The fund in the context of a rising equity market continues to deliver good absolute returns. While outperforming the average general equity fund over the last year the fund has however underperformed its benchmark, the FTSE/JSE All Share Index. The All Share Index has risen substantially over the last couple of years and we caution investors to moderate their expectations of future returns from the South African equity market. The fund has continued to add to its holdings in shares such as MTN and Remgro which have good long term growth prospects and which can still be acquired at attractive valuations. The fund now also has a relatively large investment in Sanlam which is considered to be offering good long-term value despite the challenges facing South African life assurers.

The Fund, in the context of a rising equity market continues to deliver good absolute returns and has also outperformed its benchmark, the FTSE/JSE All Share Index. The All Share Index has risen substantially over the last couple of years and we caution investors to moderate their expectations of future returns from the South African equity market. The Fund has continued to add to its holdings in shares such as MTN and Remgro which have good long-term growth prospects and which can still be acquired at attractive valuations.

When Allan Gray Equity Fund (AGEF) was launched in October 1998, its units were priced at R10. Now, seven years on, they are at almost R90, an achievement representing average capital growth of 36,8%/year compared with the 18,1%/year of the general equity index.

Success has attracted investors in droves, rocketing AGEF's total assets to almost R9bn and making it by far SA's biggest equity fund.

The question is: has it got too big to take advantage of market opportunities it could exploit in its early years?

Allan Gray COO Greg Fury does not think so. "The fund's assets represent under 0,5% of the JSE's free float," he says. "Even if all the group's equity assets are included, they represent only 3,5%." He also points out that Allan Gray has only one equity fund, but other groups have similar total assets spread over many funds.

But he agrees that the days of smaller-cap shares providing that extra edge are over. In any event, small caps have never played a big role in AGEF's performance. The bulk of returns have come from big-cap holdings, says Fury.

Some would argue that even big caps may not provide enough scope. In the US, for instance, research firm Plexus, a JPMorgan Chase subsidiary, puts the optimal size of a large-cap value fund (which best describes AGEF) at US$10,7bn (R67bn).

This is in a market where the New York Stock Exchange alone has a total market cap of $12 trillion, about 25 times more than the JSE's.

If the Plexus estimate is valid and adjusted for the difference in size of the two markets, AGEF's optimum size is about R3bn.

For now, market cap seems far from the constraint it could be, as AGEF's portfolio is slanted towards marketable resource shares, with a big exposure to precious metals and oil.

Underlying this strategy is a view that resources have lagged behind domestic and financial shares badly since 2002, a situation that will reverse. The market is moving in this direction, but it's still too early to tell whether AGEF will be able to regain top sector position as a result.

Financial Mail - 30 September 2005

The Fund, in the context of a rising equity market continues to deliver good absolute returns. The recent strength in equities has been more broad-based than earlier in the year and many individual shares are trading at or near all time highs. We caution that investors should moderate their expectations of future returns from the South African equity market. Nonetheless we continually find shares such as Sasol, the Fund's largest position, which we believe will deliver returns above that of the market. We continue to believe that Sasol remains an attractive long-term investment based on normalised earnings and its ability to substantially increase production at value enhancing returns.

The Fund returned good absolute returns over the last 12 months and outperformed its benchmark. The Fund has benefited in recent months from its exposure to selected South African focused resource shares. While the Fund has a similar weighting in resources shares to its benchmark the composition is very different. Platinum shares now constitute more than 10% of the Fund and despite their more recent price increases, we continue to find them very attractive. The South African stockmarket has risen substantially over the last couple of years and we would be more cautious about the level of returns one can expect from current levels. We nevertheless continue to find shares which we believe to be more attractive than the overall market.

The Fund returned good absolute returns for the last 12 months but marginally underperformed its benchmark over the last year. The Fund has also performed broadly in line with the average manager over the last year. This, however, included a period of underperformance for the first six months due to the Fund's higher exposure to selected resource shares which were hurt in the short-term by the strong rand. The Fund has, however, outperformed in the last six months in large part due to the impact of the 18% weakening of the rand/dollar exchange rate since January which has benefited the Fund's resource shares. Despite the rand's recent weakness we believe that it is still too strong at R6.65/dollar and we continue to find very good value in selected resource shares which we have continued to add to the Fund.

The Fund returned good absolute returns for the last 12 months and marginally outperformed its benchmark over the last year. The Fund however, underperformed the average general equity fund over the same period. As we have discussed previously, this was mainly as a result of the Fund's higher exposure to selected South African focused resource shares which were hurt by the strong rand but which we believe offer very attractive returns on a normalised basis. The recent weakening of the rand by 11% during the month of May has benefited the Fund's resource shares and the Fund's more recent performance. Despite the rand's recent weakness we believe that it is still too strong at R6.76/dollar and we continue to find very good value in selected resource shares which we continue to add to the Fund.

