For the quarter the fund grew by 1.05%, and on a 12-month rolling basis the return is up 17.45%. This comfortably outperforms the 15.45% achieved by its CPIX + 4% benchmark, despite CPIX exceeding everyone's expectations on the upside.

Yet again, the quarter presented a very challenging environment: the All Share index was down by more than 13% in July, inflationary shocks led to SA long bond yields going higher, and we had a further interest rate hike. Negative investor sentiment was further exacerbated by the release of the draft Mining Charter which led to a huge sell off, notably by foreigners, particularly in local diversified mining shares. This, however, presented the fund managers with a great buying opportunity whereby they introduced Anglo to the portfolio and increased the funds exposure to the platinum companies.

The funds saw strong performances from a number of the fund managers stock picks, including Northam, Sasol, AECI, Group 5, Massmart, Pepkor, other retailers and property stocks. In addition, after periods of disappointing share price performance, Discovery released good results that confirmed the fund managers belief that this stock offers great long-term value. The fund also benefited from some corporate actions during the period, including the offer to minorities in Energy Africa, Investment Solutions, Genbel and in the offshore listed MHL.

Some of the disappointments were: Kersaf where the fund managers think the market is simply waiting for the unlocking of shareholder value to play itself out; Adcorp on the back of poor results, and MCell/Johnnic which came under increased pressure due to negative developments, particularly in Nigeria. The banks have also been under immense pressure, mainly as a result of the interest rate increases and the publication of the Community Reinvestment Bill (while this Bill has been withdrawn, it has created doubt in the minds of investors). On the international side, the funds investments did very well, preserving capital in hard currency returns, despite the fact that the MSCI was down 16.45%.

With regards to bonds, the fund managers heavily sold down the funds exposure in favour of cash and NCDs. Towards the end of the quarter, however, the fund managers started to increase duration as the correction in the bond market played itself out. Further, the portfolio has benefited from the inflation linked bonds.

The fund managers remain cautious on global markets and have started to expose the fund to gold shares as a hedge against continuing global market turmoil and potential Middle East conflict. Within the gold shares, the fund managers have chosen the more defensive counters in line with the fund's mandate. The fund managers will continue to deploy international cash with extreme caution. Domestically, the market offers interesting opportunities due to its low rating and the relatively strong domestic growth. The fund managers are looking for stocks that will benefit from export opportunities and the weaker rand, eg Bidvest.

As the fund managers are still nervous about the property sector's prospects, they will not increase exposure. However, the fund managers remain convinced that the life assurers, on a risk adjusted basis, will continue to offer interesting return opportunities. The bond market is beginning to look more attractive, although inflation readings may surprise on the negative side. As we approach the peak in the inflation cycle, the fund managers will look to increase the funds exposure and duration.

