Despite the significant rise in the South African equity market over the last few months, the fund manager's continue to find reasonably broad based value within the market from a long-term perspective. The fund manager's continue to reduce the funds holdings in selected industrial shares which have rerated significantly on the back of a very strong earnings growth. The fund manager's believe that in certain cases these companies earnings are now above normal. The fund manager's have used the proceeds to further increase the funds exposure to attractively priced banking shares. Financial shares now constitute 29% 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. The fund manager's continue to believe that the fund's resource holdings offer very good value on a normalised basis.

The fund manager's continue to find reasonably broad based value within the market from a long-term perspective. They continue to reduce the funds holdings in selected industrial shares which have rerated significantly on the back of a very strong earnings growth. The fund manager's believe that in certain cases these companies earnings are now above normal. We have used the proceeds to further increase the funds exposure to attractively priced banking shares. Financial shares now constitute more than 25% of the fund. The surprise 0.5% interest rate cut caused a moderate weakening in the rand/dollar exchange rate from very strong levels. The rand is however stronger than 12 months ago. 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. The fund manager's continue to believe that the fund's resource holdings offer very good value on a normalised basis.

The fund manager's continue to find reasonably broad based value within the market from a long-term perspective. The fund manager's continue to reduce the funds holdings in selected industrial shares which have rerated significantly on the back of very strong earnings growth. The fund manager's believe that in certain cases these companies' earnings are now above normal. The fund manager's have used the proceeds to further increase the funds exposure to attractively priced banking shares. Financial shares now constitute 24% of the fund. The resources sector has underperformed due to the continued strength of the rand. 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. The fund manager's believe that the fund's resource holdings are offering very good value on a normalised basis.

The fund manager's continue to find reasonably broad based value within the market from a long-term perspective. They continue to reduce the funds holdings in selected industrial shares which have rerated significantly on the back of very strong earnings growth. The fund manager's believe that in certain cases these companies' earnings are now above normal. The fund manager's have used the proceeds to further increase the funds exposure to attractively priced banking shares. Financial shares now constitute 22% of the fund. The resources sector has underperformed due to the continued strength of the rand. 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. The fund manager's believe that the fund's resource holdings are offering very good value. For example the largest holding, Sasol, is trading on 8.5 times normalised earnings and a 5% dividend yield. This is very attractive for a better than average business.

This large fund has gone from hero to zero in the past three years, partly as a result of the large (29%) resources weighting. But it would be a foolish investor who ignored this fund on the basis of current performance. There's an old maxim in the unit trust industry that you should buy the worst performer, if you're happy with the fund manager involved. Allan Gray's highly disciplined approach makes this a good turnaround bet.

The South African equity market has risen by approximately 41% from its lows in April 2003. While clearly not offering the great value it was, the market is still offering the prospect of reasonable long-term returns. A good indication of this is that it is difficult to find shares that are very expensive. The market is trading at the same level in dollars as it was 10 years ago despite growing its dollar earnings significantly over that period. While current year earnings for the market are likely to be under pressure because of the strength of the rand, the long-term growth prospects are good with South African interest rates having declined significantly. South African companies are typically undergeared, and in a lower interest rate environment there is significant scope to increase gearing levels and returns on equity.