The Fund returned good absolute returns for the last 12 months and marginally outperformed its benchmark over the last year. The Fund however, underperformed the average general equity fund over the same period. This was mainly as a result of the Fund's higher exposure to selected South African focused resource shares which were hurt by the strong Rand. Our investment philosophy has always been based on seeking out investments that we believe will provide superior longterm returns. We are also quite willing to have portfolios that are different to that of the average manager. Three years ago when the Rand/dollar exchange rate was R10.66/dollar, we were underweight resources relative to the average manager at a time when general consensus was that the Rand would stay weak and even weaken further. Based on our bottom-up analysis, the Fund benefited significantly from its low exposure to resources and high exposure to specific industrials as the Rand returned to more normal levels. With the 30 April 2005 rate of R6.08/dollar, we notice that we are overweight resources and underweight industrials at a time when there is general consensus that the Rand will stay strong and even get stronger. We believe that the Rand is now too strong and that the Fund's resource holdings offer very attractive returns on a normalised basis. The Fund also remains overweight banking shares, which we find more attractive than many of the industrial shares which are now trading on reasonably high multiples on high earnings.

While the fund returned good absolute returns for the last 12 months, it underperformed its benchmark and the average general equity fund over the last year. This was mainly as a result of the Fund's higher exposure to selected South African focused resource shares which were hurt by the strong rand. Our investment philosophy has always been based on seeking out investments that we believe will provide superior long-term returns. We are also quite willing to have portfolios that are different to that of the average manager. Three years ago when the rand/dollar exchange rate was R12/dollar, we were underweight resources relative to the average manager at a time when general consensus was that the rand would stay weak and even weaken further. Based on our bottom-up analysis, the Fund benefited significantly from its low exposure to resources and high exposure to specific industrials as the rand returned to more normal levels. With the 31 March 2005 rate of R6.23/dollar, we notice that we are overweight resources and underweight industrials at a time when there is general consensus that the rand will stay strong and even get stronger. We believe that the rand is now too strong and that the fund's resource holdings offer very attractive returns on a normalised basis. The fund also remains overweight banking shares, which we find more attractive than many of the industrial shares which are now trading on reasonably high multiples on high earnings.

Many of those who invested in this fund on the strength of Allan Gray's performance in the three years to December 2004 will have been disappointed with its more recent results.

Fortunately, for the house to give clients a 22% return when the peer group provides 33% is a lot more palatable than a 5% loss when your competitors are making 6%. Long-term investors with Allan Gray should know that the contrarian style of the house can lead to bursts of underperformance.

Allan Gray typically buys and sells shares too early. It owned 19% of Edcon when it was trading at R26, but sold by the time it reached R145, missing out on the rise to R300. It bought most of its Foschini holding at R5, but sold the bulk of it between R15 and R20, missing the ride to R40.

Allan Gray is still drawn to investing in a few retailers, primarily cash businesses such as Shoprite, New Clicks and Woolworths, and a sprinkling of consumer shares that it still considers to be undervalued, such as Sun International, Nampak and Tiger Brands (though Tiger has been trimmed back).

Allan Gray correctly anticipated that retailers had more scope to be revalued than banks, but over the past year it has moved aggressively into the banking sector, taking sizeable holdings in all of the four biggest banks.

The shift is also reflected in the move back to large caps, which now make up 66% of the portfolio.

Most of Allan Gray's competitors are also attracted to the banking sector. But its hefty gold holding, through Harmony, Western Areas and JCI Gold, does look unusual. Fund manager Stephen Mildenhall says investors were piling into Harmony at R186 in 2002, but are not prepared to pay R40 (its share price if the Gold Fields stake is excluded), even though the long-term outlook for gold prices is not significantly different.

Allan Gray has missed a couple of the big movers of the past two years, Telkom and Ispat Iscor, though it was a convert to MTN, arguing that the risks in Nigeria could be exaggerated.

Financial Mail - 11 February 2005

While the fund outperformed its benchmark and returned good absolute returns for 2004, it underperformed the average general equity fund over the last year. This was mainly as a result of the fund's higher exposure to selected South African focused resource shares which were hurt by the strong rand. Our investment philosophy has always been based on seeking out investments that we believe will provide superior long-term returns. We are also quite willing to have portfolios that are different to that of the average manager. Three years ago when the rand/dollar exchange rate was R12/dollar, we were underweight resources relative to the average manager at a time when general consensus was that the rand would stay weak and even weaken further. Based on our bottom-up analysis, the fund benefited significantly from its low exposure to resources and high exposure to specific industrials as the rand returned to more normal levels. With the 2004 year-end rate of R5.64/dollar, we notice that we are overweight resources and underweight industrials at a time when there is general consensus that the rand will stay strong and even get stronger. We believe that the rand is now too strong and that the fund's resource holdings offer very attractive returns on a normalised basis. The fund is also overweight banking shares, which we find more attractive than many of the industrial shares which are now trading on reasonably high multiples on high earnings.

Despite the significant rise in the South African equity market over the last few months, we continue to find reasonably broad based value within the market from a long-term perspective. We continue to reduce our holdings in selected industrial shares which have rerated significantly on the back of a very strong earnings growth. We believe that in certain cases these companies earnings are now above normal. We have used the proceeds to further increase our exposure to attractively priced banking shares. Financial shares now constitute 33% of the fund. While the fund's weighting in resources is lower than the ALSI, it is higher than that of the average general equity fund. This has impacted the short-term performance of the Fund compared to the average general equity fund due to the continued strength of the rand. We continue to believe that the fund's resource holdings offer very good value on a normalised basis.