The fund grew by 77% over the quarter and returned 7.3%, which was significantly higher than the benchmark's return of 3.5%. Since inception on 1 July 2001, the fund has produced a return of 18.75% (bid-to-bid), once again comfortably outperforming the 13,00% achieved by its benchmark.
The last year has been extraordinary. The fund was launched in a quarter that witnessed the September 11 attacks, the repercussions of which truly tested our absolute return-orientated strategy and structure. We are delighted with how the fund performed during all the uncertainty, as well as with its performance in the subsequent market recovery. This was on the back of both a weak currency and a strong equity market in the final quarter of 2001. Furthermore, by quickly taking the fund's allowance offshore, we benefited from diversification and the weakness in the currency.
The fund's exposure to bonds has also contributed to the fund's overall performance. While the fund manager's were bearish on bonds in the third quarter, and therefore missed out on the last stages of the bull market, the fund was positioned appropriately for the huge corrections of December 2001/January 2002, and did not suffer any capital losses.
One of the fund manager's disappointments over the year has been the fund's very small exposure to gold shares. The fund manager's believed that gold shares should never form a large portion of the fund, due to their nature and volatility. However, with the benefit of hindsight, by diversifying into gold shares the fund manager's would have improved both the risk profile and performance of the fund. A second regret was not participating in the strong recovery in commodity stocks in the first week of November 2001 from its lows of 21 September. The fund manager's underestimated the global economic recovery and, during the latter half of the 12-month period, the fund manager's were concerned about the effect of a stronger currency on the share prices. That view has since been corrected.
During the second quarter of 2002, the fund manager's were very pleased with performance, particularly in April when we saw strong performances from a number of the stock picks, such as Naspers, Remgro, Kersaf, Bidvest, Barplats, Foschini and Edcon. Disappointingly, the recent slide in platinum stocks detracted from performance, in spite of exposure having been reduced. In addition, the fund manager's entered Dimension Data too early, and in some instances deep value situations have not yet worked in the fund's favour, eg New Africa Capital and Sanlam. Of late, Discovery has disappointed, but the fund manager's have used the opportunity to increase the holding, as the fund manager's believe the stock offers great long-term value. Once again, the fund manager's timed the export of capital relatively well, and benefited from further weakness in the currency in June.
The bonds did well early in the quarter. However, the fund manager's subsequently turned a little more bearish and switched into shorter dated stock, increasing asset allocation and decreasing duration. A new upswing in listed property companies had a false start during the period, although the fund manager's did introduce one new counter, Pangbourne.
Once again, offshore exposure negatively impacted the portfolio due to the strengthening in the rand by over 9% over the quarter. However, it did provide the fund with diversification and, as long as exchange control remains in place, the fund manager's will not reverse this position. During June, the fund manager's switched a significant balance into euros, providing a more balanced exposure to the major currencies.
Looking forward, the fund is positioned for a tough financial market environment. Domestic equity exposure is a little higher than the fund manager's would like. Having said that, the fund manager's will continue to take advantage of the attractively priced equities currently in existence.

The fund experienced a very tough quarter, showing a decline in value of -2.68%, compared to the benchmark return of 4.20%.
The past quarter was characterised by a stronger Rand, which appreciated by more than 5% against the Dollar. International equity markets, as measured by the MSCI World index, were essentially flat, resulting in a negative return (in Rand terms) from the international component of the fund. Although the fund manager expects the instability of the Rand to continue in the medium term, he does not regard it prudent to repatriate any offshore funds at this stage. In the longer term, the fund's international exposure will provide protection against a structurally weak Rand and will continue to provide significant risk reduction within the fund.
Over the period, the domestic equity market experienced strong resource performance (15.4%), contrasted against very poor performances in both the financial (-9.5%) and industrial (-0.2%) sectors.
In terms of stock selection, the fund benefited from resource exposure through Implats, Amplats, Sasol and AECI. However, as the fund was more heavily positioned in the financial and industrial sectors, the negative contribution from the financial sector in particular, led to a return of -5.0% from equities. The fund manager was surprised by the magnitude of the decline in many financial shares, but remain convinced of the value opportunities in this sector, and have actively built on positions which he believes to be attractively priced companies.
The major detractors from performance were Sanlam, New Africa Capital, African Life, BoE, African Bank and Standard Bank. With the exception of BoE, which was sold during the quarter, the fund manager has maintained or increased weightings in these stocks, as he believes that the fund will be rewarded in the longer term. The price weakness was also used to build up positions in quality companies such as Discovery. A notable outperformer in the portfolio was BJM as a result of an unsolicited bid at a significant premium to market price.
With the fixed interest component of the fund returning 1.58%, compared to a return of -4.56% from the All Bond index, value was added to the fund during the past quarter. Duration was increased significantly during the sell-off in December 2001, which allowed the fund to benefit from the subsequent rally. The fund took profits into this rally, protecting the fund from a further sell-off that occurred into a series of significant inflation surprises. While the fund manager believes that there is still significant upside in inflation, he has once again started to increase duration as value is beginning to emerge in the bond market. This increase in duration has been partly funded by selling the holding in inflation-linked bonds, which in his opinion are expensive relative to conventional bonds.
Looking ahead, the fund manager foresees a tough investment environment, especially given the increase in the fund benchmark as inflation rises. The fund manager does, however, remain confident that the fund is sufficiently diversified and well positioned to face the challenges of the new quarter.