth models that are independent of the economy (eg Capitec in PSG).

March 2012 was a relatively quiet month for South African financials, except for Capitec (again reported outstanding results) and Investec (reported very poor results). Generally banks and insurers were flat/marginally negative, with the exception of Capitec, Sanlam, Discovery, Coronation and Nedbank, while Investec's price fell in line with its results.

We changed very little in the Fund, reducing Coronation and Firstrand marginally (after doing very well for us), and increasing our Sasfin exposure. This is a little company that is now undervalued again and the market doesn't seem to care that it's written off the mistakes it made in 2011, and will resume its history of consistent growth in 2012 and thereafter.

Our investment in the Sanlam Global Financial Fund (18% of the Nedgroup Investments Financials Fund), also did well due to rand weakness (-2%) and the good price performances of our US, Thai and Turkish banks, while India and Brazil reduced the performance.

The year ended well with a 22% jump in Old Mutual's share price (after it sold its holding in Skandia Life). The other worthwhile moves worth mentioning in December were Firstrand (+6%) and Sasfin (-3%) and Investec (-6%).

Over the year, the disappointment was the 8% decline on Standard Bank versus the Firstrand's 7% gain. Other noteworthy price moves for the year were Coronation (+21%), PSG (+19%) and Discovery (+10%), while the biggest decliners were Sasfin (-28%), Investec (-21%) and African Bank (-12%).

While Investec's decline was in line with investment banks globally, Sasfin's decline was largely "self-made" due to write-offs in their private equity and property units. Both shares are now undervalued, but need a better environment to unlock the value or M&A a la Old Mutual.

The major changes made to the portfolio during the year were to increase the Firstrand holding from 6% to 18% at the expense of Standard Bank (reduced from 21% to 11%).

Other changes were to reduce African Bank (9% to 6%) and to sell the remaining Capitec shares (we feel they've become too expensive in the short-term).

However, we indirectly increased our holding in Capitec by increasing our PSG holding from 7% to just under 10% (42% of PSG's value being their Capitec investment).

The investment in the Sanlam Global Financial Fund declined 15% in US$ terms, which was better than the year's MSCI Global Financial Index decline of 20%. However, the Rand's fall against the US$ of 24%, more than made up for that.

We expect 2012 to remain tough for SA banks, but we think that most of the bad news is priced in global markets and especially banks. Hence, we expect the investment in the Sanlam Global Financial Fund to outperform again in 2012.

Recent US reports indicate that the US economy might avoid a recession and indeed perform better than expectations. Should this be the case, global markets should have a good year, mainly because expectations are very low. This is reflected in the fact that the US Equity Risk Premium is at 11% (record low levels).

It is still very early to make predictions, but both globally and in South Africa, the portfolio is invested in companies with track records that prove their ability to weather tough storms and come out stronger afterwards. We don't doubt that this will again be the case in 2012.